Germany plunges into recession

The German economy went into recession this winter. Gross domestic product (GDP) shrank by 0.3 percent in the first quarter from the previous quarter, the Federal Statistics Office said Thursday.

During a first assessment at the end of April, the Federal Office of Statistics still believed that the economy would stagnate at the beginning of the year.

"After GDP had already gone into the red at the end of 2022, the German economy has thus recorded two consecutive negative quarters," said the authority's president, Ruth Brand. When economic performance contracts for two consecutive quarters, economists speak of a technical recession. This does not mean that the whole year is negative. Above all, thanks to the mild winter, the worst-case scenarios did not happen - for example, a lack of gas, which would have left deep wounds.

Experts are not surprised

LBBW's Jens Oliver Niklasch is not surprised by this development, given that very weak figures were already published in March. However, he sees a similar situation going forward. "Leading indicators suggest that the second quarter will be similarly weak," he said. "Essentially, a stabilizing recession expected after the ECB rate hike. But also a good opportunity to be honest in fiscal policy and growth." He wants now in Germany to talk about strengthening growth factors in the medium term, instead of constantly talking about new burdens for the economy and for tax charity.

Thomas Gitzel, chief economist at VP Bank, also sees dark clouds gathering for the second half of the year. "By then the effects of the recovery in industry will have worn off and therefore there will be no more compensation for the still weak private consumption that can be expected and for the struggling construction sector," he explains. "Shrinkage in German economy likely to continue in second half".

"The massive increase in energy prices took its toll in the winter semester," comments Jörg Krämer, chief economist at Commerzbank. A substantial improvement is not in sight, as indicated by the drop in the Ifo business climate barometer.

Outlook for the whole year

A strong recovery is not in sight at the moment. The Bundesbank, Germany's central bank, expects at least a slight increase in the spring. "In the second quarter of 2023, economic performance is expected to pick up slightly again," the current monthly report said. Easing supply bottlenecks, strong orders and falling energy prices should bring recovery to the industry. "This should also support exports, especially as the global economy has regained some strength," predicts the Bundesbank.

For the year as a whole, experts believe the outlook for Europe's largest economy is good. The International Monetary Fund estimates that economic growth should be around the zero limit. The IMF is thus more pessimistic than the federal government, which in its spring forecasts presented at the end of April, expected a GDP growth of 0.4 percent. In its latest forecast, the European Commission predicted economic growth of 0.2 percent for Germany.

Inflation weighs down the desire to buy

In the face of inflation, private consumption did not play its role of economic support. According to the data, private economies have spent less than in the previous quarter on food and beverages as well as clothing and footwear as well as home furnishings. For consumers, high inflation is a challenge: it undermines their purchasing power. State consumption also decreased, by 4.9 percent.

Price growth has certainly weakened recently. But the annual inflation rate of 7.2% in April was still at a relatively high level.

Positive impulses but darker expectations

According to statisticians, positive impulses at the beginning of the year brought exports and investments. Investments in construction have increased, especially due to favorable weather, the same can be said for business investments in equipment such as machinery, electrical appliances and vehicles. However, according to a survey by the Ifo institute, the morale of the German export industry has deteriorated significantly. Business export forecasts fell to 1.8 points in May from 6.5 points in April, the institute said on Thursday. This is the lowest value since November 2022.

Especially in the automotive sector, expectations have worsened. In the metals sector, producers also expect lower overseas sales. According to the survey, in the chemical industry and among electrical equipment manufacturers, the positive and negative outlook is currently roughly balanced. On the other hand, computer equipment manufacturers and clothing manufacturers are optimistic about the development of their activities abroad.

Internationally, the German economy lagged behind at the beginning of the year. In both the EU and the US, GDP rose slightly. GDP as an indicator of well-being is controversial. It has been debated for some time whether the evolution of the gross domestic product is suitable for measuring well-being./ DW