German economy stumbles as Covid restrictions bite

The German economy shrank by more than expected in the first quarter, official data showed on Tuesday, as a slump in consumer spending weighed heavily.

According to Destatis, the Federal Statistics Office, GDP was down 1.8% on the previous quarter, when it improved 0.5%, and by 3.1% on the previous year on a price and calendar-adjusted basis.

The readings were marginally below forecasts. Most economists had been looking for fall in line with the initial estimate, for a 1.7% contraction, and a year-on-year decline of 3.0%.

Destatis attributed the numbers to Covid-19. "The continuing, and in part intensified, restrictions imposed to contain the coronavirus pandemic had a particularly marked impact on household final consumption expenditure at the beginning of the year," it said.

Household consumption fell 5.4% on the fourth quarter, when it declined 2.3%. The fall was further driven by the temporary cut in the VAT rate coming to an end in January.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "A plunge in private consumption was the main drag on the Germany economy at the start of the year.

"Looking ahead, we are looking for solid GDP data in the second and third quarters. Base effects in consumer spending are now very favourable, and reopening is on the way. Elsewhere, capex in machinery and equipment ought to rebound too, and we also think investment and activity in construction are now turning up, though the real story in these data looks hazy.

"Overall our preliminary second quarter GDP forecast is growth at 2% quarter-on-quarter, with risks tilted towards an even stronger number, at 2.5% to 3.0%."

Tuesday’s GDP data coincided with the latest business climate index from Ifo Institute, which showed German business sentiment had hit a two-year high.

Oliver Rakau, chief German economist at Oxford Economics, said: "The Germany Ifo index soared to a two-year high in May in a clear sign that the economy is enjoying a sharp economic rebound from the first quarter GDP contraction.

"The much-improved business optimism supports our view that the economy should grow 2.5% quarter-on-quarter in the second quarter after its 1.8% decline in the first."