Data on Monday showed that the German economy contracted unexpectedly in the fourth quarter, in a sign that Europe’s largest economy may be entering a highly anticipated recession, although it is likely to be weaker than originally expected.
The Federal Statistics Office said gross domestic product fell 0.2% on a quarterly basis in adjusted terms. A Reuters poll of analysts predicted a recession in the economy.
In the previous quarter, the German economy grew by an upwardly revised 0.5% compared to the previous three months.
A recession — generally defined as two consecutive quarters of contraction — is becoming more likely, with many experts predicting that the economy will contract in the first quarter of 2023 as well.
“The winter months have turned out to be difficult – although not as difficult as originally anticipated,” said Thomas Gitzel, chief economist at VP Bank.
“The sharp collapse of the German economy is still absent, but a slight recession is still on the cards.”
German Economics Minister Robert Habeck said last week in the government’s annual economic report that the economic crisis stemming from Russia’s invasion of Ukraine is now manageable, although higher energy prices and higher interest rates mean the government remains cautious.
The government has said the economic situation should improve from spring onwards, and last week revised its GDP forecast for 2023 – expecting growth of 0.2%, up from an autumn forecast of a 0.4% decline.
And as far as the ECB goes, interest rate expectations are unlikely to be affected by Monday’s GDP numbers as inflationary pressures remain elevated, said Circuit Banking economist Ralf Umlauf.
The European Central Bank has almost committed to raising its main interest rate by half a percentage point this week to 2.5% to curb inflation.
Monday’s figures showed that falling private consumption was the main reason for the drop in fourth-quarter GDP.
“Consumers are not immune from the erosion of their purchasing power due to record high inflation,” said Juerg Kramer, chief economist at Commerzbank.
Inflation, mainly driven by higher energy prices, eased for the second consecutive month in December, with EU-harmonized consumer prices rising 9.6% over the year.
However, analysts polled by Reuters expected EU-coordinated annual inflation to enter double digits again in January with a slight rise to 10.0%. The bureau will publish the preliminary inflation rate for January on Tuesday.
(Reporting by Miranda Murray and Renny Wagner; Editing by Rachel Moore and Christina Fincher.)
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