Germany has entered a recession as the impact of last year’s energy price shock on consumer spending.
Official figures indicated Thursday that output in Europe’s largest economy fell 0.3% in the first three months of the year. Following a 0.5% decrease at the end of 2022.
The Federal Statistical Office revised down its previous estimate of zero increase in gross domestic product (GDP) over the preceding quarter. A recession is defined as two quarters of decreasing output in a row.
“The persistence of high price increases continued to be a burden on the German economy at the start of the year,” according to the office. “This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023.”
According to Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, consumer spending in the first quarter was hampered by “the shock in energy prices.”
European energy prices were already climbing when Russia invaded Ukraine in February of last year. Sending them to all-time highs. Moscow then cut off the gas supply to European countries. Causing Germany to declare a state of emergency.
Uncertain future
Natural gas prices have now fallen and are currently at levels last seen in late 2021. Indicating that inflationary pressures on consumers’ pockets are diminishing. The annual rate of inflation in Germany dropped again in April the first month of the second quarter. But remained high at 7.2%.
“We believe consumer spending is now resuming as inflation subsides,” Vistesen wrote in a note. “We doubt that GDP will continue to fall in the coming quarters, but we do not see a strong recovery either.”
In an indication that the recession in Germany may be over, earlier this week. Timelier survey data indicated that economic activity in the country expanded again in May, despite a severe drop in manufacturing.
However, according to Franziska Palmas, senior Europe economist at Capital Economics. German output will contract again in the last two quarters of the year.
Higher interest rates, she wrote in a note, would continue to impact both consumption and investment, and Germany’s exports may suffer as demand was depleted by weakening in other developed economies.
China is Germany’s second-most important trading partner, trailing only the United States. German auto exports to China plunged 24% in the first quarter.
