Economy

German recession delayed as economy unexpectedly grows

Economists had expected 0.2% decline in GDP

Commuters at the main train station in Berlin: the German economy unexpectedly expanded in the third quarter (Photo by JOHN MACDOUGALL/AFP via Getty Images)

Fri Oct 28 2022 - 10:58

German output unexpectedly grew in the third quarter, delaying a recession that analysts still expect on the back of soaring inflation and a war-induced energy crisis.

Europe’s largest economy expanded 0.3 per cent from the previous three months, defying analyst estimates of a 0.2 per cent contraction. Growth was driven primarily by private consumption, the statistics office said Friday.

The data are “absolutely stunning given so many indicators show that the economy has been slowing significantly for months, said Jens-Oliver Niklasch, an economist at LBBW, one of Germany’s state-backed lenders.

“There are probably two factors at play — the reverberations of the Corona reopening and the cornucopia of the summer relief package — which overcompensated the negative effects of the rise in energy prices and the Ukraine war.

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While Niklasch still sees a recession as likely in the winter, he said it may not be as serious as initially feared.

Friday’s report is likely to be the last piece of good news for some time. While Germany’s government is devising subsidies for most natural gas consumption after Russia slashed shipments, the Bundesbank sees output shrinking “considerably this winter.

The numbers follow weaker gross domestic product reports from France and Spain earlier Friday. Both nations eked out growth of 0.2 per cent.

Meanwhile, gauges of private-sector activity released this week by S&P Global showed October contractions for Europe, the UK and the US. Analysts polled by Bloomberg reckon Germany will drag the 19-nation euro zone into a recession next year.

Germany’s industry-heavy economy is more exposed to soaring energy costs due to an over-reliance on Russia for deliveries. Gas supplies have become a means for the Kremlin to strike back at the West for sanctions over its war in Ukraine.

The fear now is of energy shortages, even as unusually warm weather grants households and businesses some breathing space. In addition, global demand is slowing, snarls in supply chains are proving stubbornly persistent and data later Friday are expected to show inflation stayed above 10 per cent this month.

Covestro, a maker of polymers and high-performance plastics, cut its guidance this week after profit tumbled on the back of higher energy prices and weakening orders. The supplier to the automotive, electronics and medical industries is only able to pass on a small amount of its rising costs.

Adidas, meanwhile, last week issued its second profit warning in three months, warning that unsold goods are piling up as demand dwindles across China and Western markets.

A gauge measuring business expectations stabilised this month, according to the Munich-based IFO research institute that compiles it, suggesting some hope the economy can avoid the worst-case scenarios.

Even so, “it’s very unlikely we will avoid a recession, IFO president Clemens Fuest said. “The German economy is shrinking at the moment but maybe at a slower pace than most people fear, and this is a bright spot.

Economists predict contractions of 0.4 per cent and 0.5 per cent in the fourth and first quarters, before growth resumes in the spring. — Bloomberg

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