The German economy unexpectedly contracted in the fourth quarter which indicates that Europe’s biggest economy may be approaching a recession, albeit one that is probably deeper than first feared. In other terms, the gross domestic product fell by 0.2% from one quarter to the next, and it was predicted that the economy would remain stagnant.
The German economy expanded by an upwardly revised 0.5% in the preceding quarter compared to the prior three months.
The likelihood of a recession, which is typically defined as two consecutive quarters of economic contraction, has increased because many analysts believe Germany’s economy will fall in the first quarter of 2023 as well.
The Federal Statistical Office reported that consumer expenditure, which had supported the economy in the first nine months of 2022, declined for the first time since the first quarter of 2021. The decline came after third-quarter GDP growth of 0.5% and second-quarter GDP growth of 0.1%.
“The winter months are turning out to be difficult – although not quite as difficult as originally expected,” said VP Bank chief economist Thomas Gitzel. “The severe crash of the German economy remains absent, but a slight recession is still on the cards.”
Germany’s GDP Predicted to Grow 0.2% in 2023
In the government’s yearly economic report, German Economy Minister Robert Habeck stated last week that the economic crisis brought on by Russia’s invasion of Ukraine was now under control, however high energy prices and rising interest rates mean the government is continuing to be cautious.
The government has stated that the economy should begin to revive in the spring, and last week it revised its GDP prediction for 2023, now projecting growth of 0.2% rather than a 0.4% decrease as had been predicted in the autumn.
Before it had all of the December economic data, the statistics office stated in mid-January that the economy appeared to have stagnated in the fourth quarter. In response to the news on Monday, it reduced the full-year growth rate for last year from the previously announced 1.9% to 1.8%.
The annual inflation rate in Germany decreased from a high of 10.4% in October to 8.6% in December, but increasing prices are still a big problem.
The European Central Bank is unlikely to change interest rates as a result of Monday’s GDP statistics because inflationary pressures are still high, according to Helaba bank economist Ralf Umlauf. To fight inflation, the ECB is almost certain to increase its benchmark interest rate this week by 0.5 percentage points to 2.5 percent. According to data released on Monday, a decline in private consumption was the main cause of the fourth-quarter GDP decline.
“Consumers are not immune to an erosion of their purchasing power due to record high inflation,” said Commerzbank chief economist Joerg Kraemer. With EU-harmonized consumer prices rising 9.6% on the year in December, inflation, which was mostly caused by high energy prices, was reduced for the second consecutive month. However, according to economic analysts, annual EU-harmonized inflation will slightly increase to 10.0% in January, returning to double digits. On Tuesday, the office will release the January preliminary inflation rate.
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