Germany: Economy recovers at moderate pace in 2021
A preliminary estimate revealed that the German economy expanded 2.7% year-on-year on a price-adjusted basis in 2021, marking a moderate recovery from the pandemic-induced 4.6% contraction recorded in the prior year. The annual estimate highlighted that the economy has yet to return to pre-pandemic levels, and that GDP likely contracted on a quarterly basis in the final quarter of the year. Moreover, the print confirmed that the German economy has lagged behind its Euro area peers in terms of growth, despite unprecedented fiscal stimulus.
On the domestic front, government consumption growth inched down from 3.5% in 2020 to 3.4% in 2021, but remained fairly robust due to the purchase and distribution of free rapid antigen tests, as well as the procurement of Covid-19 vaccines and expenditure on testing and vaccination centers. Meanwhile, fixed investment swung to a 1.3% expansion in 2021 from a 2.2% contraction in the previous year. This was mainly driven by greater investment in machinery and equipment, while capital outlays in construction increased at a reduced pace. Lastly, household spending growth flatlined last year, contrasting a 5.9% decrease in 2020.
The external sector supported economic growth, contributing 0.9 percentage points to the headline reading. This contrasted the 0.8 percentage-point deduction in 2020. The improved performance was driven by a strong rebound in exports of goods and services, which grew 9.4% year-on-year (2020: -9.3% yoy). Meanwhile, imports of goods and services increased 8.6% in 2021 after contracting 8.6% in 2020.
Turning to this year, the German economy will likely continue to feel the pinch from global supply chain frictions in the first quarter. However, growth should pick up thereafter on the back of easing supply bottlenecks and softer Covid-19 restrictions. A tight labor market will support wage growth and household spending, while the new government is set to increase spending on public investment and digital infrastructure.
Carsten Brzeski, global head of macro at ING, commented:
“The economy risks contracting once again in the first quarter of 2022, flirting with recession. The only upside is that growth should pick up strongly after this winter spell. Recession and growth champion in 2022? It seems possible.”
Analysts at the EIU added:
“We expect the annual headline growth rate to be fairly strong in 2022, at 3.3% […]. As 2022 progresses, the release of pent-up demand will help lift private consumption, although the normalisation of retail and services activity will remain prone to setbacks as coronavirus variants continue to emerge. Supply-chain disruptions are likely to continue in the first half of 2022, constraining industrial production and export growth, and keeping the costs of energy, materials and transport elevated. We expect an improvement later in 2022 as frictions in global trade ease and greater domestic production of components such as semiconductors comes on stream.”