Germany Falls Into Recession As Record Inflation Hits Economy

Over the first three months of 2023, persistent inflation helped push Germany into recession, the federal statistics agency Destatis said.

It noted that the economy shrank by 0.3 per cent.

That followed a 0.5% contraction in the last three months of last year, BBC News reports.

 

Europe’s largest economy was badly affected when Russian gas supplies dried up after the invasion of Ukraine, analysts said.

 

A country is deemed to be in recession when its economy shrinks for two consecutive three-month periods, or quarters.

 

“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.

 

Germany’s inflation rate stood at 7.2 per cent in April, above the euro area’s average but below the UK’s 8.7 per cent.

 

Higher prices have weighed on household spending on things such as food, clothing and furniture. Industrial orders are also weaker, reflecting the impact of higher energy prices on businesses.

 

“The persistence of high price increases continued to be a burden on the German economy at the start of the year,” the federal statistics agency Destatis said in a statement.

 

Originally, the agency had estimated zero growth for the first quarter of this year, suggesting Germany would side-step a recession.

German Chancellor Olaf Scholz had also expressed confidence that Germany had done enough to fend off a painful economic contraction.

However, the revised figures showed household spending was 1.2 per cent lower than in the previous quarter.

 

Government spending was 4.9% lower, and car sales also fell after government grants for electric and hybrid cars were scaled back.

 

The recession was less severe than some had predicted, given Germany’s heavy reliance on Russian energy. A mild winter and the reopening of China’s economy helped ease the impact of higher energy prices.

 

However, the German central bank, the Bundesbank, expects the economy to grow modestly in the April to June quarter, with a rebound in industry offsetting stagnating consumer spending.

 

The IMF has predicted that Germany will be the weakest of the world’s advanced economies, shrinking 0.1% this year, after it upgraded its forecast for the UK from minus 0.3% to growth of 0.4%.