The German Statistical Office Destatis has estimated that Germany’s economy will grow by 1.9% in 2022. The year-on-year change implies a stable performance, not a contraction, in the fourth quarter of the year, easing fears that the war in Ukraine and rising inflation have triggered a recession.
The figure is lower than the +2.6% recorded in 2021 but slightly higher than the +1.8% average estimated by analysts (Bloomberg consensus), which forecast a contraction of 0.5% in the fourth quarter of 2022.
War and inflation weigh on Germany’s GDP in 2022
The year had opened in the name of hopes for a strong recovery in post-pandemic demand, with GDP growth forecasts of around 4%. However, the Russian invasion of Ukraine has reshuffled the cardshighlighting the German economy’s dependence on cheap natural gas supplies from Moscow.
Chancellor Olaf Scholz managed to buffer the situation, quickly finding alternative energy sources and also benefiting from an unusually mild winter climate. Companies, meanwhile, recalibrated supply chains after production halted in some factories in the first days after the war broke out.
However much remains to be done and the situation is exacerbated by high inflation, which will continue to weigh on businesses and consumers in the years to come, despite the support measures launched by the government. Consumer prices reached a peak of 11.6% on a year-on-year basis in 2022. Since September, economists have begun to estimate a decline in the German economy, in the wake of signals from confidence indicators and the decline in PMI indices.
Cautious optimism with stable production and low energy consumption
A moderate optimism has returned in the last periodmotivated by the encouraging indications coming from companies. Factories are keeping production stabledespite weaker demand, to clear previously delayed orders due to logistical bottlenecks.
Companies like Volkswagen have reported that these problems are easing. The automaker expects sales to rise this year, with orders for 1.8 million vehicles in Western Europe helping to offset a slumping global economy.
Also gas prices have decreased from their previous peaks, also thanks to above-average temperatures which have curbed consumption and the country can now get through the winter unscathed, even in the event of a sudden wave of frost. A further boost to production can come from China abandoning the Zero-Covid policy.
ING remains cautious, possible downward revision of the 4Q22 estimate
ING Research’s view is decidedly cautious. The +1.9% recorded for the whole of 2022, as highlighted, “implies a stagnant economy, not a contraction, in the fourth quarter after the +0.4% cyclical trend in the third quarter. Will the widely predicted recession simply not materialize? We remain doubtful”, he comments Carsten Brzeski, Global Head of Macro at the institute, according to which “this estimate for the fourth quarter will still be slightly revised”.
The annual performance is “definitely not bad, for a year marked by lockdowns and war. Today’s data shows that in 2022 the recovery following the end of the lockdowns, for both consumption and production, has outpaced the economic fallout from the war in Ukraine. Fiscal support also cushioned the decline in the last few months of the year.”
Worst avoided but economic problems remain in Germany (ING)
“To put things in perspective,” Brzeski points out, however, “Germany’s economy has just returned to its late 2019 size. Three years of crisis have not gone unnoticed.”
Moreover, “the fact that the German economy has avoided the worst unfortunately does not mean that all the problems have disappeared. The post-lockdown recovery has ended and will not support economic activity in 2023”, while “the negative effects of the war and the energy crisis are likely to prevail and hold back the economy. Weakening industrial new orders since February last year and weak consumer confidence are just two of many reasons for further problems for Germany.”
The German economy, concludes ING, “is still facing a series of challenges that will probably weigh on growth this year and beyond: energy supply for winter 2023/24, the evolution of global trade with increased geopolitical risks and changes in the supply chain, high investment needs for digitalisation and infrastructure and a growing shortage of skilled workers”.