Europe’s two largest economies may have managed to avoid a recession in the fourth quarter, defying gloomy expectations and offering hope for similar feats across the advanced world.
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The consumer-led momentum boosted both Germany and the UK, according to official estimates of gross domestic product released on Friday.
Officials in Berlin suggested the eurozone engine likely stalled in the quarter, while UK data for November showed production unexpectedly rose 0.1%.
With both economies labeled only weeks ago by the OECD as this year’s likely laggards within the Group of Seven, generous subsidies for energy bills are shielding households against the worst cost-of-living shock in a generation. It raises the possibility of a soft landing for the world economy.
Other reasons for hope come from China’s exit from Covid-19 lockdowns and warmer weather in Europe, which is reducing energy demand and reliance on Russia for supply.
At the same time, there is a danger that inflation fueled by higher demand will persist. That would complicate decision-making for central banks from the US to the euro zone, which are scrambling to decide how much more to raise interest rates to dampen price pressures.
“Germany and the UK find themselves in the same situation: high inflation meets generous fiscal support and an economy saved by weather,” said Carsten Brzeski, head of macro at ING in Frankfurt. Still, “while the data offers some hope that the crisis will not be as severe as feared, I find it hard to think of 2023 as a year in which all will be well.”
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As recently as November, the European Commission was forecasting that Germany was succumbing to the deepest recession in the euro region, which in turn was forecast to contract slightly during the fourth and first quarters.
The UK, according to its officials, was already in the midst of an even more severe recession, a projection shared by the Bank of England.
Instead, both economies are showing unexpected resilience. Germany, whose initial and tentative fourth-quarter assessment by statisticians is the first for any G-7 country so far, expanded 1.9% in 2022 as a whole. That’s more than economists’ median prediction of 1.8%.
Meanwhile, Britain posted a second straight month of expansion, a result predicted by just one forecaster among 32 respondents.
While different narratives affect each country, especially since the UK’s departure from the European Union in 2020, the unifying theme in each is the continuation of wholesale support for consumers to weather the cost of living contraction.
In Germany, disposable income in 2022 registered a record increase, with the help of Chancellor Olaf Scholz’s coalition. Ministers offered a tax break on bonuses and, most emphatically, ensured that December’s gas bills were financed out of the public purse.
‘Incredibly robust’
“Private consumption was incredibly strong in the fourth quarter,” said Andreas Scheuerle, an economist at Dekabank. “The industry has also been stronger than expected, with automakers playing a significant role.”
In the UK, the reversal of a payroll tax increase is likely to have given a similar boost to disposable income, as Prime Minister Rishi Sunak’s government tries to combat inflation and shield consumers from rising prices. energy bills. World Cup soccer matches also boosted consumer-oriented business and helped offset the impact of strikes, statisticians said.
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“We are in the process of digesting the big shocks of last year and have made good progress in learning to cope with higher energy costs,” said Holger Schmieding, chief economist at Berenberg in London. “With inflation past the peak, things are looking up: the UK recession will be milder and Germany can avoid it entirely with any luck.”
Unexpected dynamism in each economy may still prove fleeting, especially if the current lull in energy prices reverses as China reopens. While natural gas prices in Europe have fallen in recent weeks, they are still about five times higher than in the US or pre-pandemic levels.
Similarly, the threat that growth resilience could lead to more inflation cannot be ruled out. Annual price gains in both Great Britain and Germany are around 10%.
For the European Central Bank and the BOE, whose first decisions of the year are on February 2, the silver lining of a canceled recession may still be overshadowed by the cloud of inflation.
Eurozone policymakers are expected to continue to aggressively raise interest rates, with a half-point move expected. Friday’s figures may also strengthen calls for further increases in borrowing costs in the UK.
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Meanwhile, a quarter of the good growth news could also prove short-lived, according to ING’s Brzeski.
“Consumers haven’t seen the worst of the gas price rise, factories will start to feel last year’s decline in orders over time, and the tailwinds of post-pandemic recovery spending will recede,” he said. .
