German Economy in Recession After High Prices Take Toll

Germany has entered a recession, revised official figures have revealed, after high prices took a bigger toll on the country’s economy than originally estimated.

Data from the Federal Statistical Office showed Europe’s largest economy contracted by 0.3% in the first quarter of 2023, compared with the previous three months, when it shrank by 0.5%. The technical definition of a recession is two consecutive quarters of contraction.

A previous estimate suggested Germany had narrowly avoided recession with 0% growth in the first quarter.

The statistics office said on Thursday that while private sector investment and construction grew at the start of the year, this was offset in part by a drop-off in consumer spending as higher prices forced households to rein in spending.

Overall, household spending dropped 1.2% in the first quarter, with shoppers less willing to splash out on food, clothes, and furniture. Government spending also dipped by 4.9% compared with the previous quarter.

Considerably higher heating costs, despite government subsidies, meant German consumers were holding back on spending on other things.

The war in Ukraine has unsettled both businesses and consumers, both holding back on investing and buying respectively, which has affected demand. Interest rate rises by the European Central Bank have so far had little influence on reducing inflation, which stands at 7% across the eurozone.

Carsten Brzeski, the global head of macro economics at the Dutch bank ING, said the overall decrease in Germany’s gross domestic product was “not the worst-case scenario of a severe recession” but was still “a drop of almost 1% from last summer”.

“The warm winter weather, a rebound in industrial activity, helped by the Chinese reopening and an easing of supply chain frictions, were not enough to get the economy out of the recessionary danger zone,” he added.

The Ifo Index – Germany’s most prominent leading monthly indicator, showed a continuing weak backdrop for businesses. In May it sank again for the first time in half a year. All sectors apart from services were on the decline.

The leader of the country’s main opposition party called the economic decline a “wake-up call” for the German chancellor, Olaf Scholz. “It has to shake him awake,” the CDU’s Friedrich Merz told the Agence France-Presse news agency. “The way his coalition is working means many firms doubt in the future of Germany as a location.”

The economics minister Robert Habeck cited Germany’s long-term dependence on Russian energy and the abrupt withdrawal of that supply after the invasion of Ukraine as the main reason for the downturn. “We are fighting our way out of this crisis,” he said at an event in Berlin.

Scholz appealed to people to have faith in the economy. “The prospects for the German economy are very good,” he said. He cited the massive expansion of clean energy that would “unleash the strengths of the economy” as a reason for optimism, making particular reference to large investments into semiconductors and battery factories.

However, the state-owned investment and development bank KfW said this week it expected German GDP to shrink by 0.3% overall this year. It added that two-thirds of the downturn may be caused by more work days being lost in 2023 to public holidays than last year.

Another dose of optimism was delivered by the Bundesbank. It predicted in its latest monthly report that growth would pick up in the second quarter, saying it based this outlook on improved supply chain issues and the fact, as a result, firms were now better able fulfil the backlog of orders built up during the pandemic and beyond.