Inflation has taken a heavy toll on the German economy, with consumers spending less on items such as food and clothing. The outlook for the rest of the year isn't much brighter.
Germany is officially in technical recession
On May 25, data from the German Statistical Office (Destatis) showed that the German economy shrank slightly in the first quarter of 2023 and officially entered a technical recession.
Gross domestic product (GDP) in Germany decreased by 0.3% in the first quarter of 2023 compared to the previous 3 months.
Today's data is a step backward for Germany. In January 2023, German Prime Minister Olaf Scholz believes that the country will not fall Depression, even though energy and food prices skyrocketed because of the conflict in Ukraine.
Destatis President Ruth Brand said that the European "locomotive" decreased by 0.5% in the fourth quarter of 2022, so German economic growth has decreased for two consecutive quarters. A recession is usually defined as a decline in real GDP over a period of two or more consecutive quarters during the year.
Destatis informed that inflation continued to damage the German economy in the first quarter of 2023. This was reflected in household consumption, which decreased by 1.2% in the first quarter, after price and seasonal adjustments. .
Consumers see high inflation eroding purchasing power, which, in turn, reduces demand in the economy. Besides, the annual inflation rate has decreased to 7.2% (recorded in April 2023) but this is still a relatively high number.
In the first quarter, households spent less on food, beverages, clothing, shoes and furniture than in the previous quarter. They also bought fewer new cars, possibly because the government stopped subsidies at the end of 2022.
In parallel, government spending also decreased in the first three months of the year.
There has been a ray of light when it comes to investing. Investment increased thanks to a temporary recovery in the construction sector amid unusually warm weather conditions.
Commenting on the growth results of the first three months of the year, Mr. Andrew Kenningham, chief European economist at Capital Economics consulting company, said: "The GDP decrease of 0.3% compared to the previous quarter is in line with expectations because Germany is affected by both high inflation and rising interest rates.”
The outlook is murky
Relying heavily on Russian energy imports, Germany was strongly impacted after Russia's special military campaign in Ukraine in February 2022.
A mild winter in Germany has helped the country avoid worst-case scenarios that could devastate the economy due to gas shortages.
The most recent economic recession in this country occurred during the Covid-19 pandemic in early 2020, causing the government to close all economic sectors to fight the epidemic.
The latest GDP figures highlight economic difficulties, with the country's key manufacturing sector facing challenges amid weak commodity demand.
ING economist Carsten Brzeski commented: "In the near future, Germany faces the problem of purchasing power, reduced industrial orders, and the impact of the strongest monetary policy tightening in decades." and the expected decline of the US economy.”
How is the Eurozone affected?
Germany's technical recession and gloomy outlook are bad news for the entire Eurozone. The most obvious consequence is the downward revision of GDP in the first quarter of 2023 for this region.
Economist Kenningham predicts the region's GDP will reach 0% in the first quarter of 2023, down from 0.1%. This bloc will avoid a technical recession.
Currently, the Eurozone is also reeling from high inflation and sharply rising interest rates. This problem is squeezing household consumption and business investment. The manufacturing sector is also struggling with a sharp drop in orders.
The economic situation is expected to remain dire as the European Central Bank (ECB) continues to raise interest rates to reduce demand to lower prices. Inflation in the Eurozone was at 7% in April, well above the central bank's target of 2%.
