Germany's economy shrank in the first quarter. The high inflation depresses the consumer mood and thus slows down the economy. Expectations for the full year are also subdued.
The German economy slipped into recession in winter. Gross domestic product (GDP) shrank by 0.3 percent in the first quarter compared to the previous quarter, the Federal Statistical Office announced on Thursday. In an initial estimate at the end of April, the authorities still assumed that economic output would stagnate at the beginning of the year.
“After GDP had already slipped into the red at the end of 2022, the German economy recorded two negative quarters in a row,” said Ruth Brand, President of the Authority. If economic output shrinks for two quarters in a row, economists speak of a technical recession. This does not mean that the full year is negative. Mainly thanks to the mild winter, the worst scenarios did not materialize – such as a lack of gas, which would have left deep scars.
Experts are not surprised
Jens Oliver Niklasch from LBBW is not surprised by the development after there were very weak figures in March. However, he finds the extent of the revision appalling. “The leading indicators suggest that things will continue to be similarly weak in the second quarter,” he says. “Basically an expected stabilization recession after the interest rate hikes by the ECB. But also a good opportunity to be honest about fiscal and growth policy.” He pleads for now in Germany to talk about the medium-term strengthening of the forces of growth instead of constantly about new burdens for the economy and fiscal benefits from the watering can.
Thomas Gitzel, chief economist at VP Bank, also sees gloomy clouds gathering for the second half of the year. “Then the catch-up effects in industry will be gone and there will no longer be any compensation for the continued weak private consumption to be expected and the ailing construction industry,” says the expert. “The shrinking course of the German economy will presumably continue in the second half of the year.”
“The massive increase in energy prices took their toll in the winter months,” commented Commerzbank chief economist Jörg Krämer on the development. A fundamental improvement is not in sight, as the decline in the Ifo business climate barometer indicates.
War in the Ukraine and the ensuing fear of gas shortages have pushed up energy prices and inflation sharply.
Full year outlook
A strong upswing is not in sight for the time being. The Bundesbank expects at least slight growth in the spring. “In the second quarter of 2023, economic output should increase again slightly,” says the current monthly report. Easing delivery bottlenecks, high order backlogs and lower energy prices should then ensure a recovery in industry. “This should also support exports, especially since the global economy has regained some momentum,” expects the Bundesbank.
According to experts, the prospects for Europe's largest economy for the year as a whole are The International Monetary Fund assumes that economic growth is likely to hover around the zero line. The IMF is therefore more pessimistic than the federal government, which expected GDP growth of 0.4 percent in its spring projection presented at the end of April. In its most recent forecast, the EU Commission reckoned with economic growth of 0.2 percent for Germany.
Inflation dampened the mood to buy
In view of the inflation, private consumption failed to support the economy. According to the information, private households spent less on food and beverages, clothing, shoes and furniture than in the previous quarter. High inflation is a challenge for consumers: it is eroding their purchasing power. People can afford less for one euro. Government consumption also fell, by 4.9 percent.
“Under the burden of immense inflation, German consumers have fallen to their knees and have taken the entire economy with them,” says Andreas Scheuerle from DEKA Bank. The upward pressure on prices has weakened recently. However, the annual inflation rate in April was still relatively high at 7.2 percent. A quick and clear turn for the better is not in sight, said Scheuerle. “While the inflationary burdens are slowly subsiding, those of the restrictive monetary policy are growing. The poison of inflation is being fought with the antidote of high interest rates.”
High inflation means that people actually have less in their wallets
Positive impulses but gloomy expectations
According to the statisticians, positive impetus came from exports and investments at the beginning of the year. At the same time, construction investments increased due to the favorable weather, as well as investments by companies in equipment such as machines, devices and vehicles. However, according to a survey by the Ifo Institute, the mood in the German export industry has deteriorated noticeably. Companies' export expectations fell to 1.8 points in May from 6.5 points in April, the institute announced on Thursday. That is the lowest value since November 2022. “The global interest rate increases are slowly affecting demand,” explained Klaus Wohlrabe, head of the Ifo surveys.
Expectations worsened, especially in the automotive industry. Manufacturers in the metal industry are also assuming falling foreign sales. In the chemical industry and among manufacturers of electrical equipment, according to the survey, the positive and negative prospects are currently more or less balanced. The manufacturers of data processing devices and clothing manufacturers, on the other hand, are optimistic about the development of their foreign business.
iw/hb (dpa, rtr, afp)