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 today.

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% 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.

German 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 US 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%, 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.

Meanwhile, German business morale brightened to hit a two-year high in May as Covid-19 curbs were eased and infections fell, heralding a swift summer recovery after the economy shrank more than expected in the first quarter.

With many firms reporting a build-up of supply bottlenecks, today's Ifo business climate index readout showed a jump to 99.2, up from April's revised 96.6 and beating the 98.2 forecast in a Reuters poll of analysts.

"The German economy is picking up speed," Ifo President Clemens Fuest said.

The survey among some 9,000 firms in manufacturing, the service sector, trade and construction showed that businesses were more satisfied with their current situation and optimistic regarding the coming six months.

It pointed to a quarterly growth rate of 2.6% from April to June and 2.8% from July to September, Ifo economist Klaus Wohlrabe told Reuters.