Germany enters recession after the economy contracted in the first quarter

Germany entered recession as revised figures showed gross domestic product contracted in Europe’s largest economy in the first quarter of the year.

Germany’s economy contracted by 0.3 percent in the three months through March, the federal statistics agency, Destatis, said, after revising its initial estimate of zero growth. Some economists had expected the drop after German industrial production suffered its biggest drop in 12 months in March.

The second consecutive quarterly decline in gross domestic product – after a revised contraction of 0.5 per cent in the fourth quarter of last year – meets the definition of a technical recession.

The main reason for Germany’s disappointing first-quarter performance was lower household consumption, which fell 1.2 percent from the previous quarter, as rising inflation eroded people’s purchasing power.

“The reluctance of households to buy was evident in a variety of areas: Households spent less on food and beverages, clothing and shoes, and on furnishings in the first quarter of 2023 than in the previous quarter,” Disstatis said in a statement.

Car sales in Germany fell, reflecting a decline in grants and subsidies on purchases of hybrid and electric cars since the start of the year.

German government spending also fell by 4.9 percent. But private sector investment rebounded in the first quarter from a weak second half of 2022, driven by 3.9 percent on higher construction activity that reflected mild weather.

Trade made a positive contribution as German imports fell 0.9 percent and exports rose 0.4 percent in the first quarter.

Germany is expected to be the weakest performer among the world’s major economies this year, according to the International Monetary Fund, which expected the country’s output to contract by 0.1 percent.

The contraction in the past six months means that German GDP is still languishing below pre-pandemic levels, in contrast to the overall eurozone economy. Disstatis said first-quarter production fell 0.5 percent from a year earlier.

Consumers in Germany have been hit by high inflation and higher borrowing costs, which contributed to retail sales falling 8.6 percent in March compared to the same month a year earlier, after adjusting for inflation.

German companies are becoming gloomier about the year ahead, according to the Ifo Institute’s business confidence index, which fell in May for the first time in seven months.

Europe’s largest economy has been hampered by weakness in its sprawling manufacturing sector, which is suffering from lower factory output, sluggish demand, weak exports and shrinking backlogs.

In the first quarter, manufacturing output rose 2 percent from the previous quarter, but Destatis said there was a “mitigating effect in March.” It added that growth was weaker in the larger services sector.

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