German economy enters recession following bleak first quarter

Behind the fall was a plunge in government expenditure and a decline in household spending as elevated prices weighed on consumers

Thu, 25 May, 2023 - 07:32

The German economy contracted slightly in the first quarter of 2023 compared with the previous three months, thereby entering a recession, data from the statistics office showed on Thursday.

Gross domestic product fell by 0.3% for the quarter when adjusted for price and calendar effects, the data showed. This follows a decline of 0.5% in the fourth quarter of 2022. A recession is commonly defined as two successive quarters of contraction.

A preliminary estimate had shown GDP stagnating in the first quarter and Germany skirting a recession.

Behind the fall was a plunge in government expenditure and a decline in household spending as elevated prices weighed on consumers.

Inflation continued to be a burden on the German economy at the start of the year, the statistics office said. This was reflected in household consumption, which was down 1.2% quarter-on-quarter after price, seasonal and calendar adjustments.

By contrast, investment was up in the first three months of the year, following a weak second half of 2022. There were also positive contributions from trade.

The plant of German chemical group BASF in Ludwigshafen, pictured on 13 March 2002. The company's prognosis for 2002 is that it will be a 'difficult year'.

The result is a setback for Germany, which despite escaping the bleakest scenarios feared in the aftermath of Russia’s invasion has nevertheless succumbed to a recession that Chancellor Olaf Scholz appeared to rule out in January.

The culprit is the key manufacturing sector, where a deepening downturn is casting doubt on the rebound many anticipate for the coming quarters.

A Bundesbank report this week offered some optimism, however, suggesting the economy may grow “slightly” this quarter as large order backlogs, an easing of supply bottlenecks and lower energy costs support manufacturers.

But goods demand is cratering as consumers faced with elevated inflation prefer to splurge on leisure and travel. That’s making economic growth increasingly uneven — a trend some analysts say isn’t sustainable.

“Something will have to budge,” ING economist Carsten Brzeski said this week. It’s likely services will “increasingly suffer under weak manufacturing activity and weak disposable incomes.”

Reuters and Bloomberg