Germany: Economy contracts at a softer pace in Q4 than previously estimated
The German economy ended 2021 on a sour note due to renewed restrictions related to the Omicron variant, with GDP tumbling 0.3% quarter-on-quarter on a seasonally- and calendar-adjusted basis. The print swung from a 1.7% expansion recorded in the third quarter, but was less severe than the previously-estimated 0.7% contraction. Meanwhile, the economy expanded 1.8% year-on-year in the period (Q3: +2.8% yoy), above the previously-estimated 1.4% increase.
The quarterly contraction came solely on the back of a drop in household spending, which was weighed down by the new lockdown. Private consumption fell 1.8% over the third quarter in the fourth (Q3: +6.0% qoq), despite a drop in the unemployment rate (Q4: 5.1%; Q3: 5.5%). However, rising consumer price pressures in Q4 likely further obstructed spending by burdening consumers’ wallets. On the other hand, government consumption rose 1.0% over the previous quarter in Q4, contrasting the 2.8% contraction recorded in Q3. Furthermore, fixed investment rose 0.5% quarter-on-quarter (Q3: -2.9% qoq) on the back of firming capital outlays in machinery and equipment, and other fixed assets.
Looking at the external sector, exports of goods and services jumped 4.8% quarter-on-quarter in Q4 after flatlining in Q3. The robust growth came despite lingering supply bottlenecks weighing on the country’s export-oriented industrial sector. Meanwhile, imports of goods and services increased 5.1% sequentially in the fourth quarter (Q3: -0.1% qoq), highlighting firming domestic demand, despite the sequential drop in private consumption.
Turning to Q1 2022, the economy should return to growth. Less restrictions on daily life and a tight labor market should support household spending, while filled industrial order books should spell high industrial production and export levels. However, risks are tilted somewhat to the downside. High energy prices will keep inflation elevated in the short term and continue to threaten purchasing power, particularly in light of Russia’s invasion of Ukraine, which sent commodity prices soaring. Looking beyond the first quarter, the economy is expected to grow at a stronger pace this year thanks to strong industrial demand as inventory levels remain low and the labor market remains tight. However, pre-existing challenges will resurface post-pandemic.
Carsten Brzeski, global head of macro for ING Research, elaborated:
“As the economy leaves the pandemic behind, the structural challenges of the past will re-emerge. The new government is clearly trying to tackle the problem of too little investment and too few structural reforms, improving German competitiveness over the coming years. However, the government does not seem to attach too much priority to making the pension and health care systems more sustainable. The structural problem currently most pressing for the short-term outlook is labour shortages. […] The drivers behind these labour shortages are the following: lack of EU labour mobility, demographics and skill mismatches.”