September 26, 2023
Economy International

German economy contracts in Q4 2022 due to drop in consumer spending and investment

The German economy experienced a 0.4% contraction in the fourth quarter of 2022, marking a significant downward revision from the initial report of a 0.2% decline. This quarter-on-quarter contraction was the first since the first quarter of 2021. Consumer spending, which had supported growth in the first nine months of the year, dropped by 1% in the last three months of 2022. Additionally, investment in construction and machinery experienced more significant declines in the final quarter, according to the Federal Statistical Office.

Despite pressure from high inflation and fears of an energy crunch last year when Russia reduced and then cut off its gas supplies to Germany, the economy has generally held up well. The full-year 2022 growth figure for Germany, Europe’s largest economy, remained at the 1.8% that the office reported at the end of January.

Although a closely watched survey showed that German business confidence improved for the fourth consecutive month, this was primarily due to an improvement in companies’ outlook for the next six months. Their assessment of the current situation has slightly worsened for the second consecutive month, alongside weak consumer confidence and other factors, highlighting the expectation that the German economy will contract again in the current first quarter.

ING economist Carsten Brzeski said that “Not falling off the cliff is one thing; staging a strong rebound, however, is a different matter.” He also noted that industrial orders have been weakening for the past few years, consumer confidence is still near historic lows, the loss of purchasing power will continue in 2023, and the full impact of monetary policy tightening has yet to unfold.

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