Why is GDP Falling in Germany

Why is GDP Falling in Germany Germany has slipped into recession as last year’s energy price shock takes its toll on consumer spending. Output in Europe’s largest economy dropped 0.3% in the first three months of the year, following a 0.5% contraction at the end of 2022, official data showed Thursday.

Germany’s economy shrank in the first quarter of 2023 compared to the previous three months and thus fell into recession, data from the statistical office showed on Thursday. Gross domestic product fell 0.3 percent in the quarter when adjusted for price and calendar effects, another estimate showed.

Economy Minister Robert Habeck cited Germany’s long-term dependence on Russian energy and its sudden interruption after the occupation of Ukraine as the main reason for the economic decline.

Why is GDP Falling in Germany

Germany has slipped into recession, revised official data showed, as high prices did more to the country’s economy than previously thought.

According to the Federal Statistics Office, Europe’s largest economy shrank by 0.3 percent in the first quarter of 2023, compared with a 0.5 percent contraction in the previous three months. The technical definition of a recession is two consecutive quarters of decline.

According to earlier estimates, Germany narrowly avoided recession with zero percent growth in the first quarter.
Statistics Finland said on Thursday that while private sector investment and construction increased at the start of the year, this was partly offset by a fall in consumer spending as rising prices forced households to cut back on consumption. Overall, household spending fell 1.2% in the first quarter, with shoppers reluctant to buy food, clothing and furniture. Public sector spending also fell by 4.9% compared to the previous quarter.

The war in Ukraine has disrupted both businesses and consumers, both of which have slowed investment and purchases, affecting demand. Interest rate hikes by the European Central Bank have so far had little effect on inflation, which is 7 percent in the euro area.

Significantly higher heating costs, despite state subsidies, meant that German consumers limited their spending on other things. Carsten Brzeski, global head of macroeconomics at Dutch bank ING, said the overall decline in Germany’s gross domestic product was not the worst case of a severe recession, but was still “close to a 1 percent drop compared to last summer “. “.

“Warmer winter weather, a recovery in industrial activity, aided by the reopening of China and an easing of supply chain frictions, were not enough to lift the economy out of the recession danger zone,” he added.
Germany’s most important monthly leading indicator, the Ifo index, continued to show a weak background for companies. In May, it fell again for the first time in six months. All economic sectors except service were in decline.

The leader of the country’s largest opposition party called the recession a “wake-up call” for German Chancellor Olaf Scholz. “It has to wake him up,” CDU representative Friedrich Merz told the Agence France-Presse news agency. “The way his coalition works means that many companies have doubts about Germany’s future as a location.”

Economy Minister Robert Habeck cited Germany’s long-term dependence on Russian energy and its sudden withdrawal after the occupation of Ukraine as the main reason for the economic downturn. “We will fight our way out of this crisis,” he said at an event in Berlin.

Scholz called people to believe in the economy. “The outlook for the German economy is very good,” he said. He cited a massive expansion of clean energy that would “unleash the forces of the economy” as a reason for optimism, specifically citing large investments in semiconductor and battery factories. The Bundesbank offered another dose of optimism. In its latest monthly report, it predicted that economic growth would pick up in the second quarter, saying that this view was based on an improvement in supply chain issues and the fact that as a result companies are now better able to meet the backlog of orders built. during 2010. pandemic. and then.

However, state investment and development bank KfW said this week that it expects Germany’s gross domestic product to contract by 0.3 percent this year. He added that two-thirds of the drop could be due to more working days lost to public holidays in 2023 than last year.

The German economy fell into a technical depression in the first quarter of this year as families tightened their spending.
Thursday’s data from Germany’s statistical office showed a downward revision of GDP (gross domestic product) from zero to -0.3 percent in the first three months of the year.
This is due to a 0.5% decline in Germany in the last quarter of 2022. Two consecutive quarters of negative growth defines a technical recession.

Europe’s largest economy has been under considerable pressure, particularly due to Russia’s attack on Ukraine and the subsequent decision by European leaders to cut ties with Moscow. According to Statistics Finland, German households spent much less money in the first quarter, consumer spending fell by 1.2% in the period, as consumers did not want to spend their money on clothes, furniture, cars, etc.

“Germany was forced into recession late last year as the energy price shock weighed on consumer spending,” Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told clients.
He added that it is unlikely that Germany’s GDP contraction will continue in the coming quarters, “but we don’t see a strong recovery either.”

Franziska Palmas, chief European economist at Capital Economics, said: “We expect more weakness from here.”

Recent economic developments are taking place against a backdrop of high inflation and high interest rates across the region. The European Central Bank is expected to raise key interest rates again at its next meeting on June 15. The central bank has raised interest rates by 375 basis points since July. Germany’s central bank president, Joachim Nagel, said earlier this week that “several” more interest rate hikes are ahead of the ECB. He is one of the funniest members of the central bank.

“The rise in interest rates will continue to affect both consumption and investment, and exports may also suffer due to the weakening of the economies of other developed markets. We foresee further contraction in the third and fourth quarters, added Palmas of Capital Economics.

The 10-year German Bund changed hands about 2.46 percent in early European trade.

German GDP decreased in the first quarter, according to updated data, as poor consumer and industrial activity increased concerns that Europe’s largest economy would experience a protracted recession.

The German economy shrank by 0.3% in the three months leading up to March, according to Destatis, the federal statistical agency, following a downward revision from its initial estimate of zero growth. Some economists had anticipated the decline following the strong March retail sales decline and the largest 12-month decline in industrial production in Germany.

According to economists, Europe’s industrial powerhouse is technically in a recession as a result of the second consecutive quarterly loss in GDP, which occurred in the last quarter of last year when output decreased by a downwardly revised 0.5%.

Why is GDP Falling in Germany

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