German Economy Grows 1.90% In 2022 To Beat Expectations. Can It Avoid Recession?

Germany’s gross domestic product growth slowed less than expected in the year 2022, driven mainly by private consumption and investment in machinery, and returned to pre-pandemic levels. Despite the better performance, economists continue to look forward to a mild recession in the biggest euro area economy this year.

GDP grew a price-adjusted 1.90 percent in 2022, which was slower than the 2.60 percent expansion in the previous year, preliminary data from Destatis showed Friday. Economists had forecast 1.8 percent growth.

The German economy expanded for a second year in a row after a 3.7 percent contraction in 2020, when the Covid-19 pandemic severely hurt growth across the world. In 2019, the economy grew 1.1 percent.

“The overall economic situation in Germany in 2022 was characterized by the consequences of the war in Ukraine such as the extreme increases in energy prices,” said Ruth Brand, new president of the Federal Statistical Office/Destatis, said. Brand became the Destatis chief on January 1, 2023.

“In addition, there were aggravated material and delivery bottlenecks, massively increasing prices for food, for example, as well as the shortage of skilled workers and the ongoing corona pandemic, albeit easing over the course of the year.”

“Despite these persistently difficult conditions, the German economy was able to hold its ground overall in 2022,” Brand added.

Compared to 2019, the year before the start of the corona pandemic, GDP in 2022 was 0.7 percent higher, Destatis said.

The sheer fact that the German economy avoided the worst, unfortunately, does not mean that all of the economic problems have disappeared, ING economist Carsten Brzeski said, adding that the firm remains doubtful if the leading Eurozone economy would indeed avoid the much-predicted recession.

The German economy now faces a host of issues such as energy supply in the winter of 2023/24, changing global trade with more geopolitical risks and changes to supply chains, high investment needs for digitalisation and infrastructure and an increasing lack of skilled workers, Brzeski said. The economist expects these to weigh on growth this year.

Commerzbank Chief Economist Jorg Kramer predicted a mild recession with a 0.5 percent decline in real GDP for 2023, citing significant interest rate hikes by the central banks in the Western world. Another argument the economist put forward is that the German government’s relief packages cannot be targeted so precisely that every private household and every company is largely relieved of the consequences of high energy costs.

On a price and calendar-adjusted basis, the economy grew 2.0 percent in 2022, following a 2.6 percent growth in the previous year.

While the service sectors benefited from catch-up effects, high prices and a shortage of materials slowed down industrial production and construction, the statistical office said.

Private consumption grew 4.6 percent year-on-year, thus almost reached the pre-crisis level of 2019, Destatis said, thanks to the catch-up effects in the course of the lifting of almost all corona protection measures in spring 2022.

Construction investments shrank 1.6 percent, while outlay in machinery equipment and vehicles grew 2.5 percent.

Meanwhile, the trade balance damped GDP growth overall as the growth in imports exceeded that in exports. Exports grew 3.2 percent, while imports increased 6.7 percent.

Employment grew 1.3 percent or by 589,000 persons year-on-year to a record 45.6 million in 2022.

State budgets ended the year 2022 with a financing deficit of EUR 101.6 billion, which was nearly EUR 33 billion less than in 2021, when it was EUR 134.3 billion.

The relief in the state budget from the expiring corona measures was overshadowed by new burdens from the energy crisis resulting from the Russian war of aggression in Ukraine, Destatis said.

Government support measures including the three relief packages to help reduce the energy cost burden of households and businesses boosted government spending.

The federal deficit totaled EUR 117.6 billion in 2022, which was lower than the EUR 145.9 billion in the previous year.

The deficit to GDP ratio was 2.6 percent versus 3.7 percent in 2021. In 2020, it was 4.3 percent, while there was a surplus of 1.5 percent in the pre-pandemic year 2019.

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