San Francisco Frontiers - German economy shrinks slightly in third quarter

The economy contracted by 0.1 percent quarter-on-quarter, federal statistics agency Destatis said in preliminary figures, dragged down by lower household spending.

Elevated energy costs, a sluggish manufacturing sector and high interest rates designed to tame consumer price rises have all similarly weighed on the German economy.

Analysts surveyed by FactSet had predicted a sharper contraction of 0.2 percent.

More surprisingly, Destatis said revised data showed the economy stagnated in the first quarter and did not shrink as previously thought, meaning Germany dodged a technical recession of two consecutive quarters of contraction around the turn of the year.

The agency also updated its second-quarter figure, saying output grew by 0.1 percent instead of showing zero growth as earlier data had suggested.

Germany's performance so far this year has been "a little better than we had feared", said LBBW economic Jens-Oliver Niklasch.

But it does not "change the overall picture", he said. "Germany's economy is more or less treading water."

The German economy has faced severe headwinds since Russia's invasion of Ukraine last year sent inflation, particularly the cost of energy, soaring.

The resulting slowdown in the energy-hungry manufacturing sector has been compounded by weakness in key trading partner China and aggressive eurozone rate hikes.

- Slower inflation -

The third-quarter contraction keeps Germany on track to end the year in recession, with many analysts expecting another drop in gross domestic product over the final three months of 2023.

Following a slew of underwhelming data since the start of October, "it seems likely that GDP will decline again in the fourth quarter", said Capital Economics economist Andrew Kenningham.

The German government said earlier this month it expected the economy to shrink by 0.4 percent this year, a sharp downgrade from previous forecasts.

The International Monetary Fund believes Germany will be the only major advanced economy to contract in 2023, acting as a drag on eurozone growth.

The European Central Bank last week opted to keep interest rates steady after 10 consecutive hikes, as inflation eased and concerns grew about weakening economic activity in the 20-nation currency club.

German inflation slowed from 6.2 percent in July to 4.5 percent at the end of the quarter in September, a low since the start of the Ukraine war, thanks in large part to falling energy costs.

The indicator fell again to 3.8 percent in October, according to data published by Destatis on Monday, with energy prices posting their first year-on-year fall since January 2021.

- Sick man? -

In addition to the current economic headwinds, Germany is facing major structural challenges including a shortage of skilled workers as the population ages, a costly transition towards green energy and years of under-investment in infrastructure.

Germany's woes have led to debate about whether it is once again the "sick man of Europe", a label from the late 1990s when the country grappled with the costly fallout of reunification.

But some analysts say this is going too far, pointing out the labour market remains robust despite the challenges.

Economic recovery is seen getting under way next year with the government predicting growth of 1.3 percent, helped by cooling inflation and rising wages.

Q.Taylor--SFF