Recession: Germany has slipped


The gross domestic product fell again at the beginning of the year. This means that Germany is technically in a recession in the winter months. And the prospects are mixed at best.

< p>The still high inflation burdens consumer spending and slows down Germany's economic performance

Since Thursday, another specter has been sighted in the economic realms of Germany – it is the specter of the recession. Because the Federal Statistical Office has revised its first estimate of the gross domestic product for the beginning of the year downwards, and not too narrowly: the statisticians in Wiesbaden have now calculated in detail a decline in the economy by 0.3 percent. In their first estimate, they assumed zero growth.

Since gross domestic product had already shrunk by 0.5 percent in the last quarter of 2022, a recession has been defined – at least technically. Because economists speak of a recession when economic output falls for two consecutive quarters.

“From an economic perspective, it will be a difficult summer,” Holger Bahr told DW. He is head of the economics department at Deka Bank. “And it's uncomfortable enough that after two quarters of decline in a row, you have to speak of a mild recession in Germany in the rear-view mirror.”

People are keeping their money together

Private consumption in particular was weak. According to the statisticians' data, it fell by 1.2 percent. The restraint is evident in various areas. “Private households spent less on food and beverages, clothing, shoes and furnishings than in the previous quarter.” In addition, fewer new cars were bought by private households. This is probably due, among other things, to the elimination of premiums for plug-in hybrids and the reduction in premiums for electric vehicles at the beginning of 2023.

However, the dwindling consumption is based on a deeper problem: inflation, which is still high . “The massive increase in energy prices took their toll in the winter months,” says Jörg Krämer, chief economist at Commerzbank. Because wages are not keeping up with the high inflation, which leads to a loss of purchasing power.

Expensive cars are built by Mercedes-Benz in Sindelfingen, for example

Union unions in most sectors manage to push through significantly higher wages in collective bargaining. However, the increases are usually spread over two years and take place in stages. This means that real wages will continue to fall if inflation remains high. However, government purchases also fell significantly at the beginning of the year: the state spent almost five percent less than in the previous quarter. 

Many construction projects are on hold

On the other hand, positive impetus came from investments at the beginning of the year. They recorded an increase of almost four percent. Above all, construction investments have increased, which according to the statisticians was also due to the comparatively mild winter – most companies were able to work through it.

However, the construction industry is currently experiencing massive headwinds. Construction projects are being postponed or canceled due to high material costs and rising interest rates. The positive momentum at the start of the year is therefore likely to weaken or fail to materialize. “I am assuming that we will now be going through a long dry spell and will only see significant improvements again in a good year,” writes the chief economist at ING Germany, Carsten Brzeski. 

Production of wind turbines at the company eno energy in Rostock

“Things are looking bleak for the second half of the year,” predicts the chief economist at VP Bank, Thomas Gitzel. “Then the catch-up effects in industry will be gone. There will no longer be any compensation for the continued weak private consumption to be expected and the ailing construction industry.” Therefore, in his opinion, the shrinking course of the German economy will continue.

The Ifo business climate also points in this direction. The most important economic indicator fell again this week for the first time in six months – the mood in the executive floors of the German economy has therefore clouded over. “All in all, the economic risks have increased significantly in the past few months,” says economist Jörg Krämer. “We think a technical recession in the second half of the year is more likely than an economic recovery, which most economists are still expecting.”

Interest rate hikes are having an effect

Finally, the sharp rise in interest rates is having a braking effect on the economy. The European Central Bank is trying to get the high inflation under control. On Wednesday, ECB President Christine Lagarde announced at the celebration of the ECB's 25th anniversary that she intended to continue on this course. Because it is the central bank's primary task to achieve the inflation target of two percent and thus price stability in a timely manner. “And we will fulfill this task,” said the Frenchwoman. And that's the goal of interest rate hikes: to take the momentum out of the economy in order to depress prices. The danger lurks, however, of completely choking off economic growth. That's happening in Germany right now, other European countries are in a better position there at the moment. As of now, the federal government's forecast of growth of 0.4 percent this year is unlikely to be achieved. The specter of the recession is back.