By Michael Nienaber

BERLIN (Reuters) – The German economy shrank more than expected in the first quarter as coronavirus-related restrictions spurred householders to put more money than ever into savings, data showed on Tuesday.

Europe’s largest economy contracted by 1.8% quarter on quarter and by 3.1% on the year, the Federal Statistics Office said. The readings, for which a Reuters poll had forecast drops of 1.7% and 3.0% respectively, were significantly weaker than the euro zone average.

German households’ disposable income increased slightly as the government ploughed billions of euros into job protection schemes and cash handouts such as extra child benefits. But curbs linked to containing the pandemic also made it harder for consumers to spend it.

“The drop in consumption is colossal,” VP Bank Group economist Thomas Gitzel said.

Household spending fell by 5.4% on the quarter as the savings rate rose to a record high of 23.2%.

Company investments in machinery and equipment fell slightly, though construction activity rose.

Exports increased by 1.8% on the quarter helped by strong demand from the United States and China, while imports rose 3.8%, meaning net trade pushed down overall growth as well.

The quarter-on-quarter GDP data compared with a euro zone average of -0.6 percent, and growth of 0.4% in France, while the economy of the United States – whose vaccination programme has progressed more rapidly – grew 1.6%.

Year on year, the euro zone economy shrank 1.8%.

VP Bank’s Gitzel said falling infection rates and progress in inoculations meant the German economy would soon be back on a healthier footing as COVID-19 curbs were eased and then lifted.

“We’re heading towards a relaxed summer in which retailers in German cities can expect consumers to splash out,” Gitzel said.

(Reporting by Michael Nienaber, editing by Kirsti Knolle and John Stonestreet)