Europe’s Biggest Economy Falls Into Recession, Data Shows
Europe’s Biggest Economy Falls Into Recession, Data Shows

By Katabella Roberts

Germany, Europe’s largest economy, has slipped into recession, official data published on May 25 shows.

Data from Destatis, Germany’s federal statistical agency, shows that gross domestic product (GDP) fell by 0.3 percent for the quarter when adjusted for price and calendar effects, following a 0.5 percent contraction at the end of 2022.

Last month, Destatis had estimated zero growth for the first quarter of this year, skirting a recession.

“After GDP growth entered negative territory at the end of 2022, the German economy has now recorded two consecutive negative quarters,” Ruth Brand, president of the Federal Statistical Office, said in a statement.

The standard definition of a recession is based on two consecutive quarters of declining gross national product.

Destatis noted that persistently high prices continue to be a burden on the German economy, with household consumption down 1.2 percent in the first quarter of 2023 after seasonal and calendar adjustments.

“The reluctance of households to buy was apparent in a variety of areas,” the statement reads. “Households spent less on food and beverages, clothing and footwear, and on furnishings.”

Households also purchased fewer new cars, which the agency said was likely attributable, in part, to the discontinuation of grants for plug-in hybrids and the reduction of grants for electric vehicles at the start of 2023.

Food, Energy Prices Remain High

Government spending also declined by 4.9 percent compared with the previous quarter, data showed.

In contrast, investment was up from the fourth quarter of 2022, following a weak second half of 2022. Investment in machinery and equipment increased by 3.2 percent compared with the previous quarter, while investment in construction was up 3.9 percent, in part due to good weather.

There were also positive contributions from trade compared with the fourth quarter of 2022. Exports of goods and services rose 0.4 percent, with trade with plastics and fabricated metal products “particularly showing robust growth,” the agency said. Imports fell 0.9 percent due, in part, to reduced imports of mineral fuels such as crude oil and mineral oil products, as well as chemicals and chemical products.

Destatis noted that increases in energy and food prices remain high in Germany and mainly contributed to the 7.3 percent rise in household final consumption expenditure at current prices year on year.

Energy prices across Europe were already rising before Ukraine was invaded by Russia, which was previously Germany’s main gas supplier, in February 2022 but have since soared after Russia closed its Nord Stream 1 pipeline in August.

Energy prices were up 6.8 percent year on year in April. Food prices, meanwhile, were up 17.2 percent year on year in April. Overall, Germany’s inflation rate stood at 7.2 percent in April, above the euro area’s average but down from 7.4 percent a month earlier.

Meanwhile, the International Monetary Fund (IMF) predicts the German economy will shrink by 0.1 percent this year.

Economy Is ‘Very Good’ Chancellor Says

Despite the nation meeting the technical definition of a recession, a separate Bundesbank report published on May 24 cut a more optimistic tone, with officials suggesting the economy will grow modestly in the second quarter in part due to a rebound in industry that will offset stagnating household consumption and a slump in construction.

“Easing supply bottlenecks, the high backlog of orders and the fall in energy prices support the continued recovery in industry,” the Bundesbank said. “This should also support exports, especially since the global economy has regained some momentum.”

However, officials noted that private consumption would likely remain weak as a quick rise in nominal incomes only serves to stop real wages from falling further.

Germany’s once-thriving manufacturing sector has been suffering from a sharp downturn in recent months, with the sector contracting at its fastest rate in almost three years in April, although preliminary survey data released earlier this week showed that business activity in the country expanded again in May.

Speaking at a press conference in Berlin on Thursday, German Chancellor Olaf Scholz appeared to brush off the latest data and insisted that the outlook for the economy was “very good,” while noting measures his government is taking to attract foreign workers and expand renewable energy production to help boost the economy.

“There is a lot of investment in Germany in terms of battery and ship factories, which is increasing significantly, and we can therefore be confident,” he said.

Reuters contributed to this report.

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