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Germany tips into recession with analysts warning economy won’t get much better

Official figures today show that Germany slipped into an official recession over the winter, sparked by the strain on family finances from sky-high energy bills.

Revised estimates by the country’s statistics agency, Destatis, showed that gross domestic product (GDP) shrank 0.3 percent in the first three months of this year.

The organization previously assumed production had stagnated over the period.

Today’s downgrade means the German economy has contracted for two straight quarters, in line with the rule of thumb of a recession. GDP collapsed by 0.5 percent in the last quarter of last year.

The 1.2 percent decline in consumer spending at the start of the year was the main reason for the fall in output. That was a slight improvement from the 1.7 percent drop seen in the final months of 2022.

Germany was particularly exposed to the energy price shock caused by Russia’s large-scale invasion of Ukraine.

A large part of the economic output is generated by industry and manufacturing, which have been dependent on cheap energy from Russia for years. Rising gas prices have forced businesses to scale back operations and forced households to save their money.

Pressure on the economy from the energy price shock was compounded by the European Central Bank’s (ECB) aggressive interest rate hikes to curb inflation across the 20-member eurozone.

President Christine Lagarde and the rest of the governing council have increased borrowing costs from minus 0.5 percent to 3.25 percent in less than a year. The bloc had negative interest rates for several years.

ECB officials are advised to raise interest rates at least once more this year. Eurozone inflation has fallen to 7% from a peak of almost 11%. In Germany, the price increase rate is 7.6 percent.

Analysts warned that the performance of Europe’s economic powerhouse won’t get much better over the course of the year.

“Looking ahead, we doubt that GDP will fall further in the coming quarters, but we don’t see a strong recovery either,” said Claus Vistesen, chief eurozone economist at consultancy Pantheon Macroeconomics.

“We expect consumer spending to pick up now as inflation eases and the 4.9 percent slump in government spending will also result in a reversal. In contrast, we expect investment to fall now as higher interest rates and tighter credit standards have an impact and net export growth also slows,” he added.

Earlier this week, the International Monetary Fund raised its forecast for UK GDP growth this year to 0.4% from a 0.3% contraction. This means that Germany is expected to be the worst-performing economy among the G7 countries this year.



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