German Economy Enters Recession As GDP Shrinks In Q1 2023

The German economy slipped into recession as it recorded a decline in the first quarter of 2023 when compared to the previous three months, according to data released by the statistics office on Thursday.

When price and calendar effects are taken into account, GDP fell by 0.3% in the third quarter, following a 0.5% loss in the fourth quarter of 2022. A recession is commonly characterised as two consecutive quarters of contraction.

The initial estimate showed GDP stagnating in the first quarter and Germany avoiding a recession.
GDP decreased 0.5% year on year after adjusting for price and calendar changes.

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

Household consumption fell 1.2% quarter on quarter following price, seasonal, and calendar adjustments. Government spending fell by 4.9% in the third 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's global head of macro Carsten Brzeski said.

Investment, on the other hand, increased in the first three months of the year after a lacklustre second half of 2022. Investment in machinery and equipment climbed by 3.2% year on year, while construction investment increased by 3.9% year on year.

Trade also had a favourable impact. Exports increased 0.4% while imports decreased 0.9%.

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

A recession was unavoidable, and the question now is whether or not there will be any rebound 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," ING's Brzeski said.

A decline in spending power, dwindling industry order books, aggressive monetary policy tightening, and the predicted slowing of the US economy all point to sluggish economic activity.

Following the dip in the Ifo business climate on Wednesday, all significant leading indicators in the manufacturing sector are now declining, according to Commerzbank's Kraemer.

According to a monthly economy report published on Wednesday, the German Bundesbank forecasts the economy to increase marginally in the second quarter as a comeback in industry more than offsets stagnant home consumption and a downturn in construction.