German economy enters review as inflation hurts consumers

2023-05-25 13:19:00, Ekonomi CNA
German economy enters review as inflation hurts consumers
Illustrative photo

The German economy was in review at the start of 2023 as households that spent in Europe's economic engine finally succumbed to the pressure of high inflation.

Gross domestic product fell 0.3% in the first quarter of the year when adjusted for price and calendar effects, a second estimate from the statistics office showed on Thursday. This follows a 0.5% decline in the fourth quarter of 2022. A recession is usually defined as two consecutive quarters of contraction.

German GDP data showed "surprisingly negative signals", Finance Minister Christian Lindner said on Thursday. He added that comparing Germany with other highly developed economies, the economy was losing its 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 forecasts by the International Monetary Fund, which predicts a recession in 2023 only in Germany, Britain and European countries.

"Under the weight of extraordinary inflation, the German consumer has fallen to its knees, dragging the whole economy down with it," said Andreas Scheuerle, an analyst at DekaBank.

Household consumption decreased by 1.2% in quarterly terms after price, seasonal and calendar adjustments. Government spending also fell sharply by 4.9% in the quarter.

"Warm winter weather, a rebound in industrial activity helped by the Chinese reopening and an easing of supply chain frictions were not enough to lift the economy out of the recession danger zone," said the global head of macro ING Carsten Brzeski.

In contrast, investment increased 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 to the previous quarter, while investment in construction increased by 3.9 % per quarter.

There were also positive contributions from trade. Exports increased by 0.4%, while imports decreased by 0.9%.

"The massive increase in energy prices took its toll in the winter half," said Commerzbank chief economist Joerg Kraemer.

A recession could not be avoided and now the question is whether there will be a 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," said ING's Brzeski.

Declining purchasing power, thinning industrial order books, aggressive monetary policy tightening and an expected slowdown in the US economy all argue in favor of weak economic activity.

After Wednesday's decline in the Ifo business climate, all leading indicators in the manufacturing sector are now falling, said Commerzbank's Kraemer.

Germany's Bundesbank, however, expects the economy to grow modestly in the second quarter, as a rebound in industry more than offsets stagnant household consumption and a decline in construction, according to a monthly economic report published Wednesday./ CNA .co.uk

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