Germany's Economy Shrinks: Q4 GDP Contracts by 0.3%

Highlights

• In the fourth quarter, German GDP diminishes by 0.3%, in line with initial calculations.
• Household spending and the service industry exhibit slight expansion.
• Despite obstacles, there is a rise in motor vehicle manufacturing.  

German Economy Contracts

The German economy experienced a 0.3% contraction quarter-on-quarter in Q4, consistent with initial estimates, following a stagnant performance in Q3. According to Destatis:

- Household spending saw a slight increase of 0.2%.
- Positive contributions came from the services sector and government spending.
- However, there were declines in construction investment (-1.7%) and machinery and equipment investment (-3.5%).
- Trade terms also had a negative impact, with exports dropping by 1.6%.
- Despite this, there was an increase in the production of motor vehicles, trailers, and semi-trailers, which defied the broader manufacturing trend.
- Year-on-year, the German economy shrank by 0.2% in Q4, following a 0.3% contraction in the previous quarter.

Implications for ECB Monetary Policy

The ECB closely monitors the German economy, and while recent private sector PMI data may have alleviated immediate concerns about the German economy leading the Eurozone into recession, the possibility of a technical recession in Germany could prompt discussions about interest rate cuts by the ECB.

EUR/USD Reaction to German Economic Data

Before the release of the German GDP figures, the EUR/USD pair dropped to $1.08148 before rebounding to $1.08319. However, after the GDP numbers were announced, it fell to $1.08238 before recovering to $1.08270. By Friday, the EUR/USD had risen slightly to $1.08253.

230224 EURUSD 3 Minute Chart

What's Ahead

Focus will be on German business sentiment, consumer inflation expectations, and ECB commentary. Economists anticipate the Ifo German Business Climate Index to rise from 85.2 to 85.5 in February, which could indicate a shift in momentum for the German economy. However, the ECB Consumer Inflation Expectations Survey might carry more weight for the ECB, given its focus on wage growth and inflation. ECB President Christine Lagarde and Executive Board member Isabel Schnabel are scheduled to speak, adding further significance to ECB commentary amidst the attention on Germany and inflation.