Germany: Economy ends 2021 on a sour note
The German economy contracted 0.7% over the prior quarter on a seasonally- and calendar-adjusted basis in the fourth quarter (Q3: +1.7% qoq). The result undershot market analysts’ expectations of a smaller drop, and was driven by the reintroduction of Covid-19 restrictions amid a surge in cases and lingering supply-side concerns. Meanwhile, on an annual basis, the economy expanded 1.4% in Q4, down from the 2.8% increase logged in the third quarter.
Activity was dented by declining household spending, which suffered from skyrocketing price pressures amid higher energy prices in addition to restrictions on daily life. Investment in the construction sector also declined. On the other hand, government consumption continued to grow in the quarter. A detailed breakdown of national accounts data is set to be released on 25 February.
The economy will continue to feel the pinch from global supply chain frictions and high energy prices in the first quarter of this year, and could enter a technical recession as a consequence. That said, activity should pick up steam thereafter amid the removal of social restrictions. Household spending will be supported by a tight labor market and associated wage growth, while the rise in inflation should moderate as well. Moreover, the government is set to increase public investment and spending on digital infrastructure.
Dr. Jörg Krämer, chief economist at Commerzbank, commented:
“After the minus in the fourth quarter, the real GDP is likely to fall slightly again in the first quarter. For example, data from the reservation platform Open Table indicate that the hospitality industry’s turnover declined about 15.0% in January compared to the average for the fourth quarter. Retail sales are also expected to be below the fourth quarter average in January, according to data from Google. In addition, the truck toll index suggests that the manufacturing’s recovery in the fourth quarter did not continue, at least in January.”
Carsten Brzeski, global head of macro at ING, added:
“Even if the economy were to fall into a technical recession, this recession will be mild and short-lived and is unlikely to harm the labour market. On the contrary, we stick to our view that the German economy will stage an impressive comeback in the spring. Admittedly, geopolitical risks could still spoil the growth party but the end of social restrictions and significant relief in global supply chains should combine to give the German economy an enormous boost.”