UPDATE 2-COVID leaves Germany and France with contrasting economic fortunes

·2 min read

(Adds France GDP, context)

By Joseph Nasr and Leigh Thomas

BERLIN/PARIS, Jan 28 (Reuters) - The German economy contracted over the last three months of 2021 while the French economy expanded, data published on Friday showed, pointing to contrasting fortunes for the euro zone's two largest economies during the pandemic.

Germany is often referred to as the European Union's economic engine, but restrictions introduced in the autumn to fight a fourth COVID-19 wave as well as supply chain disruptions translated into a contraction of 0.7% in the fourth quarter.

The French economy, which saw an economic revival toward midyear as restrictions were largely lifted, kept growing in the same period, posting a 0.7% rise. This translated into a full-year expansion of 7%, the strongest since 1969.

The German economy expanded by 2.8% last year, exposing its vulnerability to supply chain bottlenecks hampering the manufacturing sector that forms its export-oriented backbone.

"The German economy went into hibernation at the turn of the year," Carsten Brzeski of ING wrote in a note.

"New restrictions to tackle the fourth wave of the pandemic and the Omicron wave as well as higher energy prices dented private consumption. With this weak fourth quarter, the likelihood of Germany being in an outright recession at the turn of the year has increased."

The preliminary data published by Germany's Statistics Office showed that private consumption fell significantly while government spending increased. The construction sector also contracted.

The government this month cut its economic growth forecast for 2022 to 3.6%. Economy Minister Robert Habeck said on Friday he expected a slowdown to 2.3% in 2023.

Despite the French recovery, weak growth in Germany, Europe's largest economy, bodes ill for the euro zone.

Data published on Friday showed economic sentiment in the bloc deteriorated in January, pulled down mainly by a more downbeat sentiment in the industrial sector.

The German economy also faces headwinds from high energy prices, which have dampened private consumption.

An easing of raw material shortages should help the economy remain on a growth path but the pandemic and a possible military conflict between Russia and Ukraine are major risks, Thomas Gitzel of VP Bank Group said.

"A worsening of supply chain problems linked to a rapidly spreading Omicron wave in China and a military escalation on Ukraine's eastern border are among the risks," he wrote in a note.

Western powers fear that a Russian invasion of Ukraine could worsen an energy crunch in Europe should the Kremlin respond to sanctions by cutting gas supplies. Russia has denied it plans to invade. (Writing by Joseph Nasr Editing by Paul Carrel, Maria Sheahan and Frances Kerry)

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