German Economy Plunges Into Recession as Household Spending Succumbed to Inflationary Pressure

Europe’s largest economy, Germany has plunged into recession as inflationary pressure eroded consumer spending and household income.

The economy contracted by 0.3% in the first quarter of the year following a 0.5% decline recorded in the final quarter of 2022. An economy is said to be in recession if it contracted for two successive quarters.

German economic GDP data showed “surprisingly negative signals,” said Finance Minister Christian Lindner on Thursday. Comparing Germany with other developed economies, the minister said the economy was losing potential for growth.

“I don’t want Germany to play in a league in which we have to relegate ourselves to the last positions,” he said, referring to the forecasts of the International Monetary Fund, which predicted a recession in 2023 only in Germany and Britain among European countries.

However, Robert Habeck, Germany’s economy minister, had attributed the slowdown in growth to the previous exposure to Russia’s energy supply and the decision to cut supply following the breakout of war in Ukraine.

“We’re fighting our way out of this crisis,” Habeck said at an event in Berlin on Thursday.

“Under the weight of immense inflation, the German consumer has fallen to his knees, dragging the entire economy down with him,” said Andreas Scheuerle, an analyst at DekaBank.

Data revealed by Investors King showed German household consumption declined by 1.2% quarter on quarter after price, seasonal and calendar adjustments. While government spending also contracted substantially by 4.9% in the quarter.

“The warm winter weather, a rebound in industrial activity, helped by the Chinese reopening, and an easing of supply chain frictions were not enough to get the economy out of the recessionary danger zone,” ING global head of macro Carsten Brzeski said.

By contrast, investment was up in the first three months of the year, following a weak second half of 2022. Investment in machinery and equipment increased by 3.2% compared with the previous quarter, while investment in construction went up 3.9% on quarter.

There were also positive contributions from trade. Exports rose 0.4%, while imports fell 0.9%.

“The massive rise in energy prices took its toll in the winter half-year,” Commerzbank chief economist Joerg Kraemer said.

A recession could not be avoided and now the question is whether there will be any recovery in the second half of the year.

“Looking beyond the first quarter, the optimism at the start of the year seems to have given way to more of a sense of reality,” Brzeski said.