Economy: Winter recession – German economy has shrunk

Economy: Winter recession – German economy has shrunk

The stubbornly high inflation dampened the buying mood of the Germans. This has consequences for the economy at the beginning of the year. The prospects for the year as a whole are also subdued.

After the German economy unexpectedly slipped into a winter recession, the outlook remains subdued. Slowed down by lower consumer spending, the gross domestic product shrank by 0.3 percent in the first quarter of 2023 compared to the previous quarter, according to the Federal Statistical Office. Initially, the authority had assumed stagnation. “The massive increase in energy prices took their toll in the winter months,” said Commerzbank chief economist Jörg Kramer on Thursday. Experts do not expect a quick, clear turnaround.

Weak growth in the winter half-year

At the end of 2022, economic output had already fallen by 0.5 percent compared to the previous quarter after price, seasonal and calendar adjustments. In the first quarter of this year there was another minus. If gross domestic product shrinks for two quarters in a row, economists speak of a technical recession. This does not mean that the year as a whole will be negative. However, some economists do not rule this out for 2023.

Consumers are stepping on the brakes when it comes to consumption

Private consumption shrank by 1.2 percent quarter-on-quarter due to persistently high inflation. “When everything gets more expensive, people start saving,” said Thomas Gitzel, chief economist at VP Bank. Consumers spent less on food and beverages, clothing, shoes and home furnishings than at the end of the year. In addition, since the beginning of the year, the state has not been helping citizens so much when buying a car. Plug-in hybrids, which use a combustion engine in addition to an electric motor, are no longer supported. Electric vehicle premiums have been reduced. People bought fewer new cars.

High inflation is eroding people’s purchasing power. You can afford less for one euro. The Bundesbank anticipates that the rate of inflation will ease only very gradually. Despite a slowdown, the annual inflation rate in April remained at a comparatively high level of 7.2 percent. According to economists, private consumption should remain the problem child. According to data from the consumer research company GfK, consumer sentiment is only recovering slowly.

Export and investments support economy

Exports and investments provided positive impetus in the first quarter. “Made in Germany” exports benefited from better functioning supply chains. As a result, companies were able to ship more goods. Construction investments increased given the mild weather. In addition, companies invested more money in equipment such as machines, devices and vehicles than in the previous quarter. However, the prospects are muted. According to the Ifo Institute, the mood in the German economy clouded over in May for the first time in six months. “The German economy is skeptical about the summer,” said Ifo President Clemens Fuest recently.

No light at the end of the tunnel

According to economists, given the general conditions, the coming months will not be easy. “Growth in the second quarter will remain a ride on the razor blade between slight growth and progressive recession,” expects economist Gitzel. Things are looking bleak for the second half of the year. Then the catch-up effects in industry will be gone. There is therefore no longer any compensation for the probably further weak private consumption and the ailing construction industry. “There is no light at the end of the economic tunnel for the time being,” agrees economics expert Christoph Swonke from DZ Bank. The German Institute for Economic Research, on the other hand, expects private consumption and thus also economic output to recover significantly over the course of the year.

The International Monetary Fund assumes that economic growth in Europe’s largest economy should be around zero for the year as a whole. The IMF is therefore more pessimistic than the federal government, which expected an increase of 0.4 percent in its spring projection presented at the end of April. In its most recent forecast, the EU Commission expected economic growth of 0.2 percent for Germany.

Source: Stern

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