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Monday, March 27, 2023

Germany: The economy shrank more than expected at the end of 2022

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On the anniversary of the Ukraine war, the consequences for the economy are becoming clear. At the end of 2022, the German economy will shrink more than initially calculated. Economists expect a difficult winter.

After a surprisingly significant decline in economic output at the end of 2022, Germany is heading for a winter recession. Lower consumer spending in times of high inflation and declining investments stalled the economy in the fourth quarter of 2022. According to data published by the Federal Statistical Office on Friday, gross domestic product (GDP) fell by 0.4 percent compared to the previous quarter. In a first estimate, the authority had assumed a decrease of 0.2 percent. “The energy price shock took its toll in the fourth quarter,” said Commerzbank chief economist Joerg Kraemer.

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According to economists’ estimates, the gross domestic product should also shrink in the first quarter of the current year after price, seasonal and calendar adjustments. This would send Germany into a winter recession: if gross domestic product falls for two quarters in a row, economists speak of a technical recession. “Due to the absence of a gas shortage and the extensive state aid, I still do not expect a deep recession,” said Krämer.

High inflation weighed on private consumption in the final quarter of 2022, which had initially supported the economy over the course of the past year after the end of the corona restrictions. Investments in construction fell for the third quarter in a row after years of boom. Rising interest rates and high material costs mean that house builders and large investors are holding back or canceling projects that have already started. Business investment in equipment such as machinery, equipment and vehicles also decreased. “On the anniversary of the Ukraine war, we are clearly seeing the consequences for growth in Germany,” said Stefan Schneider, chief economist for Germany at Deutsche Bank.

There is hope that consumer sentiment in Europe’s largest economy has continued to brighten. “Consumer pessimism, which reached its absolute peak last autumn, is fading,” said GfK consumer expert Rolf Bürkl on Friday. Sebastian Dullien from the Institute for Macroeconomics and Business Cycle Research (IMK) of the Hans Böckler Foundation expects a certain economic recovery from the spring quarter, “because inflation will then gradually fall and consumption should stabilize as a result.”

Prospects for 2023 no longer so gloomy

Despite the expected winter doldrums, the prospects for 2023 as a whole are no longer as gloomy as they were after the start of the Russian war of aggression in Ukraine. “The German economy is able to hold its own better in the ongoing crisis environment than was feared a few months ago, and there is unlikely to be a steep economic downturn,” said KfW chief economist Fritzi Köhler-Geib.

Some economists are expecting a slight decline in economic output or stagnation for 2023 as a whole. Some economists are expecting slight economic growth because the state is providing billions of euros in relief for private households and companies in connection with the sharp rise in energy costs. The federal government recently raised its economic forecast for this year. She expects economic growth of 0.2 percent instead of a decline in gross domestic product.

However, the billions in aid are a burden on the state coffers. In 2022, the German tax authorities spent more money than they took in for the third year in a row. According to the statisticians, tax revenue increased by 8.0 percent in view of the economic recovery after the Corona crisis and high inflation. At the same time, the state spent a lot of money to relieve consumers and companies during the energy crisis. The federal budget was particularly affected with a deficit of 129.2 billion euros. The federal states, local authorities and social security funds all reported funding surpluses.

The good news: Overall, the deficit fell by 32.9 billion euros year-on-year to 101.3 billion euros. In relation to overall economic output, the minus was 2.6 percent.

After two outliers in the Corona years 2020 and 2021, Germany thus again complied with the European debt rule. The European Stability and Growth Pact allows the EU states to have a budget deficit of no more than three percent and a total debt of no more than 60 percent of nominal GDP. These rules are currently suspended until 2024 due to the stress caused by the corona pandemic. The European Union is discussing a reform of the rules.

Source: Stern

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