Germany falls into recession as inflation hits economy
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Loading... - Morken Brandt
- 06 Jun 2023
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Persistent inflationary pressures have played a significant role in propelling Germany into a state of recession during the initial three months of this year, as evidenced by improved analysis of growth data. Analysts further attribute the substantial impact on Europe's largest economy to the disruption caused by the cessation of Russian gas supplies following the invasion of Ukraine.
According to the statistics office, the German economy contracted by 0.3% between January and March, following a previous decline of 0.5% in the last quarter of the preceding year. The technical definition of a recession involves an economy experiencing contraction over two consecutive three-month periods or quarters.
"Andreas Scheuerle, an analyst at DekaBank, remarked, "Under the tremendous weight of inflation, the German consumer has succumbed, subsequently dragging the entire economy down with them." In April, Germany's inflation rate reached 7.2%, surpassing the average for the euro area but remaining below the UK's rate of 8.7%.
Elevated prices have hurt household expenditure, affecting essential items such as food, clothing, and furniture. The industrial sector has also experienced weakness, reflecting the consequences of escalated energy costs for businesses.
"The persistence of significant price increases continued to burden the German economy at the beginning of the year," stated the federal statistics agency Destatis in a released statement. Initially, the agency projected zero growth for the first quarter, indicating the likelihood of Germany avoiding a recession. However, revised figures revealed that household spending had declined by 1.2% compared to the previous quarter. Government spending experienced an even more substantial decrease of 4.9%, and car sales declined due to reduced government grants for electric and hybrid vehicles.
Despite Germany's heavy reliance on Russian energy, the recession was less severe than anticipated. A mild winter and the reopening of China's economy played a mitigating role in alleviating the impact of higher energy prices.
While private sector investment and exports saw increases, these improvements proved insufficient to remove Germany from the "danger zone" of recession, according to analysts. Jens-Oliver Niklasch, an analyst at LBBW bank, stated, "Early indicators suggest that the second quarter of 2023 will exhibit similar weaknesses."
Conversely, the German central bank, known as the Bundesbank, expects modest growth in the economy during the April to June quarter, as a rebound in the industrial sector offsets stagnating consumer spending.
In contrast, the International Monetary Fund (IMF) predicts that Germany will be the weakest performing among the world's advanced economies, with a contraction of 0.1% projected for this year. Interestingly, the IMF has upgraded its forecast for the United Kingdom, revising it from a negative growth rate of 0.3% to a positive growth rate of 0.4%.
