German economy was in recession in Q1- Destatis

By Friederike Marx, dpa I Thursday, May 25, 2023

 

BERLIN – The German economy slipped into recession during the winter, the Federal Statistical Office (Destatis) said on Thursday, updating a first estimate which had still assumed stagnation of economic performance for the first quarter.

Gross domestic product (GDP) shrank by 0.3% during the first months of 2023 compared to the previous quarter, the authority said.

“After GDP had already slipped into negative territory at the end of 2022, the German economy thus recorded two negative quarters in a row,” said Destatis president Ruth Brand.

If economic output shrinks for two consecutive quarters, economists speak of a technical recession. This does not mean, however, that the entire year is negative, though some economists are not precluding the possibility.

Thanks mainly to a mild winter in Germany, the worst scenarios did not come to pass – such as a gas shortage, which would have had a major impact on the economy. However, the “massive rise in energy prices took its toll in the winter half-year,” Commerzbank chief economist Joerg Krämer said on Thursday.

Private consumption failed to support the economy in the face of high inflation rates. The new figures show that private households spent less on food and beverages as well as on clothing and shoes and on furnishings in the first quarter of 2023 than in the previous quarter.

“When everything becomes more expensive, people start saving,” said Thomas Gitzel, chief economist at VP Bank.

A further impact was that people bought fewer new cars, as the government stopped providing subsidies to help people buy plug-in hybrid cars, which have a combustion engine as well as an electric motor.

Premiums for electric vehicles were also reduced. For consumers, the high inflation is a challenge as it eats away at their purchasing power, as people can afford less with every euro.

While the upward trend in prices has weakened recently, the annual inflation rate of 7.2% recorded in April was still comparatively high.According to the statistical office, positive impulses came from exports and investments at the beginning of the year.

Exports “Made in Germany” benefited from improvements in supply chains that enabled companies to ship more goods. Construction investments increased, also due to the favourable weather, as did company investments in equipment such as machines, devices and vehicles.

The Bundesbank expects the inflation rate to ease only very gradually. Some economists say private consumption is likely to remain a weaker area, with consumer sentiment only recovering slowly, according to data from the consumer research company GfK.

The Ifo Institute says the mood in the German economy clouded over in May for the first time in six months. “The German economy is looking to the summer with scepticism,” Ifo President Clemens Fuest said recently.

That means the months ahead are not likely to be easy, according to economists. “Growth will remain a ride on the razor’s edge between slight growth and advancing recession in the second quarter,” Gitzel said. He called the outlook for the second half of the year bleak, saying the catch-up effects in industry would by then be exhausted.

“There is no light at the end of the economic tunnel for the time being,” says Christoph Swonke, an economist at DZ Bank.

But views differ and the German Institute for Economic Research expects private consumption and so economic output as a whole to recover significantly in the course of the year.

The International Monetary Fund (IMF) expects economic growth to hover around stagnation. The IMF is thus more pessimistic than the German government, which expected a GDP increase of 0.4% in its spring projection presented at the end of April.

In its latest forecast, the European Commission projected economic growth of 0.2% for Germany.