German economy shrinks in the fourth quarter of 2022

Berlin The German economy shrank in the fourth quarter of 2022. Between October and December, gross domestic product (GDP) fell by 0.2 percent compared to the previous quarter. This was announced by the Federal Statistical Office on Monday.

Despite the war in Ukraine, GDP still grew in the first three quarters, albeit only slightly recently. The Wiesbaden statisticians see the reason for the decline in the fourth quarter in particular in private consumer spending. These initially supported the economy, but then declined in the past quarter.

During the peak of the corona pandemic, many citizens had accumulated savings because they could not spend their money in restaurants, on vacations or cultural events. After the end of the restrictions, many caught up, private consumption supported the economy, despite the energy crisis.

The high prices for electricity and gas had already peaked on the energy exchanges in the summer. But apparently a large part was only passed on to private households in the months that followed. Because they now have to spend more money on their energy bills, there is less scope for other purchases.

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According to the Ifo Institute, the fact that the decline in GDP was not greater was probably due to the surprisingly strong increase in the number of vehicle registrations at the end of the year. “Due to the expiry and reduction of government subsidies for plug-in hybrids and electric vehicles on December 31, new registrations soared by 20 percent compared to the previous quarter,” said Ifo economic chief Timo Wollmershäuser. Taken in isolation, this should have expanded private consumption by around 0.8 percent.

Germany is facing a technical recession

With the first decline in GDP, the German economy is moving towards recession. A technical recession occurs when economic output falls for two consecutive quarters. A further decline in private consumption is quite conceivable in the first quarter of 2023, which could cause GDP to shrink again.

>> Read here: What is a recession? Meaning, examples and causes

A first idea for consumption development could be the table reservations of the Germans in restaurants. They are currently at the December level, but below the figures for October and November, according to data from the service provider Open Table.

A technical recession is still likely, said Federal Minister of Economics Robert Habeck (Greens) recently. “In the current quarter, there is a high probability of a further decline, which is likely to be somewhat larger,” said Wollmershäuser. According to an analysis by Bloomberg, which forms the average of 32 forecasts, German GDP will fall by 0.5 percent in the first quarter.

German economy grew by 1.8 percent in 2022

Nevertheless, Europe’s largest economy held up comparatively well last year despite multiple crises. In 2022 as a whole, GDP rose by 1.8 percent, according to the Federal Statistical Office.

While that is significantly less than was expected before the Russian attack on Ukraine, it is significantly more than some economists predicted after the outbreak of war.

For the fourth quarter alone, some feared a slump of several percentage points. Jan-Christopher Scherer from the German Institute for Economic Research (DIW) said there should only be a “slight economic slowdown” in winter.

This fuels the hope that the upcoming year 2023 could also be better overall. In autumn, almost all forecasters were still expecting a recession in the traditional sense, ie a decline in economic output on average for the year.

More and more institutions are now abandoning their recession forecasts. The federal government, for example, expects growth of 0.2 percent for 2023. The German economy will gain momentum again in the course of the year, explained Habeck’s chief economist Elga Bartsch when presenting the forecast. DIW economist Scherer explained that this will mainly be due to the recovering private consumption.

>> Read here: Federal government expects low growth for 2023

The reason for the better prospects is that various leading indicators have recently improved. Industrial production has stabilized, and even energy-intensive companies have recently halted their downward trend. Foreign trade is getting better and better.

Focus on the central banks

Above all, however, a look at the price dynamics is reassuring. A large part of the high energy prices may only now have reached private households. A few months ago, however, the ongoing decline in prices on the energy exchanges was not to be expected. This is increasingly being translated into producer and consumer prices.

Inflation appears to have peaked. In December it was 8.6 percent in Germany, after having reached a record high of 10.4 percent in October. The Federal Statistical Office will release its first estimate for the inflation rate in January tomorrow, Tuesday. Further relaxation is expected.

As a result, economic forecasters are likely to focus primarily on the central banks in the coming months. The European Central Bank (ECB) and the US Federal Reserve (Fed) want to raise interest rates further. Because despite the fall in inflation, the central banks’ target of a rate of around two percent is still a long way off.

Nevertheless, the danger is now increasing that the central bankers could slow down economic activity too much with their reaction. The interest rate hikes could stall the economic recovery. The ECB will provide the next indication of this on Thursday. Then she meets for her next meeting, including the interest rate decision.

More: Dispute over new debt fund – the EU still has that much money in reserve

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