Output shrank 5.0 percent year-on-year, as “almost all economic sectors were markedly affected by the corona pandemic”, the federal statistics agency Destatis said.
The downturn ended 10 years of growth, Destatis added, though its figure was better than the government's own forecast, which had anticipated a decline of 5.5 percent.
In 2009, in the midst of a global economic crisis, gross domestic product (GDP) had plunged by 5.7 percent.
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“Measured against the original fears after the outbreak of the pandemic, this sad result is also a success in damage limitation,” said Fritzi Köhler-Geib, chief economist at the KfW public bank.
The 2020 German slump is smaller than others recorded in France, Italy or Spain, where GDP is projected to have declined by 9.3, 9.0 and 11.1 percent respectively, according to European Central Bank forecasts.
The pandemic's first wave caused the worst quarterly drop in GDP on record, when output plummeted 9.8 percent in the three months from April to June.
But the economy recovered, expanding by 8.5 percent in the third quarter, before slowing down again following a resurgence of the virus.
Germany owes much to its robust industrial base, including the car sector and machine makers, even though manufacturing, which accounts for about a quarter of the economy, was particularly hit by pandemic restrictions, Destatis said.
Physical retail trade declined substantially as online trade boomed, the agency said, while restrictions closing hotels, restaurants and bars led to a dramatic decline in hospitality.
Yet, with many businesses shutdown again since November, the 2020 GDP data
“must be seen as a positive surprise,” said Uwe Burkert, head economist at LBBW bank.
Like its neighbours, the country of 83 million people has been hit hard by a resurgence in coronavirus cases, prompting the shuttering of bars, gyms,cultural and leisure centres in November, followed by non-essential shops in December.
But unlike during the first wave, the latest restrictions did not close Germany's export-oriented factories or manufacturing businesses, meaning they have had less impact on the economy than earlier in the year.
Industrial orders jumped 2.3 percent in November month-on-month, Destatis data showed, while manufacturing production rose 0.9 percent.
Both indicators have been rising for several months, buoyed by a recovery in demand from China where the virus has been largely contained.
“The German economy was less affected by the second round of restrictions than by the first,” Destatis president Georg Thiel commented.
It means that, while “it now seems likely that GDP will decline in the first quarter of 2021,” according to Andrew Kenningham at Capital Economics, “it should expand rapidly after that as the vaccination programme is rolled out.”
Reason for hope
Looking ahead, the German government is upbeat, having forecast growth of 4.4 percent in 2021 and 2.5 percent in 2022.
But with Covid-19 deaths regularly topping 1,000 a day and vaccines still months away from being widely available, concerns about the virus' impact are mounting.
The German Retail Association (HDE) has warned that the current shutdowns could trigger a wave of bankruptcies, leading to the disappearance of up to 50,000 stores in the months ahead.
In small and medium-sized business, often considered the backbone of the German economy, more than one million jobs are at risk, according to the KfW bank.
Many firms have also complained the financial assistance has been slow to arrive and that calculation rules have changed to their disadvantage in January.
Whereas the government reimbursed affected companies for lost turnover in November and December, future compensation will only cover fixed costs such as rent and utilities.
Anxiety about more transmissible variants of the virus, which first emerged in Britain and South Africa, is adding to the economic uncertainty.
Health Minister Jens Spahn told parliament on Wednesday the current shutdowns would probably be extended into February.
And Chancellor Angela Merkel has warned the country faces “tough weeks” until Easter in early April.
“Extended and stricter lockdowns do not bode well for the economy,” ING economist Carsten Brzeski noted.