Germany enters recession after economy contracts in first quarter

Germany has slipped into recession, with revised data showing a decline in GDP in Europe’s biggest economy in the first quarter of the year.

Destatis, the federal statistics agency, said the German economy contracted 0.3 percent in the three months to March, adjusting its initial forecast of zero growth. Some economists had expected a decline after German industrial production fell by its biggest in 12 months in March.

A second consecutive quarterly decline in GDP – following a 0.5 per cent decline in the last quarter of last year – meets the definition of a technical recession.

The main reason for Germany’s disappointing performance in the first quarter was a decline in domestic consumption, which fell 1.2 percent compared to the previous quarter, as high inflation eroded people’s purchasing power.

“Households’ reluctance to buy was evident in several areas: Households spent less on food and beverages, clothing and shoes, and furnishings in the first quarter of 2023 than in the previous quarter,” Destatis said in a statement.

Car sales fell in Germany, reflecting a reduction in grants and subsidies on the purchase of plug-in hybrid and electric vehicles since the beginning of the year.

German government spending was also down 4.9 percent. But private sector investment rebounded from a weak second half of 2022 in the first quarter, rising 3.9 percent on higher construction activity that reflected mild weather.

Trade contributed positively as German imports fell 0.9 percent in the first quarter and exports rose 0.4 percent.

Germany is expected to have the weakest performance among the world’s large economies this year, according to the IMF, which forecasts the country’s output to shrink by 0.1 percent.

The slowdown over the past six months means that unlike the overall eurozone economy, German GDP is still below pre-pandemic levels. Destatis said first-quarter production was down 0.5 percent from a year earlier.

Consumers in Germany have been hit by high inflation and rising borrowing costs, which led to an 8.6 percent drop in retail sales in March from the same month in March after adjusting for inflation.

German companies are increasingly gloomier about the year ahead, according to the Ifo Institute’s business confidence index, which fell in May for the first time in seven months.

Europe’s biggest economy has been hit by weakness in its vast manufacturing sector, which has been plagued by lower factory output, falling demand, weak exports and a shrinking backlog of orders.

In the first quarter, manufacturing output rose 2 percent from the previous quarter, but Destatis said there was “an effect of the March slowdown.” Growth in the large services sector was weak, it said.