An image of “traffic at a street junction in Berlin” sat atop one outlet’s summary of Germany’s Q4 GDP data, released on Friday.
The intersection in the picture was rain-soaked. The wet pavement reflected orange street lamps and red taillights. It was dusk. And it was cloudy.
That captured the mood. Germany’s economy, the world’s fourth largest, shrank in Q4 (figure below), bringing the country to the brink of its second recession of the pandemic era.
“After economic performance had increased again in summer despite growing delivery bottlenecks and material shortages, the recovery of the German economy came to a halt at the end of the year due to the fourth COVID-19 wave and another reinforcement of preventive measures,” the government said Friday.
This was largely expected. I previewed it months ago here. The question now is whether Germany can skirt recession, a task that’ll likely be complicated by holidays in China and Omicron’s impact on Asia.
“Countries in Europe are loosening restrictions and the WHO even suggested that Europe is heading towards a pandemic end game [which] bodes well for domestic restrictions, but there’s a catch,” Rabobank said, warning of “a chance [the] Omicron outbreak in China significantly aggravates supply chain issues, just as some of [those] issues have started to ease.”
Unlike persistent, “sticky” price pressures in the US, inflation in Europe is likely to abate. But additional supply chain problems and, of course, any kind of escalation in the energy crisis tied to Russia and Ukraine, would introduce considerably uncertainty into benign inflation forecasts. Inflation in Germany surged to multi-decade highs last year (figure below).
“With this weak fourth quarter, the likelihood of Germany being in an outright recession at the turn of the year has increased,” ING wrote, cautioning that “high energy prices will continue weighing on private consumption, even if social restrictions are lifted in the coming weeks.”
Thankfully for the broader European outlook, figures out of France and Spain were considerably better.
But Germany is the bloc’s growth engine. The country has faced a series of crises over the past two years, and is now flying with a new captain. Generally speaking, analysts don’t expect a recession, even if it materializes, to be deep or prolonged. You could (easily) argue that geopolitical tensions and energy uncertainty skew the risks to the downside, but it’s worth noting that if supply chains ever do normalize, Germany will be a big beneficiary.
For now, though, it’s rainy, cloudy and seemingly always dusk — just like the image atop Bloomberg’s Friday coverage.
“Even though the German government didn’t impose significant additional containment measures, some consumers decided to stay home voluntarily, as indicated by mobility data,” Rabobank’s strategists remarked. “On top of that, the large German industrial sector had to deal with higher input prices, a shortage of key inputs such as semi-conductors and lengthened delivery times.”
It never ends.