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STORY: German shoppers are watching what they spend.

And that seems to be bad news for the country's growth prospects.

Data out Monday (January 30) showed the German economy unexpectedly shrank in the fourth quarter, with falling private consumption the big driver.

It all could be a sign that Europe's largest economy is approaching a much-predicted recession.

The Federal Statistics Office said GDP decreased 0.2% quarter on quarter in adjusted terms, when economists had predicted no change.

A recession - commonly defined as two successive quarters of contraction - now seems more likely, as many experts predict the economy will shrink in the first quarter of 2023 as well.

The government has said the economic situation should improve from spring onwards though, and last week revised up its GDP forecast for this year.

It now predicts growth of 0.2%, up from a prior forecast of 0.4% decline.

Economists say the figures probably won't change the European Central Bank's plans on rates, with inflation still high.

Tim Oechsner is a trader at Steubing:

"Yes, with regard to the ECB, which as you know has its next meeting on Thursday, the market expects 0.5 per cent or 50 basis points, so from 2.5 of the main refinancing rate to 3. And anything else would be a big surprise as we expect the ECB to continue to tighten the reins."

Inflation, driven mainly by high energy prices, eased for a second month in a row in December, with consumer prices rising 9.6% on the year.

But analysts polled by Reuters predict price rises will hit double digits again in January, with a slight rise, to 10%.

The January figures are due out on Tuesday (January 31).