German economy dodges recession in 1st quarter despite war, pandemic - GulfToday

German economy dodges recession in 1st quarter despite war, pandemic

A salesman waits for customers on a farmer’s market in the northern German town of Hamburg. Reuters

A salesman waits for customers on a farmer’s market in the northern German town of Hamburg. Reuters

The German economy grew slightly in the first quarter from the previous one, data showed, with higher investments offset by the twin impacts of war in Ukraine and COVID-19 that experts predicted would weigh more heavily in the three months to June.

Europe’s largest economy grew an adjusted 0.2 per cent quarter on quarter and 3.8 per cent on the year, the Federal Statistics Office said on Wednesday. A Reuters poll had forecast 0.2 per cent and 3.7 per cent, respectively.

The reading meant that Germany skirted a recession, often defined as two quarters in a row of quarter-on-quarter contraction, after gross domestic product (GDP) fell by 0.3 per cent at the end of 2021.

While household and government spending remained mostly at the same level as in the previous quarter and exports were down at the start of the year, investments grew.

Construction investments, boosted by mild weather, were up 4.6 per cent from the previous quarter, despite price increases, and machinery and equipment investments rose 2.5 per cent.

German business morale rose unexpectedly in May as its economy showed resilience, according to an Ifo institute survey published this week that found no observable signs of a recession.

However, there is no upswing in sight either, and Sebastian Dullien, director of the Macroeconomic Policy Institute (IMK), predicted the effect of the war and pandemic-linked restrictions in China - Germany’s biggest trading partner last year, according to official data - would be much greater in the second quarter.

ING economist Carsten Brzeski said he was sticking with his baseline scenario of a slight GDP contraction in the second quarter after Wednesday’s reading.

“The build-up of inventories and weak consumption in the first quarter, as well as very weak consumer confidence, clearly dampen the optimism that traditional leading indicators are currently conveying,” he said.

A consumer sentiment index by the GfK institute inched up slightly heading into June from an all-time low in May, with household spending burdened by inflation.

The government forecasts economic growth of 2.2 per cent in 2022.

Meanwhile the German government bond yields edged lower on Wednesday after falling sharply the day before, while concerns about the economic outlook dampened risk appetite and expectations about the European Central Bank’s monetary tightening.

Flash Purchasing Managers’ Indexes released on Tuesday of the eurozone’s services and manufacturing sectors fell respectively well below and short of expectations.

Stocks moved cautiously higher on Wednesday before minutes of the latest US Federal Reserve meeting are released, while New Zealand’s dollar soared as its central bank joined those now aggressively jacking up interest rates. The Fed will release the minutes from its May 3-4 policy meeting at 1800 GMT.

“The bond market lacks clear direction as it doesn’t know what will happen with the ECB, while concerns about the economy continue to weigh,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

Germany’s 10-year government bond yield, the benchmark for the eurozone, dropped 0.5 basis points (bps) to 0.943%, after falling 7 bps on Tuesday.

“I expect the 10-year Bund yield to float around 1 per cent and the Italian-German yield spread to remain at around 200 bps before any clear indication about next ECB moves, which I think the central bank will provide in its next policy meeting,” Maxia added.

Investors’ focus remained on ECB speakers after recent comments from the eurozone central bank’s president Christine Lagarde broadly confirmed analysts’ expectations about future rate hikes, albeit at a gradual pace.

ECB board member Fabio Panetta said on Wednesday the central bank should curb stimulus gradually, avoiding the risk of a “normalisation tantrum”.

Lagarde has advocated a gradual approach to monetary tightening while asserting the ECB is free to observe and react to the effects on the economy and the inflation outlook as rates rise.

“Lagarde’s forward hikes serve as a tranquilliser for euro rates markets. Despite ongoing noise from the hawks, markets continue to focus on her guidance of steady 25 bps hikes,” said Michael Leister, head of interest rates strategy at Commerzbank, in a note to clients.

Investment banks pointed to hawkish policymaker Robert Holzmann who said on Tuesday that a 50 bps hike in July would be appropriate, and to Latvia’s central bank governor Martins Kazaks, who argued that the ECB shouldn’t rule out 50 bps hikes.

“The decline in yields has been more muted after there was further chatter about a potential 50 bps hike from the ECB,” Deutsche Bank analysts said.

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