Germany Turns Page on Economic Abyss With Sign of Green Shoots

(Bloomberg) —

Germany is approaching the end of the first quarter with a sense of quiet optimism that its crisis of 2022 has been consigned to history.

Forecasters no longer predict Europe’s biggest economy will shrink this year, escaping instead with a mild recession that it’s likely to exit in the spring. Some, including Goldman Sachs, even reckon that short downturn can still just be averted. 

Germany’s corporate sector provides grounds for hope. Industrial output and business expectations have reached the highest levels since Russia invaded Ukraine. So has the benchmark DAX stock index.

There’s also anecdotal cause for cheer — not least with carmaker Volkswagen AG’s projection of a possible 15% jump in revenue this year.

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Meanwhile China’s reopening offers bright prospects for exporters. In a taste of what could transpire, German factories saw a surge in orders from abroad as 2023 began.

There’s no cause for complacency as a once-in-a-generation cost-of-living shock reverberates among consumers, the housing market teeters and aggressive European Central Bank interest-rate hikes start to bite. 

But the prevailing sentiment in a country whose prior Russian energy dependency left it staring into an “abyss” last year — according to Economy Minister Robert Habeck — is that a winter once feared with dread really wasn’t so bad after all, and that spring will soon be in the air. 

What Bloomberg Economics Says…

“Germany’s economy has proved surprisingly robust over the winter and recent indicators provide some optimism for the coming months. However, on the back of tighter monetary policy, economic activity is unlikely to develop much momentum in 2023.”

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—Martin Ademmer, economist

Little more than four months ago, European Union officials reckoned Germany faced the euro zone’s deepest contraction in 2023.

Chancellor Olaf Scholz began the year by bullishly declaring he was convinced the slump wouldn’t come to pass. Habeck was less positive, but insisted worst-case scenarios had been avoided.

As it turned out, the economy shrank 0.4% in the fourth quarter — less than half the European Commission’s prediction at the time. 

The median forecast in Bloomberg’s monthly analyst survey remains for a 0.3% drop in gross domestic product between January and March. But projections for the whole year have improved to suggest GDP will be unchanged.

There’s also optimism that the outcome may turn out even better. 

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The Ifo index’s expectations gauge rose more than anticipated last month to its highest in a year. Industrial production soared by 3.5% in January — more than twice as much as forecast. Factory orders unexpectedly increased, too.

Volkswagen is an example of the rosier mood. Europe’s biggest carmaker this month predicted sales will jump thanks to a full order book and an easing in the supply squeeze on semiconductors.

Auto-parts maker Continental AG is another beacon of hope.

“We can go for an outlook which is striving for increased growth, higher sales, as well as higher earnings,” Chief Executive Officer Nikolai Setzer told Bloomberg Television this week after lamenting the “extremely challenging and difficult year” just passed.

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What saved the economy was the combination of a mild winter that required less energy use, and government efforts to secure alternative sources of natural gas and expand storage.

Germany isn’t totally out of the woods. The VDMA association of machinery and equipment manufacturers reported a drastic annual drop in orders in January, citing continuing uncertainty — even if supply snarls have moderated.

Consumers remain weak, with inflation still at 9.3%, and retail sales fell for a second month in January. Bundesbank Chief Economist Jens Ulbrich has warned housing investment could sink, risking a “perfect storm.” 

Another ECB rate hike next week — adding to more than 300 basis points of increases to date — will also crimp growth.

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More broadly, a composite index of indicators compiled by the DIW Berlin institute declined in February. Geraldine Dany-Knedlik, an analyst there, said the economy hasn’t “bottomed out” yet, though she did concede that things look more positive than late last year.

In truth, even if Germany succumbs to a contraction this quarter, it’s already clear the recession that would entail has been far less damaging than it could have been. Unemployment, for one, hasn’t climbed beyond 5.5%, while government aid to households facing high energy bills has also helped. 

China’s pickup now offers firm prospects for manufacturing: The factory-order report for January was already buoyed by an 11.2% increase from outside the euro area. 

—With assistance from Julia Manns and Oliver Crook.