The latest estimates from the government have confirmed that Germany is now officially in a recession. This is due to the significant impact of the rapidly rising prices on the economy, which has been even more severe than initially anticipated.
According to data from the Federal Statistical Office, Europe's largest economy had contracted by 0.3% in the first three months of 2023, as compared to the previous three months, when it shrank by 0.5%. A recession is technically defined as two consecutive quarters of contraction. Previous estimates claimed that Germany narrowly escaped recession in the first quarter, with 0% growth.
Prices have increased due to dwindling energy supplies from wartime Russia, fueling inflation.
The recession was milder than some early forecasts at the start of the conflict. Still, mild winter weather and the resolution of supply chain issues caused by the Covid pandemic were "not enough to get the economy out of the recessionary danger zone," according to Carsten Brzeski, head of macro at ING bank.
Consumers Hit By Inflation
As per the statistics office, while private sector investment and building increased at the start of the year, this was partly offset by a dip in consumer expenditure as higher prices pushed people to cut down on spending.
Household expenditure plunged to 1.2% in the first quarter, as consumers were less inclined to spend money on food, clothing, and furnishings. Government expenditure was also down 4.9% from the previous quarter, as per a report in The Guardian
The Ukraine conflict has negatively impacted firms and consumers, who have held back on investment and purchasing, respectively, affecting demand. The European Central Bank's interest rate increases have had little effect on lowering inflation, which is currently around 7% throughout the eurozone.
Despite government subsidies, significantly increasing heating prices meant German consumers were spending less on other items.
The Ifo Index, Germany's most significant leading monthly indicator, revealed a persistently dismal business environment. It fell again in May for the first time in six months. Except for services, all industries were declining.
The leader of Germany's most prominent opposition party labeled the country's economic downturn a "wake-up call" for German Chancellor Olaf Scholz. "It has to shake him awake," said the CDU member Friedrich Merz. "The way his coalition is working means many firms doubt in the future of Germany as a location."
However, Scholz urged people to believe in the economy. "The prospects for Germany's economy are very good," he remarked. He mentioned substantial investments in semiconductors and battery manufacturers as reasons for confidence, citing the tremendous rise of renewable energy that would "unleash the strengths of the economy."
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