Omicron, supply shortages risk pushing Germany into recession

Germany’s economy contracted 0.7% in the fourth quarter and now risks falling into recession.

By Alexander WeberBloomberg

Published On 28 Jan 2022

Germany’s economy shrank 0.7% in the fourth quarter with consumers spooked by another wave of Covid-19 infections and factories reeling from supply-chain problems.

The figures reported by the nation’s statistics office are in line with an earlier estimate, but missed expectations by economists for a contraction of 0.3%. With no easing of coronavirus restrictions in sight and manufacturing constraints only starting to ease, Europe’s largest economy risks falling into its second recession of the pandemic.

Chart showing Germany's GDP compared to Grance and Spain

France and Spain meanwhile reported faster-than-expected growth. Rising consumer spending and investment in the former powered an expansion of 0.7%, output in the latter was up 2% at the end of last year.

In Germany, private consumption declined in the fourth quarter along with construction. The economy grew 2.8% last year, slightly more than reported earlier.

BioNTech SE, which developed one of the world’s first coronavirus vaccines with Pfizer Inc., contributed about half a percentage point to annual growth. Still, the economy remained 1.5% smaller than before the pandemic, the statistics office said.

“With this weak fourth quarter, the likelihood of Germany being in an outright recession at the turn of the year has increased,” said Carsten Brzeski, an economist at ING. “High energy prices will continue weighing on private consumption, even if social restrictions are lifted in the coming weeks.”

At the start of 2022, the coronavirus crisis continues to rage in Germany. The omicron variant has sparked record infections and prompted curbs on restaurants and other leisure activities, targeting mainly unvaccinated people.

What Bloomberg Economics Says…

“The omicron wave has yet to peak in Germany and we have not seen any meaningful pickup in contact-intensive activity at the start of the year. Even so, the experience from countries like the U.K. is that an intense period of high infections can also past swiftly. We are expecting the German economy to rebound somewhat later in 1Q as cases fall.”

–Jamie Rush, chief European economist. For full REACT, click here

Health Minister Karl Lauterbach has predicted the current wave will only peak in mid-February, leaving little leeway to loosen restrictions even as hospitalization rates remain in check.

At the same time, supply constraints that have hampered the country’s manufacturing sector are only easing gradually, and the spread of omicron in Asia raises the specter of a setback.

Germany was the only European country that saw car sales shrinking in 2021, illustrating its strong exposure to the chip-supply crisis. Volkswagen AG deliveries dropped to the lowest in a decade, despite robust orders.

Heightening tensions with Russia over Ukraine, which could send energy prices even higher, has emerged as another risk. The German government this week predicted 2022 growth of 3.6%, down from an earlier estimate of 4.1%.

Read more: ECB’s Simkus Warns of Major Economic Risk From Ukraine Tensions

Businesses are still optimistic that Germany’s economy will stage a strong comeback this year. A confidence indicator for January improved more than analysts had predicted amid hopes that supplies become more readily available and consumers spend at least some of their excess savings.

Puma SE has already benefited from a rebound in demand. The sports-gear maker posted record sales and earnings last year.

(Updates with comment from economists starting in sixth paragraph)

–With assistance from Harumi Ichikura and Kristian Siedenburg.

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