German economy shrank 0.2% in Q4, worse than expected

Germany's economy shrank by 0.2% in the fourth quarter compared with the previous three-month period, official figures showed Monday. The performance by Europe's biggest economy was worse than expected.

Gross domestic product shrank for the first time since the first quarter of 2021 largely because of a decline in consumer spending, which had supported the economy in the first nine months of 2022, the Federal Statistical Office said. The drop followed GDP growth of 0.5% in the third quarter and 0.1% in the second quarter.

The statistics office said in mid-January, before it had full December economic data, that the economy appeared to have stagnated in the fourth quarter. Monday's announcement prompted it to revise last year's full-year growth figure down to 1.8% from the 1.9% it initially reported.

In the fourth quarter, “surging inflation weighed on consumers’ real purchasing power and concerns abounded about a possible acute gas shortage during the winter,” Timo Klein, principal economist at S&P Global Market Intelligence, wrote in a research note.

But "on the bright side, as those fears have largely disappeared in recent weeks and as China’s economy looks to be recovering earlier than expected, the odds have improved for avoiding a recession in the first quarter of 2023,” he added.

The German government said last week that it expects the country to eke out economic growth of 0.2% this year instead of a 0.4% contraction that it previously forecast.

Germany’s annual inflation rate rolled back from a peak of 10.4% in October to 8.6% in December, but galloping prices remain a major headache for consumers whose money isn't going as far.

A potential energy crunch following Russia’s invasion of Ukraine and the end of its gas supplies to Germany also was a concern last year. But Germany’s network regulator said this month that a gas shortage was “increasingly unlikely” this winter.

European Union’s statistics agency, Eurostat, will release fourth-quarter economic growth figures for the entire eurozone on Tuesday and January inflation figures on Wednesday.

While inflation has ebbed, it is still painfully high and in the crosshairs of the European Central Bank, which is expected to raise interest rates again Thursday. The U.S. Federal Reserve and Bank of England also are expected to hike rates this week, which can slow economic growth.