Germany enters recession due to rising prices and falling consumption

Inflation has taken its toll on Europe's largest economy.

Oliver Thansan
Oliver Thansan
25 May 2023 Thursday 16:35
13 Reads
Germany enters recession due to rising prices and falling consumption

Inflation has taken its toll on Europe's largest economy. Germany entered a technical recession in the first quarter of 2023 after suffering a contraction of 0.3%, the second consecutive drop in its gross domestic product (GDP) after the one experienced in the last quarter of last year, which was 0.5%. .

That is the scenario drawn by the final data published yesterday by the Federal Statistical Office (Destatis), which had first pointed to a mere stagnation for the months of January to March, which would have allowed avoiding the category of technical recession, that is, , the accumulation of two consecutive quarters of negative GDP growth. Main cause: the rise in prices, which has slowed down consumption.

Given these data, Chancellor Olaf Scholz replied that "the prospects for the German economy are very good" during a press conference yesterday in Berlin together with the President of Cyprus, Nikos Hristodulidis. “We are solving the challenges we are facing; we have full employment, the lack of personnel is debated in public and in fact we have a great demand for skilled labor,” said Scholz.

This situation occurs in Germany for the first time since the coronavirus pandemic, which caused falls in GDP in the first and second quarters of 2020. In fact, the German economy seemed to be resisting the blows derived from the Russian invasion better than expected of Ukraine and the consequent energy emergency due to the cut off of Russian gas, which it has addressed with million-dollar aid to the industry and is committed to liquefied natural gas and other supply routes. The leading economy in Europe closed the year 2022 with a GDP increase of 1.8% compared to 2021.

Now, although inflation has dropped compared to the peaks of last autumn -in October it exceeded 10%-, it continues to remain very high (7.2% year-on-year in April), which has led to a drop in spending both private and public for several months.

Thus, household consumption fell by 1.2% quarter-on-quarter, and public spending also decreased significantly (4.9%) in the quarter. “The reluctance of households to buy was evident in a variety of areas; households spent less on food and beverages, clothing and footwear, and furniture,” Destatis said in a statement.

German GDP data show "surprisingly negative signs," lamented Finance Minister Christian Lindner, the liberal, who admitted that, compared to other advanced economies, Germany is losing growth potential. "I don't want Germany to play in a league in which we have to see ourselves relegated to the last places," Lindner said, referring to the forecasts of the International Monetary Fund (IMF), which, among all European countries, forecasts a recession in the 2023 only in Germany and the UK.

There is, however, positive data, such as exports, which registered an increase of 0.4% in the first quarter compared to the last quarter of 2022. On the other hand, imports fell by 0.9%, with a particular decrease in fuels , minerals and chemicals. Investments also increased in the first three months of the year, after a weak second half last year. Thus, the Federal Statistics Office notes a recovery in construction (3.9%), industrial equipment and machinery (3.2%), and domestic appliances and automobiles.

Overall, the German economy thus registers the worst performance among the large euro area economies, as Spain and Italy grew by 0.5% and France by 0.2%, while the average for the euro area was 0 ,1%. But, despite this slowdown, the German government forecasts a gradual recovery in economic activity this year, which Chancellor Olaf Scholz and Vice Chancellor and Economy Minister Robert Habeck hope will close with 0 growth. .4% of GDP.

The Bundesbank is also moderately optimistic. In its latest monthly report, published on Wednesday, it forecasts modest growth, estimating an industrial rebound that should offset the stagnation in household consumption and an eventual drop in construction.