Germany enters recession due to rising prices and falling consumption

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

Oliver Thansan
Oliver Thansan
26 May 2023 Friday 05:06
3 Reads
Germany enters recession due to rising prices and falling consumption

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

This is the scenario depicted by the final data published yesterday by the Federal Statistics Office (Destatis), which initially pointed to a simple stagnation for the months from January to March, which would have allowed it to avoid the category of technical recession , that is, the accumulation of two consecutive quarters of negative GDP growth. Main cause: rising prices, which has slowed consumption.

Faced with these data, Chancellor Olaf Scholz replied that "the prospects for the German economy are very good", during a press conference yesterday in Berlin alongside the President of Cyprus, Nikos Khristodulidis. “We are solving the challenges we face; we have full employment, the lack of staff is debated in public and in fact we have a great demand for qualified labour", assured Scholz.

This situation is experienced in Germany for the first time since the coronavirus pandemic, which led to falls in GDP in the first and second quarters of 2020. In fact, the German economy appeared to withstand the resulting onslaughts better than expected of the Russian invasion of Ukraine and the resulting energy emergency due to the cut off of Russian gas, which has been tackled with millionaire aid to the industry and with the bet on liquefied natural gas and other supply routes. The first economy in Europe closed the year 2022 with a GDP increase of 1.8% compared to 2021.

Now, although inflation has fallen compared to the peaks of last autumn - in October it reached over 10% -, it continues to remain very high (7.2% year-on-year in April), which which has led to a fall in both private and public spending 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 renunciation 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 shows “surprisingly negative signs”, lamented Finance Minister, liberal Christian Lindner, 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 be relegated to the last places", said Lindner with reference to the forecasts of the International Monetary Fund (IMF), which, among all European countries, predicts a recession in 2023 only in Germany and the UK.

All in all, there are positive data, such as exports, which in the first quarter registered an increase of 0.4% compared to the last quarter of 2022. In contrast, imports fell by 0.9%, with a particular decline in fuels, minerals and chemical products. Investments also increased in the first three months of the year, after a weak second semester last year. Thus, the Federal Statistics Office notes a recovery in construction (3.9%), industrial equipment and machinery (3.2%), and household appliances and cars.

As a whole, the German economy thus recorded the worst performance among the large economies of the eurozone, since Spain and Italy grew by 0.5% and France by 0.2%, while the average of the eurozone went be 0.1%. But, despite this slowdown, the forecasts of the German Government are for a gradual recovery of economic activity during this year, which the Chancellor, Olaf Scholz, and the Vice-Chancellor and Minister of Economy, Robert Habeck, trust to close with a growth of 0.4% of GDP.

The Bundesbank is also moderately optimistic. In its latest monthly report, published on Wednesday, it forecasts modest growth, as it estimates an industrial upswing that should compensate for the stagnation in household consumption and an eventual fall in construction.