New data released Thursday shows that Germany suffered a recession during the winter, quashing hopes the country could avoid a recession amid the war in Ukraine.
Output shrank by 0.3% in the first quarter compared to the previous three months after a 0.5% drop in output between October to December, according to the German statistics office Destatis. Last month it had issued a prediction of stagnation.
In a statement, the office said, “The reluctance of households to buy was apparent in a variety of areas. Households spent less on food and beverages, clothing and footwear, and on furnishings.” It also noted sales of electric cars fell on reduced incentives.
Government expenditures fell, as investment was up, partly due to unseasonably warm weather increasing construction numbers.
The result is a disappointment for the nation, which had hoped to avoid a recession, with Chancellor Olaf Scholz appearing to rule any recession out as recently as January.
The deepening reductions in output are also causing some analysts to doubt the manufacturing sector will be capable of producing the rebound many have been counting on arriving in the coming quarters.
The industrial weakness is, in turn, impacting the overall business outlook. Lobby group DIHK is forecasting zero GDP growth in 2023, while the Ifo institute’s expectation gauge fell for the first time in the last eight months in May.
Some seeking a little optimism are pointing to a Bundesbank report issued this week which suggests the economy may grow “slightly” in this quarter, due to a combination of large order backlogs, an easing of supply chain bottlenecks, as well as lower energy costs.
However the demand for goods is cratering as the elevated inflation has consumers focusing all of their elective spending splurges on travel and leisure. As a result, the nation’s economic growth has become very uneven, and analysts are observing that trend is not sustainable.
In a note to clients, ING economist Carsten Brzeski said, “The optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favor of weak economic activity.”
Commerzbank economists are now predicting that a second-half recession is likelier than the rebound which most have been forecasting up until now, and which many are continuing to predict.
Meanwhile inflation continues to weigh on the economy. It is still above 7%, and is expected to continue to persist, as rising salaries continue to pressure it, according to the Bundesbank analysis.
The efforts by the European Central Bank to bring inflation back towards the regulator’s 2% target rate also are threatening to dampen demand further. Bank loans are already more expensive, and interest rate hikes will continue from here, threatening to cool the German economy even further.
