Germany's economy shrank by 5 percent in 2020, according to new data from Berlin's Federal Statistics Office. The contraction is smaller than some economists had predicted, and less than that recorded during the the 2008 Global Financial Crisis.

Early in the pandemic, some feared that Europe's largest economy would take a severe hit after Berlin announced the first national lockdown that shut factories, retail and hospitality.

"Judging by what had been feared in the course of the year, one could say we got off lightly," said Uwe Burkert, an analyst at commercial bank LBBW.

The positive news boosted investor confidence and Frankfurt's DAX market rallied on a new daily high of just over 14,000 early Thursday, before dropping.

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European economists have projected growth in 2021, but estimates of the speed of the recovery have varied. Many are hoping that the vaccines from Pfizer-BioNTech, Oxford-AstraZeneca and Moderna which are slowly being released in North America, Europe and some parts of Asia can accelerate the return to normality. 

However, national lockdowns remain in place across much of Europe. A second wave has pushed hospitals to breaking point, while new virus variants are spreading even faster than before. 

Chancellor Angela Merkel has suggested Germany's current lockdown could continue into April, which would mean many businesses have no choice but to remain at a standstill.

"I would hope that there could be a similar upswing after April," said Georg Thiel of Germany's Federal Statistical Office. "I would suspect there is at least an incentive on the demand side... that private spending could rise significantly again."

Hospitality and retail sectors took the biggest hit in 2020, and are likely to not recover fully for many years. Experts say Germany's manufacturing arm helped offset some losses and was key to the economy's recovery.

"[Industry] learned this will not end quickly", said Marco Wagner, an economist at Commerzbank. "They have adjusted production lines, delivery lines."

Berlin and Brussels have offered billions in rescue funds and stimulus measures to help lessen the financial shock of the COVID-19 pandemic.