Germany dodges recession but inflation climbs to 11.6%

Germany staved off the threat of recession in the third quarter with unexpected growth but the economy remained in choppy waters as high inflation driven by a painful energy standoff with Russia surged, data showed on Friday.

Consumer prices, harmonised to compare with other European Union countries, were up 11.6% on the year in October, the federal statistics office said. Analysts polled by Reuters had forecast 10.9%, unchanged on the previous month.

The Ifo economic institute warned on Friday that the full effect of inflation had not yet reached consumers, even as its survey showed a slightly lower number of companies in Germany planning price hikes in October.

Economists said inflation was likely to stay in double-digit territory for some time, keeping pressure on the European Central Bank to continue raising interest rates after it hiked them to their highest level since 2009 on Thursday.

“It is not yet clear that inflation has peaked, even if the recent decline in market prices for natural gas has raised hopes for this,” said Thomas Theobald of the IMK institute.

A plunge in energy imports from Russia following the invasion of Ukraine has sent energy prices spiralling in Germany, pushing inflation to its highest rate in over 25 years while fuelling concerns of a potential gas shortage this winter, even with storage facilities filled to near capacity.

Despite the headwinds, gross domestic product posted unexpected growth of 0.3% in the third quarter compared to the second, the statistics office said separately.

The reading took economists by surprise. After myriad warnings of a looming recession for Europe’s largest economy, they had forecast a contraction of 0.2%, according to a Reuters poll of analysts.

Q4 CONTRACTION FORECAST

The economy had “continued to hold its own despite difficult global economic conditions …. disrupted supply chains, rising prices and the war in Ukraine,” the statistics office said in a statement.

Economic output in the third quarter was driven primarily by private consumer spending, it added. Year on year, GDP rose 1.2% in seasonally adjusted terms, also beating analysts’ forecast of 0.8% growth.

In the previous quarter, it grew 0.1% quarter on quarter.

“The German economy kept its head above water…,” VP Bank chief economic Thomas Gitzel said.

“However, the burdens for the coming quarters are immense,” he said, adding that the third quarter data had only postponed the arrival of a recession in Germany and the euro zone.

Ifo this week forecast that the German economy would contract by 0.6% in the fourth quarter.

In its latest forecast, the government predicted growth of 1.4% this year and a 0.4% slump next year. An economy ministry spokesperson said on Friday it was too early to assess the implications of the latest GDP data.

“The recession is now likely to hit in the winter, but it may not be as severe as initially feared,” said LBBW bank’s Jens-Oliver Niklasch.

He put the shock third-quarter growth down to the end of restrictions to mitigate the COVID-19 pandemic and relief measures introduced over the summer.