Germany's economy shrank by 0.3 percent in the first quarter

Berlin (AFP) - Germany fell into a recession around the turn of the year, official figures published Thursday showed, as inflation and higher interest rates curbed demand in Europe’s largest economy.

Over the first three months of 2023, the economy shrank by 0.3 percent, the federal statistics agency Destatis said, downgrading an initial estimate of zero percent.

Following a 0.5-percent contraction in the last three months of 2022, it was Germany’s second consecutive quarter of negative growth – the threshold for a “technical recession”.

The slump came as Germany battled a surge in energy prices in the wake of the Russian invasion of Ukraine, which weighed on households and businesses.

But Chancellor Olaf Scholz, who previously expressed confidence that Germany had done enough to avoid a downturn, played down fears of a prolonged recession.

“The German economy’s prospects are very good,” he said at a press conference, citing significant investments in the country including in battery factories.

- ‘Danger zone’ -

Inflation, which reached 7.2 percent in Germany in April, has been fuelled by the increased cost of energy. Consumer prices have come down only slightly from their peak towards the end of 2022.

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

The impact was felt particularly by consumers who reined in their spending on items such as food and clothing.

Germany, which had long been heavily reliant on Russian energy imports, was left particularly exposed following the Russian invasion in February last year.

The curtailment of gas supplies in particular left Berlin scrambling to find new sources of energy and fill reserves ahead of what was anticipated to be a harsh winter at the end of 2022.

The slump was “not the worst-case scenario of a severe recession” predicted by some following the Russian invasion, said Carsten Brzeski, head of macro at the ING bank.

But mild temperatures, a rebound in key market China and the easing of supply chain problems following the coronavirus pandemic were “not enough to get the economy out of the recessionary danger zone”, Brzeski said.

“A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades” were likely to drag on the economy further, he said, referring to the European Central Bank’s interest rate hikes against inflation.

An anticipated slowdown in the US economy and the continuation of the war in Ukraine would also weigh on output, he said.

- ‘Consumer spending rebound?’ -

The poor performance in the first quarter contrast the optimism showed by policymakers in Berlin who in April raised their forecast for economic growth in 2023 to 0.4 percent.

“We continue to expect a significant improvement over the course of the year,” an economy ministry spokesman told AFP in response to the growth figures.

The negative revision by Destatis was no surprise following a string of weak economic indicators, LBBW bank analyst Jens-Oliver Niklasch said.

“The early indicators suggest that things will continue to be similarly weak in the second quarter” of 2023, Niklasch said.

Industrial orders, which give a foretaste of factory output, plummeted in March when compared with the same month last year.

By contrast, consumer confidence in Germany had continued its upward trend “amid all the negative news”, Citi bank analyst Christian Schulz noted.

A rebound in consumer spending could fuel an economic recovery later in the year, Schulz said.

Germany’s last recession came as the coronavirus pandemic swept through Europe at the start of 2020, prompting governments to effectively shut down large swathes of the economy.