
Germany’s economy contracted in the first quarter of 2023 compared with the previous three months, thereby entering a recession. The country’s gross domestic product, or GDP, fell by 0.3% when adjusted for price and calendar effects, a second estimate showed on Thursday. That’s a technical definition of recession and follows a decline of 0.5% in the fourth quarter of 2022 as Europe’s largest economy battled an energy crisis unleashed by Russia’s invasion of Ukraine.
According to the statistics office, the contraction in the first three months of the year was mainly caused by declining household consumption. Household spending decreased by 1.2 percent quarter-on-quarters after price, seasonal and calendar adjustments. Government spending also declined significantly. However, the investment positively contributed to GDP increasing by 3.2% versus the preceding quarter after price and calendar adjustments. Trade also contributed positively, with exports rising by 0.4 percent and imports falling by 0.9%.
A rebound in construction, helped by a strong housing market, and a recovery in industrial activity helped to cushion the blow from the sluggish household sector. Nevertheless, the slowdown in demand from abroad and higher energy prices continued to weigh on the economy, with consumers facing increasing inflation.
Inflation continued to be a significant burden on the German economy in the first quarter, with consumer prices up by 2.1% compared to a year earlier. In addition, energy prices climbed incredibly steeply, with the average oil price jumping by more than 20% on the year. As a result, inflation will likely continue to be a significant concern for the central bank as it works to bring the eurozone’s inflation rate down to its target of 2%.
ING’s global head of macro, Carsten Brzeski, said that the rebound in GDP growth suggests any panic about the state of the economy was probably overblown but that the world’s biggest economy “cannot be complacent.” The data also stoked concerns that the eurozone could slide into a double-dip recession if other countries experience similar contractions to Germany’s. The euro was down slightly on the news, trading near monthly lows against the dollar.