Europe’s largest economy Germany slips into recession

Germany, Europe’s biggest economy and the world’s fourth-largest, slipped into recession in the first quarter of the year as households scaled back spending on food, furniture and clothing.

Data issued by the country’s statistics office on Thursday revealed that the gross domestic product (GDP) diminished by 0.3 per cent in the year’s first quarter, marking the second quarter in a row where contraction would be recorded.

Two straight quarters of negative growth often mean a technical recession.

According to the statistics agency, private sector investment and construction expanded at the beginning of 2023, but the growth was partly obliterated by a slump in consumer spending as prices increased, causing households to reduce spending.

While investment in equipment and machinery grew by 3.2 per cent in relation to the last quarter of 2022, investment in construction advanced by 3.9 per cent quarter on quarter.

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

There are worries that the eurozone economy might also have shrunken in the first three months of the year, given Germany’s status as the powerhouse of the zone.

A recession in the eurozone could shape policy direction as the European Central Bank warms up to tighten interest rates again.

Household spending in Germany last quarter slid 1.2 per cent, while government spending declined by 4.9 per cent relative to the preceding quarter.

Much of household spending power was weakened by an increase in the costs of food.

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Considering Germany’s dependence on Russia for natural gas, the country became particularly vulnerable following Russia’s occupation of Ukraine.

According to business surveys, Germany is expected to record growth this quarter even though the effects of increased borrowing costs and a fragile increase in many of its export markets mean it is probable that another contraction is imminent in the third quarter.

“Higher interest rates will continue to weigh on both consumption and investment, and exports may also suffer amid economic weakness in other developed markets,” Franziska Palmas, an economist at Capital Economics, said.