Germany has slipped into recession as the economy contracted by 0.3% between January and March 2023
As per the data released by the Federal Statistical Office, Germany has slipped into recession as the economy contracted by 0.3% between January and March 2023, following a decline of 0.5% in the 4th quarter of 2022.
Germany’s inflation rate stood at 7.2% in April 2023, above the Euro Area’s average but below the United Kingdom’s (U.K.’s) inflation rate of 8.7%.
Continued inflation led to Germany slip into recession. Germany got affected severely when Russian gas supplies were stopped owing to Russia’s invasion of Ukraine. Industrial orders also weakened-up, reflecting the impact of higher energy prices on businesses. Higher prices weighed heavily on household spending such as food, clothing and furniture.
A Statement from the Federal Statistical Office read, “The persistence of high price increases continued to be a burden on the German economy at the start of the year. This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023.”
Initially, the agency had estimated zero growth for the first quarter of 2023, suggesting Germany would side-step a recession. However, the revised figures showed household spending was 1.2% lower than in the previous quarter. Government spending was 4.9% lower. Car sales also fell after Government grants for electric and hybrid cars were scaled back. China is Germany’s most important trading partner, just ahead of the United States (U.S.). Exports of German cars to China fell 24% in the first quarter of 2023.
By contrast, investment was up 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 with the previous quarter, while investment in construction went up by 3.9% in the quarter.
The recession was less severe than some had predicted, given Germany’s heavy reliance on Russian energy. A mild winter and the reopening of China’s economy helped ease the impact of higher energy prices. Private sector investment and exports rose, but that was not enough to get Germany out of the danger zone of recession. The early indicators suggest that things will continue to be similarly weak in the second quarter of 2023.
However, the German Central Bank – The Bundesbank, expects the economy to grow modestly in the April to June quarter of 2023, with a rebound in industry offsetting stagnating consumer spending. The International Monetary Fund (IMF) has predicted that Germany will be the weakest of the world’s advanced economies, shrinking by 0.1% in 2023, after it upgraded its forecast for the U.K. from minus 0.3% to growth of 0.4%.
