The German economy is shrinking in the fourth quarter as a sharp increase in supply takes its toll

The German economy has shrunk by as much as 1 percent in the last three months of last year as recent coronavirus restrictions and supply chain bottlenecks kept production below pre-pandemic levels.

The Federal Bureau of Statistics released initial estimates on Friday showing that Europe’s largest economy managed to grow 2.7 percent last year, despite production falling between 0.5 and 1 percent in the fourth quarter from the previous quarter.

The figures mark a return from 2020, when German gross domestic product fell 4.6 percent in a record post-war recession caused by the Covid-19 crisis. But the country is lagging behind other major economies, including the U.S., France and the UK, which have recovered above pre-pandemic output levels.

Georg Thiel, president of Destatis, Germany’s statistical agency, said the country’s GDP remained 2 percent below pre-pandemic levels. “Despite the current pandemic situation and growing supply and material bottlenecks, the German economy has managed to recover from a decline in the previous year, although economic performance has not yet reached pre-crisis levels.”

Growth would be lower without the additional contribution of license fees earned by German vaccine maker BioNTech, which increased total GDP by 0.5 percentage points last year, according to Destatis.

The huge German manufacturing sector has been hampered for months by supply chain delays and shortages of materials such as semiconductors. Its larger services sector has also been hampered by new restrictions to stem the record rise in coronavirus infection.

“The last quarter of 2021 was probably weak given the necessary constraints on services that are more intense in contacts and production difficulties in production due to persistent supply bottlenecks,” the German finance ministry said in a statement.

Economists expect the German economy to recover strongly later this year after lifting restrictions on coronavirus and easing supply bottlenecks. But they worry that if the problems persist, the country could slide into recession – defined as two consecutive quarters of GDP decline.

Carsten Brzeski, head of macro research at ING, said: “Annual figures mask the economic downturn in the last quarter of 2021, highlighting the high risk of the economy falling into a complete recession at the turn of the year.”

The Bundesbank he cut his German growth forecast last month, but said he still expects the economy to recover above the pre-pandemic GDP level in the coming months with 4.2 percent growth in 2022, spurred by a “private consumption boom” as and higher exports and business investments.

“From the beginning of summer onwards, we expect a strong economic recovery again with the seasonal weakening of the crown,” said Jörg Krämer, Commerzbank’s chief economist. “This is also supported by the fact that production order books are fuller than at any time since statistics began in the early 1960s.”

Destatis said production in the country’s manufacturing sector remained 6 percent below 2019 levels last year, while the deficit in the sports, culture and entertainment sector was 9.9 percent.

This was partially offset by a recovery in the public sector, fueled by increased government spending as the country’s budget deficit widened slightly to 153.9 billion euros last year, the second largest since the country’s reunification more than 30 years ago.