Inflation and energy price spikes are weighing on household consumption and capital investment in Germany
The German economy shrank by 0.4% quarter-on-quarter in the final three months of 2022, the country’s Federal Statistical Office reported on Friday. The contraction came in larger than the previously estimated 0.2% GDP drop.
Analysts attribute the worse than expected reading to persistently high inflation and lingering concerns over energy supplies, which are weighing heavily on household consumption and capital investment. Data showed that German household spending was down 1.0% in the fourth quarter, while investment in construction was down 2.9% and in machinery and equipment down 3.6%.
German exports of goods and services also dropped, by 1% against the third quarter, on lingering supply chain disruptions and high energy prices.
The weaker than expected performance signals a risk of recession, particularly given that the current quarter may also see a contraction, analysts say. Technically, a country is considered in recession after two consecutive quarters of negative growth.
Europe’s largest economy, Germany suffered from record inflation last year due to a surge in energy prices following the drop in supplies from Russia amid Ukraine-related sanctions.
Last month, the annual inflation rate rose to 8.7% and 1% in monthly terms, according to official figures released on Wednesday. Analysts warn that Berlin could face further price spikes in the coming months, when it will have to refill gas storages for next winter largely without Russian supplies.
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