German economy shrinks 0.4% in fourth quarter, weak start to 2023 seen

The skyline with its financial district amid the outbreak of the coronavirus disease (COVID-19) in Frankfurt
The skyline with its financial district is photographed during sunset as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, October 26, 2020, REUTERS/Kai Pfaffenbach

BERLIN, Feb 24 (Reuters) - The German economy contracted more strongly than expected in the final three months of 2022, as inflation and the energy crisis took their toll on household consumption and capital investment.

The German economy shrank by 0.4% in the fourth quarter of 2022 compared with the previous three months, the statistics office said on Friday.

Preliminary data from the office had pointed to a 0.2% quarter-on-quarter contraction adjusted for price and calendar effects. In the third quarter of 2022, gross domestic product saw slight growth of 0.5% compared to the three months prior.

The second consecutive drop in the Ifo's current assessment component, a falling manufacturing PMI, weak consumer confidence and a willingness to spend close to historical lows, all point to a contraction of the German economy once again in the first quarter, ING's global head of macro Carsten Brzeski said.

The worse-than-expected final result for the fourth quarter increases fears of a winter recession. A recession is commonly defined as two successive quarters of contraction.

"Today's numbers show that the sharp rise in energy prices has noticeably slowed down the economy despite the government's extensive aid measures," Commerzbank's economist Ralph Solveen said. With the global tightening of monetary policy, Solveen said a noticeable economic recovery is hardly to be expected.

After relief measures such as the fuel discount and the 9-euro transport ticket ended, consumers spent less in the fourth quarter than in the third quarter, the statistics office said. Household spending was down 1.0%, while government spending rose 0.6% compared to the previous quarter.

Investment also weighed on economic performance, according to the statistics office. Investment in construction fell 2.9% in the fourth quarter, while investment in machinery and equipment declined 3.6%, both adjusted for inflation, seasonal and calendar effects.

In the fourth quarter, exports of goods and services fell 1.0% compared to the third quarter. This was due to the difficult international situation, marked by ongoing supply chain disruptions and high energy prices, according to the statistics office.

Reporting by Maria Martinez, Editing by Kirsti Knolle, Friederike Heine, Rachel More and Tomasz Janowski

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