Recession view revived as German economy unexpectedly shrinks in Q4.

Germany’s economy unexpectedly shrank in the fourth quarter, compared with the previous three-month period, official figures showed Monday.

The data marked a worse-than-expected performance and a sign that Europe’s biggest economy may be entering a much-predicted recession, though likely a shallower one than initially feared.

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The gross domestic product (GDP) decreased 0.2% quarter on quarter in adjusted terms, the Federal Statistical Office said. A Reuters poll of analysts had forecast the economy would stagnate.

The office said that the GDP shrank for the first time since the first quarter of 2021 largely because of a decline in consumer spending, which had supported the economy in the first nine months of 2022.

The drop followed a growth of 0.5% in the third quarter and 0.1% in the second quarter.

The statistics office said in mid-January, before it had complete December economic data, that the economy appeared to have stagnated in the fourth quarter. Monday’s announcement prompted it to revise last year’s full-year growth figure down to 1.8% from the 1.9% it initially reported.

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A recession – commonly defined as two successive quarters of contraction – has become more likely, as many experts predict the economy will also shrink in the first quarter of 2023.

“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.”

German Economy Minister Robert Habeck said last week in the government’s annual financial report that the economic crisis triggered by the Russian invasion of Ukraine was manageable, though. However high energy prices and interest rate rises mean the government remains cautious.

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The government has said the economic situation should improve from spring onwards, and last week revised the GDP forecast for 2023 – predicting growth of 0.2%, up from an autumn forecast of a 0.4% decline.

As far as the European Central Bank (ECB) goes, Monday’s GDP figures are unlikely to affect interest rate expectations as inflationary pressures remain high, said Helaba bank economist Ralf Umlauf.

The ECB has committed to raising its key rate by half a percentage point this week to 2.5% to curb inflation.

Monday’s figures showed falling private consumption was the primary reason for the decrease in fourth-quarter GDP.

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“Consumers are not immune to an erosion of their purchasing power due to record high inflation,” said Commerzbank chief economist Joerg Kraemer.

Inflation, driven mainly by high energy prices, eased for a second month in December, with EU-harmonized consumer prices rising 9.6% on the year.

However, analysts polled by Reuters predict annual EU-harmonized inflation will enter the double digits again in January with a slight rise to 10%. The office will publish the preliminary inflation rate for January on Tuesday.

A potential energy crunch following Russia’s invasion of Ukraine and the end of its gas supplies to Germany also was a concern last year. But Germany’s network regulator said that a gas shortage was “increasingly unlikely” this winter


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