The German economy entered a recession as inflation hurt consumers

BERLIN, May 25 (Reuters) – The German economy was in recession in early 2023 after household spending in Europe’s economic engine finally succumbed to the pressures of high inflation.

Gross domestic product fell by 0.3% in the first quarter of the year, corrected for price and calendar effects, according to a second estimate from the statistics bureau on Thursday. This follows a 0.5% decline in the fourth quarter of 2022. A recession is usually defined as two consecutive quarters of contraction.

Germany’s GDP data showed “surprisingly negative signals,” Finance Minister Christian Lindner said Thursday. He added that compared to other highly developed economies, the economy was losing growth potential.

“I don’t want Germany to play in a league where we have to relegate ourselves to the last positions,” he said, referring to forecasts from the International Monetary Fund, which predicted a recession in 2023 only in Germany and Britain. European countries.

Robert Habeck, Germany’s economy minister, said his country’s previous heavy dependence on Russia for energy supplies led to the recession, but growth prospects were much bleaker.

“We are fighting our way out of this crisis,” Habeck said at an event in Berlin on Thursday.

“Under the weight of immense inflation, the German consumer has fallen to his knees and is dragging the entire economy with him,” said Andreas Scheuerle, analyst at DekaBank.

Household consumption fell by 1.2% quarter on quarter after price, seasonal and calendar adjustments. Government spending also fell significantly, down 4.9% in the quarter.

“Warm winter weather, a pick-up in industrial activity helped by China’s reopening, and an easing of supply chain frictions were not enough to lift the economy out of recession,” said Carsten Brzeski, head of macroeconomics. economic at ING.

By contrast, investment increased in the first three months of the year, following a weak second half of 2022. Investment in machinery and equipment increased by 3.2% compared to the previous quarter, while investment in construction increased by 3.9%. % increased quarter on quarter.

There were also positive contributions from trade. Exports increased by 0.4%, while imports fell by 0.9%.

“The huge rise in energy prices took its toll in the winter half,” said Commerzbank chief economist Joerg Kraemer.

A recession was unavoidable and now the question is whether there will be a recovery in the second half of the year.

“Looking beyond the first quarter, the optimism at the beginning of the year seems to have given way to more realism,” Brzeski said.

Declining purchasing power, depleted industrial order books, aggressive monetary policy tightening and the expected slowdown in the US economy all point to weak economic activity.

Following Wednesday’s decline in the Ifo business climate, all major leading indicators in the manufacturing sector are now falling, Kraemer said.

However, Germany’s Bundesbank expects the economy to grow modestly in the second quarter, as a rebound in manufacturing more than offset stagnant household consumption and a slump in construction, according to a monthly economics report released Wednesday.

Reporting by Maria Martinez, additional reporting by Christian Kraemer, editing by Friederike Heine, Simon Cameron-Moore, Toby Chopra, and Mark Porter

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