Recession fears return after German economy shrinks 0.4% in fourth quarter

Germany’s economy shrank more than expected in the fourth quarter, according to revised figures, raising doubts over the ability of Europe’s biggest economy to escape recession and recover swiftly from its energy crisis.

High inflation drove sharp falls in German consumer spending and investment in buildings and machinery in the final quarter of 2022, the federal statistics office Destatis said on Friday, which led to a 0.4 per cent contraction in gross domestic product (GDP) from the previous quarter.

That is the second downward revision in Germany’s latest GDP figures in the past month. Initially Destatis estimated the economy had stagnated, before announcing a 0.2 per cent fall in fourth-quarter output in its flash estimate at the end of January.

The biggest quarterly decline in the country’s GDP since the start of 2021 outstripped economists’ expectations, according to a poll by Reuters. The contraction, coupled with recent upward revisions in German and euro zone estimates for inflation, dealt a blow to hopes that Europe will swiftly rebound from the fallout of Russia’s full-scale invasion of Ukraine one year ago.

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Recent surveys of businesses and consumers have painted a more upbeat picture of Europe’s economy at the start of this year, however, suggesting it may prove more resilient than expected after a mild winter helped to lower gas prices and avert fears of energy shortages.

“Looking ahead the recent upturn in the surveys is positive, but we doubt that the economy has enough momentum to avoid another fall in first-quarter GDP, and as a result, a technical recession,” said Claus Vistesen, an economist at research group Pantheon Macroeconomics. A recession is defined as two consecutive quarters of falling output.

[ Euro zone on course to dodge recession as energy crunch eases ]

German investment in construction and equipment, such as machinery and vehicles, fell 2.5 per cent quarter on quarter. The country’s trade surplus was weaker than expected, as exports fell 1 per cent and imports were down 1.3 per cent. However, Government spending rose 0.6 per cent.

“The continued strong price increases and the ongoing energy crisis weighed on the German economy at the end of the year,” Destatis said, adding that this was “particularly noticeable in private consumer spending”, which fell 1 per cent in the three months to the end of December.

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Household spending dropped after the government ended some support measures, such as a discount on fuel and a subsidised €9-a-month train ticket, it said, even though Berlin paid most people’s gas bills in December and plans to cap them this year.

The figures “show that the sharp rise in energy prices has noticeably slowed down the economy despite the government’s extensive aid measures”, said Ralph Solveen, an economist at German lender Commerzbank. He added that interest rate rises by the European Central Bank were “likely to have had an impact on the construction sector in particular”.

[ Irish economic growth helps EU narrowly avoid recession ]

Research group GfK said on Friday that its German consumer confidence index rose to minus 30.5, up from minus 33.8 in the previous month, slightly below economists’ expectations and well below the positive scores of less than two years ago.

– Copyright The Financial Times Limited 2023