Germany slips into recession as consumers in Europe’s biggest economy spend less

London
CNN
—

Germany slipped into recession as last year’s energy price shock impacted consumer spending.

Output in Europe’s biggest economy fell 0.3% in the first three months of the year, after contracting 0.5% at the end of 2022, official data showed on Thursday.

The Federal Statistical Office has revised down its previous estimate of zero growth in gross domestic product (GDP) compared to the previous quarter. A recession is defined as two consecutive quarters of declining output.

“The persistence of strong price increases continued to weigh on the German economy at the start of the year,” the office said. “This was notably reflected in household final consumption expenditure, which fell by 1.2% in the first quarter of 2023.”

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said consumer spending in the first quarter was held back by “the energy price shock”.

European energy prices were already rising when Russia’s invasion of Ukraine in February last year propelled them to record highs. Moscow then cut gas supplies to European countries, prompting Germany to declare an emergency.

Natural gas prices have since fallen and are now at levels last seen at the end of 2021, indicating an easing of inflationary pressures on consumers’ pockets. Germany’s annual inflation rate slowed again in April — the first month of the second quarter — although it remained high at 7.2%.

“We believe consumer spending is now rebounding as inflation declines,” Vissen said in a note. “We doubt GDP will continue to decline over the next few quarters, but we don’t see a strong recovery either.”

In a sign that Germany’s recession may prove to be short-lived, more recent survey data showed earlier this week that business activity in the country rose again in May, despite a sharp drop in industry manufacturing.

German Chancellor Olaf Scholz described the economic outlook as “very good”, highlighting the steps his government has taken in recent months to expand renewable energy production and attract foreign workers.

“There are a lot of investments in Germany in terms of battery factories and ships, which are increasing significantly, so we can be confident,” he told a press conference in Berlin. .

However, Franziska Palmas, senior Europe economist at Capital Economics, predicted that German output would contract again in the third and fourth quarters.

In a note, she said higher interest rates, needed to keep inflation under control, would continue to weigh on both consumption and investment, and that German exports could also suffer as demand was sapped. by weakness. in other developed economies.

China is Germany’s largest trading partner, just ahead of the United States. German car exports to China fell 24% in the first quarter.

Germany’s recession at the start of the year appears to have been relatively shallow, defying the much gloomy forecasts of its leading economic forecasters. A report from five German economic institutes in April 2022 indicated that the country’s GDP would contract by 2.2% in 2023 if its supply of Russian natural gas was suddenly interrupted.

The German economy is expected to contract by 0.1% in 2023, according to the latest forecasts from the International Monetary Fund.

In August, Russia closed its Nord Stream 1 gas pipeline, Germany’s main source of Russian gas, for maintenance, then extended shutdown indefinitely.

— Anna Cooban, Mark Thompson, Nadine Schmidt and Claudia Otto contributed reporting.