The rebound that almost wasn’t… Despite one of the biggest fiscal stimulus packages during the pandemic, the German economy disappointed in 2021. Global supply chain frictions crippled industrial activity and weighed on economic activity. As a result, and according to the data just released, the German economy grew by 2.7% in 2021, compared to -4.6% in 2020. According to the monthly information available and the statement by the statistical agency , the economy contracted in the fourth quarter. of 2021. As a result, it could take until the second quarter of 2022 before the economy returns to its pre-crisis level.
Recession now, growth champion later?
It’s a strange tradition that the German statistics agency releases GDP growth data for the full year in mid-January, when no hard data is available for December. Admittedly, the last month of the year, as well as the last quarter of the year, have a relatively less impact on the full year figures. Further revisions in the fourth quarter will hardly change today’s annual growth figure.
With 2.7% in 2021, the German economy is one of the growth laggards in the euro zone. Despite having one of the largest fiscal stimulus packages throughout the crisis, the economy has not emerged as one of the top or one of the strongest economies. However, the main reason for the delay is not fiscal policy inefficiency, but global supply chain frictions. No other eurozone country has suffered as much as the German economy amid a series of supply chain frictions. Industrial production has practically stagnated since the spring of last year, despite well-filled order books and very low inventories. The benefit of a disappointing growth performance in 2021 is that the economy is fundamentally sound and once pandemic-related restrictions are lifted and global supply chain frictions ease, activity industry and with it, the whole economy will restart.
Focusing on the most recent developments, today’s GDP data implies that the economy contracted slightly in the fourth quarter of 2021. Since there is no hard data available yet for December, and also given that December was anything but a strong month, we wouldn’t be surprised to see a negative surprise once Q4 data is officially released in a few weeks. In any case and as expected, the fourth wave of the pandemic, restrictions in the retail, hospitality and leisure sectors towards the end of the year as well as the continuing frictions of the chain of supply, rising inflation in general and rising energy and commodity prices in particular, has brought the German economy to the brink of stagnation.
Going forward, even though the health implications of Omicron appear to be less severe than previous Covid variants, the fact that it is more contagious will weigh on the short-term outlook for the German economy. Exceptionally high sick leave alone will weigh on economic activity. Add to that the ongoing restrictions, the fact that rising energy and producer prices will still impact consumers in the months to come, and the fact that global supply chain frictions will not will start to subside significantly only after the Chinese New Year and it is clear that the German economy will flirt with recession.
Overall, today’s data suggests that the German economy contracted in the last quarter of 2021. As there is unlikely to be any near-term improvement, the economy is likely to shrink. contract again in the first quarter of 2022, flirting with recession. The only downside is that growth should pick up strongly after this winter period. Champion of recession and growth in 2022? It seems possible.