Data released on Friday showed that the German economy contracted more than projected in the fourth quarter of last year, as restrictions imposed to slow the spread of the Omicron variant hindered activity.

According to the Federal Statistics Office, Europe's largest economy shrank by 0.7% QoQ in adjusted terms.

The preliminary data showed that private consumption has decreased dramatically while government spending has surged, according to the office. The construction industry also shrank.

The German economy grew by 2.8% last year, and the government has reduced its prediction for 2022 growth to 3.6% from 4.1% in October. Economy Minister Robert Habeck stated on Friday that he expects the economy to decline to 2.3% in 2023.

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Habeck told the Bundestag lower house of parliament that he anticipates that the economy will return to pre-pandemic levels in the second quarter of 2022.

Alleviating raw material shortages should help the economy maintain its future growth, but the pandemic poses a danger, Thomas Gitzel of VP Bank Group said.

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

Western powers are concerned that a Russian invasion of Ukraine will exacerbate Europe's energy crisis if the Kremlin responds to sanctions by cutting gas supplies to Europe.