German Economy Shrinks as Soaring Energy Costs Pinch Demand

The German figures, which come ahead of publication of the latest growth data for the eurozone, raise the prospect of the region’s largest economy recording two quarters of negative growth — meeting the technical definition of recession, the Financial Times reported.

Fears of a recession had eased in January, when officials said the economy was likely to have stagnated, rather than shrunk, in the fourth quarter.

“High rates of inflation have driven the German economy into a winter recession,” said Timo Wollmershäuser of the Ifo Institute, a think-tank.

Economists downgraded their expectations for the eurozone growth figure to a 0.1 percent fall, down from the no-change forecast before the release of the German figures.

The gross domestic product drop “pours cold water on the recent optimism about the prospects for the eurozone and suggests that a technical recession in both Germany and the eurozone as a whole is more likely than not after all”, said Franziska Palmas, senior Europe economist at Capital Economics.

However, the scale of the downturn in Germany and elsewhere in Europe is far better than economists had anticipated during much of the latter half of 2022, when soaring gas prices stoked concerns of a severe recession. “We’re looking at a technical recession,” said Stefan Schneider of Deutsche Bank. “Not the setback to growth that many had recently feared.”

Economists polled by Reuters had anticipated a flat reading for the fourth quarter, though officials upgraded the economy’s expansion in the previous three-month period to 0.5 from 0.4 percent.

“After the German economy held up well in the first three quarters despite difficult conditions, economic output decreased slightly in the fourth quarter,” Destatis, the federal statistics office, said.

Destatis said private consumer spending was a key driver of the contraction, suggesting that the fall in real household incomes due to the energy crisis is now starting to bite. Energy costs for German consumers rose by 34.7 percent over the course of 2022.

The German economy is now only 0.2 percent larger than before the pandemic — a slower recovery than in the rest of the currency union — with the eurozone economy about 2.3 per cent above its pre-pandemic level based on growth figures for the third quarter.

Leading economists polled by Consensus Economics expect the German economy to contract by 0.5 percent in 2023, while the eurozone economy is forecast to expand marginally. However, the German government forecast growth of 0.2 per cent this year. That is an upgrade from October, when it was predicting a contraction of 0.4 per cent. Germany has been hit harder than other European countries by soaring gas prices because of its large manufacturing base. However, the government has stepped in with generous support to cushion the blow.

Timo Klein, economist at S&P Global Market Intelligence, said Germany’s outlook had “brightened” in recent weeks, thanks to benign winter weather, which had reduced gas demand, the end of China’s zero-Covid policy and the boost that will give to German exports, and the downward correction of wholesale gas and power prices, which would ease headline inflation. However, others believe that the return to growth is threatened by the ECB’s aggressive hiking cycle and the risk of sustained high energy prices.

Markets expect the ECB to raise rates by half a percentage point later, and by another half point in March. Sweden’s economy shrank 0.6 percent in the last quarter of 2022, separate figures showed.

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