German economy contracts, fuelling recession fears

Germany’s economy unexpectedly shrank at the end of 2022 due to the fallout from the war in Ukraine, official data showed Monday, adding to worries it could be on the brink of recession.

Europe’s top economy contracted 0.2 percent in the October to December period compared to the previous quarter, according to preliminary figures from statistics authority Destatis.

Analysts from financial data firm Factset had been expecting zero growth, while Destatis said earlier this month the economy stagnated in the fourth quarter.

For the whole of 2022, the German economy grew 1.8 percent, the data showed, a revision from an earlier figure of 1.9 percent.

Russia’s invasion of Ukraine, and subsequent move to slash crucial gas supplies, triggered an energy crisis in industrial powerhouse Germany, and sent food and electricity costs soaring.

But after massive government interventions, signs had improved recently and expectations grew that the German economy might avoid a recession after all.

Monday’s disappointing data, however, dented those hopes.

“Recession fears are back,” said ING economist Carsten Brzeski.

“The warmer winter weather, along with implemented and announced government fiscal stimulus packages, have prevented the economy from falling off a cliff, but a technical recession is still a likely outcome.”

A technical recession is defined as two consecutive quarters of contraction.

– Crisis hitting households –

Franziska Palmas, senior Europe economist at Capital Economics, said the data “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”.

Germany was, however, likely to avoid a “deep downturn,” she said.

“That’s thanks to generous government energy support, the recent fall in gas prices, and backlogs of orders supporting activity in some industrial sectors,” Palmas said.

After Russia invaded Ukraine, Berlin raced to find new energy sources, and unveiled a 200-billion-euro ($218-billion) support package to cushion consumers and businesses, including a cap on electricity and gas prices.

Destatis said that a fall in consumer spending, which supported the economy in the first three quarters of 2022, had hit GDP in the final months of the year.

This suggests the energy crisis was starting to hit household incomes, Palmas said.

The government has nevertheless struck a more optimistic tone lately, with an official forecast last week predicting that Germany would dodge a recession with growth of 0.2 percent for 2023 as a whole.

A few months earlier, they had predicated it would contract by 0.4 percent.

Earlier this month, Chancellor Olaf Scholz said Germany would avoid a painful recession this year.

Lower energy prices have also helped bring down inflation from a peak of 10.4 percent in October, with officials expecting the trend to continue.

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