France’s economy bounces back, while Germany’s falters under the strain of omicron

People return to Oxford Circus in London as retail shops open and England begins to lift its third Coronavirus lockdown restrictions, on Monday, April 12, 2021, following a COVID-19 lockdown
France assumed Germany’s traditional role as the driving economic force in Europe after a strong finish to last year, while the German economy contracted in the final three months as it grappled with a resurgence of the coronavirus, official data showed Friday.

Economists expect growth across Europe to return to pre-pandemic levels in the first part of this year but with the pace varying by country. A variety of factors will play a role in the speed of recovery, including restrictions surrounding the pandemic and how reliant the countries are on manufacturing, which is still plagued by backups.

“We expect a stronger pickup in growth later this year as supply bottlenecks ease and consumer demand picks up,” said Katharina Koenz, an economist with Oxford Economics, but she cautioned that the crunch in the energy markets and lingering constraints from the clogged global supply chain would continue to drag on growth. Germany relies on exports for more than 46% of its economy, which is deeply intertwined with markets in the United States and China, the world’s two largest economies.

On the whole, Europe has been slower to recover than the United States, where the economy grew last year at the fastest pace since 1984, although inflation is taking a bite out of the recovery and people remain cautious about the coronavirus. The US economy expanded 1.7% in the last three months of 2021.

The European Union will release data for the economy of the eurozone, made up of the 19 countries that use the euro, on Monday.

The French economy grew 7% in 2021 — its fastest pace since 1969 — buoyed by government subsidies that fed investment and production, both of which surpassed pre-pandemic levels, according to official data released by the Insee statistics institute in Paris. In the final quarter of the year, the economy grew 0.7%, bolstered by an increase in consumer spending.

The economy of neighboring Spain also expanded at a rapid pace in 2021, posting growth of 5%, its fastest rate since 2000. The pace was helped by the easing of government restrictions on social life, leading to a rebound in the hospitality industry in the last three months of the year, when the economy expanded 2%.

Both countries appeared to have fared better than Germany because higher vaccination rates allowed them to rebound more quickly.

“It is a spectacular rebound for the French economy,” the country’s economy minister, Bruno Le Maire, told France 2 television. “It erases the economic crisis.”

France is gearing up for a presidential election in April, and President Emmanuel Macron is in a bruising campaign to serve a second five-year term. His government kept only minimal pandemic restrictions in place and instead encouraged people to get vaccinated in an effort to keep the country’s economy open.

But economists cautioned against overexuberance, warning of challenges posed by lingering effects of the pandemic.

“The shock in France in 2020 was stronger than the European average, and the French economic recovery in 2021 was in turn much more dynamic than the average recovery in Europe,” Charlotte de Montpellier, an economist with ING, wrote in a research note. “Nevertheless, the global imbalances generated by the pandemic, particularly in terms of prices, are now being felt, and overcoming their effects will be a complicated and important challenge for the recovery in the coming quarters.”

The latest surge of the omicron variant in Germany served as an example of that imbalance when the government enacted more restrictions heading into the year-end shopping season. People entering stores were required to show proof of vaccination, and holiday markets were shuttered. These measures damped consumer spending, which contributed to the 0.7% contraction in the last quarter of 2021, according to data released by the Federal Statistical Office.

Overall, the German economy grew 2.8% in 2021, slightly above the 2.7% expected by officials. But it was still hampered by persistent bottlenecks in supply chains, especially in the country’s automobile industry, where domestic production slumped 1% last year compared with 2019, to 3.1 million vehicles.

Some economists expect Germany to struggle in the first quarter of 2022. Others foresee the potential for soft growth, provided that supply chains ease enough to allow manufacturers to begin filling their backlog of orders.

This week, the German government cut its forecast of annual growth to 3.6%, from a 4.% forecast made in late October. Robert Habeck, the new economy minister, warned that “the consequences of the coronavirus pandemic are still being felt, and many companies are struggling with that.”

Even as they face the threat of a recession — commonly defined as two consecutive quarters of shrinking production — German businesses seem confident that as the year progresses, growth will pick up again, two different surveys showed. Manufacturers hope bottlenecks will ease, and restaurants and hotels are gearing up for consumers once milder weather ushers in a reprieve from the virus in the spring and summer tourism season.

The Ifo Institute’s most recent survey of German business managers, considered a reliable predictor of the direction of the economy in Germany, showed sentiment improving nearly a full point for the first time in seven months. At the same time, a survey by IHS Markit, a research firm, that tracks the manufacturing and service industries rose to a four-month high.

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