The German economy contracts as inflation picks up on both Spain and Italy

by Shaun Richards

Last week ended with us looking at how the ECB was planning to apply the brakes more forcefully on the Euro area economy. We have a new context for this today as Germany released this.

WIESBADEN – The gross domestic product (GDP) fell by 0.2% in the fourth quarter of 2022 compared to the third quarter of 2022 – adjusted for price, seasonal and calendar effects.

We had our concerns but there has been quite an effort from the German government on the subject starting just under a fortnight ago.

“I’m absolutely convinced that this will not happen — Germany going into a recession,”  Scholz said Tuesday in an interview with Bloomberg Editor-in-Chief John Micklethwait.

Then last week we were told this via Bloomberg.

The German government expects Europe’s biggest economy to grow by 0.2% this year instead of the 0.4% contraction it predicted in October, according to people familiar with new forecasts to be published Wednesday.
The government downgraded its growth forecast for next year to 1.8% from 2.3%, according to the people, who asked not to be identified ahead of official publication.

People can of course forecast whatever they want and indeed they often do. But the narrative as presented here was.

Germany to Quash Recession Fears With 2023 Growth Forecast

This morning has brought a dose of reality to this rather than forecasts. Also the forecast above applied one of my rules where essentially the growth was taken from next year and given to this one. That is easy to do because by the time we get to 2024 there will have been new forecasts anyway and Hey Presto! this year looks better.

Breaking the numbers down

It looks as though an issue I have frequently raised ( the problem of falling real wages in the Euro area) came home to roost via consumption.

After the German economy held up well in the first three quarters despite difficult conditions, economic output decreased slightly in the fourth quarter of 2022. In particular, the price-, seasonally and calendar-adjusted private consumer spending, which had supported the German economy in the course of the year to date, was lower than in the previous quarter.

This means that if we look back there has not been much economic growth at all.

In a year-on-year comparison, GDP in the fourth quarter of 2022 was 0.5% higher in price-adjusted terms and 1.1% higher in price- and calendar-adjusted terms than in the fourth quarter of 2021. The difference to the non-calendar-adjusted value is also due to the fact that the fourth quarter of 2022 had an average of 1.2 fewer working days than in the same quarter of the previous year.

I am not sure how you get to 1.2 working days but anyway the picture is not materially changed by the 0.2.

We can take a deeper perspective because GDP was rebased at 100 in 2015 and is now after price and calendar adjustment at 107.7. So not a lot especially when we recall it includes a period that was described at the time as the Euro Boom. For newer readers Germany later had some downwards revisions which rather changed the picture.

Spain Inflation

We can continue our journey into the gap between perception and reality via this.

Spanish inflation on Monday expected at 4.7% – I see material downside risk to that number And guess what, Spain leads Europe by 2 months Inflation is falling off a cliff in Europe now ( @AndreasSteno)

4.7% would have been quite a number even for Spain which has managed to decouple from European gas prices to a large degree and thus seen lower inflation. There were many forecasts of lower inflation whereas yet again reality was somewhat different.

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The estimated annual inflation of the CPI in January 2023 is 5.8%, according to the indicator advance prepared by the INE. This indicator provides a preview of the CPI which, if confirmed, would mean an increase of one tenth in its annual rate, since in the month of December this variation was of 5.7%.

So in fact rather than the sharp fall predicted and promised we saw a rise driven by the factors below.

This evolution is mainly due to the fact that fuel prices rise more than in January 2022, since the decrease in the prices of clothing and footwear is less than in the past year.

It seems that the experts missed the rise in fuel prices,although they did have this in their favour.

In the opposite direction, the drop in electricity prices stands out, greater than in January of 2022.

If we switch to the view of the ECB well they are perhaps wishing they had never played with the toy they call core inflation.

The estimated annual change rate of core inflation (general index without food not processed or energy products) increased five tenths, up to 7.5%.

At this point the ECB may well be mulling the words of the C+C Music Factory.

(Things that make you go hmmmm… ay)(Things that make you go hmm, hmm, hmm)Hmmmm…

Then Italy added some extra flavour.

In December 2022, industrial production prices increased by 2.9% on a monthly basis and by 31.7% on an annual basis (it was +29.4% in November). ( Istat )

So things accelerated rather than slowed  and this time around the main influences were domestic.

On the domestic market, prices grew by 3.8% compared to November and by 39.2% on an annual basis (from +35.7% in the previous month).

Combined with confirmation that so much of this has been energy related.

Excluding the energy sector, prices decreased by 0.1% compared to the previous month and recorded a growth trend of 11.2%, slowing down compared to November (+12.0%).

Lots of  people and indeed  businesses would like to exclude energy from their bills but sadly only central bankers can.


Today has shown how difficult the job of the ECB will be in 2023 as we have seen both a weaker economy ( Germany) and higher inflation ( Spain and Italy). Also the external environment does nit look particularly bright either.

Sweden’s GDP decreased by 0.5 percent in December, seasonally adjusted and compared with the previous month, as shown in the preliminary compilation of the GDP indicator. For the fourth quarter as a whole, GDP decreased by 0.6 percent, seasonally adjusted and compared with the previous quarter. ( Sweden Statistics )

Indeed Sweden is in a particularly rough run.

In December, GDP was 1.8 percent lower than in the corresponding month a year ago.

Fair play to them for showing the difference between the output and expenditure measures as this often gets swept under the carpet. Or more specifically into table so far down the release that few get there.

From the point of the ECB the interest-rate rises are yet to impact and it looks set to add another 0.5% later this week. So as I noted on Friday the monetary brakes are on with the money supply falling. Yet it acted too later to deal with the inflationary surge, which is ongoing. One thing we can be sure of is that Germany has seen economic events turn against it.

The German economy is back to its pre-pandemic *level*.  The US economy is back to its pre-pandemic *trend*, i.e. 5% above its pre-pandemic level in Q3. ( @fwred )


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