Puzzle graphic representing European financial crisis

Germany’s economy contracted 0.4 percent in last year’s final quarter as high inflation shrank consumer spending and business investment.

Persistently high energy prices also have gnawed at consumption and economic output.

The national statistics office originally estimated the contraction would be 0.2 percent.

Inflation remained above 8 percent through the quarter and ticked up to 8.7 percent in January from 8.1 percent in December, causing new worries about the country’s economic outlook.

Household spending fell 1.0 percent through the quarter, businesses invested 3.6 percent less in machinery and equipment, and construction spending was off by 2.9 percent.

Exports ticked down 1 percent compared to the third quarter as energy prices and lingering supply chain tangles curbed factory output. 

The government’s statistics office originally had estimated the economy had stagnated through the quarter, causing celebration among officials that it had not shrunk.

“According to current data, the economic slowdown [this winter] will be milder and shorter than expected,” the economics ministry said then in a public statement, adding that the economy had proven to be “gratifyingly resilient.”

“Decisive action last year helped us take control of the crisis,” economics minister Robert Habeck added, by enacting a series of government grants, loans, and other forms of support.

The new numbers have erased any cause for celebration and raised the risk of recession for Europe’s biggest economy, especially as Germany will now have to replenish its natural gas supplies ahead of next winter without access to Russia’s exported gas.

Because of Germany’s slump, “Eurozone GDP is very likely to be revised down” for 2022’s last quarter, economist Franziska Palmas at Capital Economics said to the Financial Times.

TREND FORECAST: As goes Germany, so goes the EU. Therefore, expect the Eurozone GDP to be revised downward as well. 

Even though lower energy prices allowed Germany to barely skirt a recession so far, the country still teeters on the edge. At the moment, the nation is in the grip of Dragflation, our Top 2022 Trend in which prices keep rising even though economic activity is shrinking.

Because Germany’s economy is the Eurozone’s largest, its fate exerts a powerful force on the rest of the region’s performance—and, therefore, because Germany is still stumbling toward a recession, the odds of a pan-European economic reversal have increased.

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