Don’t call off the European recession just yet.
The German economy contracted in the fourth quarter, according to a preliminary estimate released by the government on Monday. The outcome was at odds with a previous estimate for stagnation.
“After the German economy managed to perform well despite difficult conditions in the first three quarters, economic performance slightly decreased in the fourth quarter,” the statistics office said, citing faltering consumption.
As a result, full-year growth was revised slightly lower. Just last week, Berlin revised its growth outlook for 2023 markedly higher, from a 0.4% contraction to an expected expansion.
The macro zeitgeist in January leaned heavily on the notion that the European economy might avoid a recession altogether. That made for a stark contrast with the fears of an existential energy crisis which proliferated last summer as the Kremlin choked off gas flows and wholesale power prices exploded higher.
German inflation receded last month into the single-digits, but Monday’s preliminary growth data (which didn’t include a detailed breakdown) suggested consumers retrenched meaningfully versus the third quarter. There’s some evidence that elevated consumer price growth in Europe is finding its way into wage-setting, a development which’ll keep the ECB on its toes. The central bank meets this week. Another half-point rate hike is likely.
More timely indicators hint at an improving outlook. For example, PMIs released last week suggested bloc-wide economic activity expanded during the first weeks of 2023, albeit barely. In Germany, the composite gauge printed a seven-month high, even as it remained just short of the expansion line. The services sector expanded and manufacturing contracted at about the same pace as last month.
Also on Monday, Spain said inflation picked up to 5.8% this month, a full point above consensus. Spain’s inflation trajectory was very favorable prior to January’s uptick. After peaking above 10% last summer, price growth nearly halved. Core inflation hit a record at 7.5% this month, according to Monday’s figures.
One concern for Spain, apparently, is that falling energy prices and subsidies are forestalling the demand destruction necessary to dampen broader price pressures. “Core inflation continues to rise worryingly strongly, showing that underlying price pressures in the economy are still very high,” ING’s Wouter Thierie said. “The Spanish government has launched several support packages to help families [through the] energy crisis. One drawback of these measures is that they may prolong inflationary pressures.”
A gauge of European economic sentiment rose a third month in January, driven in part by optimism in the services sector. That muddied the waters further, and also appeared to nod in the direction of demand construction (as opposed to destruction) at odds with the ECB’s inflation fight.
As for the read-through from Germany’s surprise Q4 contraction, ING’s global head of macro, Carsten Brzeski, summed it up: “Today’s GDP numbers once again show that caution, better than hope, is probably the best guidance for predicting German and European economic growth.”
