Germany’s economy shrinks to 0.2% in Q4

At the end of last year, Germany's economy fell 0.2% - a worse outcome than previously flagged and makes a recession more likely after rising energy bills.

The numbers from the statistics office contrast with the estimate for output to have stagnated in the fourth quarter this month. They also mean a contraction in the period through March would still cause a recession in the euro area's largest economy.

In the last few weeks, several indicators have pointed to growing confidence in Germany after a mild winter and well-filled natural gas storages, but have not eliminated the risk of shortages during the heating period. The expectation that inflation will cool sooner than previously thought is fueled by the fact that wholesale prices for the commodity have fallen from record highs.

Demand is weighed down as surging prices continue to filter through to consumers. Sweden, whose economy unexpectedly contracted in the fourth quarter, showed that trend was also visible, according to separate data earlier in the day.

Salomon Fiedler, economist at Berenberg, said that we expect more of the same in early 2023, namely a modest decline in real GDP reflecting mostly lower consumption. After the mild winter recession, the economy is likely to stabilize in spring and start to expand again in mid- 2023. There was some good news elsewhere. Belgium eke out growth of 0.1% and Latvia grew by 0.3% in January, while euro-area economic confidence rose for the third month in January, reaching the highest level since June.

Germany is seeing orders fall due to a large backlog and an easing of supply bottlenecks.

The government in Berlin forecast growth of 0.2% for 2023, compared to a 0.4% contraction earlier in the week. Economy Minister Robert Habeck warned of a possible recession and that Russia sparked its invasion of Ukraine with its invasion of Ukraine.

There is growing demand for higher wages that may cause inflation to become more severe. Postal workers are on strike to push for a 15% pay hike, and public sector employees are seeking a double-digit raise.

The European Central Bank is determined to tackle surging prices with restrictive monetary policy. It is poised to lift interest rates by another 50 basis points this week, adding to what is already the most aggressive tightening campaign in its history. The full impact of the measures has yet to be felt.

With help from Joel Rinneby, Kristian Siedenburg, Barbara Sladkowska and Zoe Schneeweiss.

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