Germany, once Europe’s economic powerhouse, has tipped into recession. The double-whammy of higher prices squeezing consumer spending saw the German economy shrink by 0.3% in the first quarter of this year. 

Coming after a 0.5% drop in GDP for the three months to December last year means the country has now had two consecutive quarters of negative growth – the technical definition of a recession.

Earlier forecasts in April had suggested that Germany would narrowly avoid a recession but the latest revised numbers show just how deeply higher inflation and higher interest rates have bitten into consumer spending.

According to the Federal statistics office, German households tightened their belts in the first quarter, with spending falling 1.2% over that period. Government spending also fell by 4.9% compared with the previous quarter.

The statistics office added that while private sector investment and construction grew at the start of the year, this was partly offset by a drop-off in consumer spending across a range of household products. Analysts had hoped that the warmer winter weather and a bounce back in industrial production – helped by the opening up of China and easing of supply chains – would help power the German economy. Yet these factors weren’t enough on their own to lift Germany out of the danger zone. 

Olaf Scholz’s government will be bitterly disappointed by the latest figures. Only recently the government predicted that GDP will grow by 0.4 per cent, with a big uptick towards the end of the year. This was up from a 0.2 per cent expansion predicted in late January but will now have to be sharply revised. 

Carsten Brzeski, ING’s global head of macro, says the overall drop in GDP was “not the worst-case scenario of a severe recession but a drop of almost 1% from last summer.”

But Brzeski also warned that the fall in purchasing power, weaker industrial sector orders, rising interest rates, as well as a slowdown in economic growth around the world including the US would all likely lead to even weaker economic activity for Germany in the months ahead.

What next for Europe’s powerhouse, the fourth biggest economy in the world ? Over the last decade Germany has gone from being the sick man of Europe to economic superstar. No longer it seems. The impact of Russia’s war on Ukraine – and economic sanctions – has been particularly devastating for Germany because of its high reliance on Russian energy to feed its huge manufacturing base.  

Most analysts reckon the outlook can only get worse  with higher interest rates still to come. The European Central Bank is expected to raise rates again at its next meeting on June 15. Indeed, Germany’s hawkish Central Bank Governor Joachim Nagel warned earlier this week that the ECB has “several” more rate increases ahead which will squeeze consumer spending still more.

Franziska Palmas, European economist at Capital Economics, warns of further weakness, with forecasts of further contractions in the second half of the year: “Higher interest rates will continue to weigh on both consumption and investment and exports may also suffer amid economic weakness in other developed markets.”

Any temptation to indulge in schadenfreude – or dare mention Brexit – should be firmly resisted. We have only just avoided recession ourselves, for now. 

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