In Germany the economy entered a technical recession in Q1. The main reason for this was falling consumer spending by inflation-stricken consumers.
According to the latest figures released by the Federal Statistical Office, the country’s gross domestic product (GDP) dropped by 0.3 per cent between January and March compared with the previous quarter. This marks the second consecutive decline, as the GDP had already fallen by 0.5 per cent in Q4 of last year. What does that mean for the German economy and what is the outlook for the second half of the year?
Recession – one term, many definitions
Germany has entered a so-called “technical recession”, as the most common definition of a recession – two consecutive quarters of shrinking economic output – has been met.
Among economists, however, it is disputed whether this simple definition alone is sufficient to speak of a recession, i.e. a significant and general downturn after a phase of economic growth. This definition is merely the best-known of several approaches to defining a recession, with other attempts at an economic definition also take into account parameters such as production capacity utilisation, demand or the situation on the labour market.
Inflation and loss of purchasing power dampen rrivate consumption
The German economy was impacted by shrinking private consumption, which declined by 1.2 per cent in the first quarter. One reason for this is likely to be consumers’ loss of purchasing power due to the high inflation. While employees’ gross monthly earnings saw the strongest increase since 2008, growing by 5.6 per cent between January and March in a YoY quarterly comparison, consumer prices rose by an even stronger 8.3 per cent in the same period, according to the Federal Statistical Office.
Government consumption also fell by 4.9 per cent in Q1. However, a positive stimulus for the economy came from investments, which grew by 3.9 per cent, as well as foreign trade.
Latest data shows improving consumer sentiment
A ray of hope for a recovering consumer sentiment comes from the latest indicators. The consumer climate index calculated by the market research institute GfK recently improved for the eighth consecutive month following noticeable wage increases. The institute forecasts a 1.6-point increase for its consumer climate barometer in June, bringing it up to minus 24.2 points.
The slight recovery was supported by expectations of higher wages, which also increased for the eighth month in a row. „Expectations of significantly higher, collectively agreed income increases are primarily responsible for the more optimistic mood,” GfK expert Rolf Bürkl said of the institute’s consumer survey. However, a strong upturn in consumer sentiment is not on the horizon short-term.
Consumer sentiment remains below the low level of spring 2020 during the first pandemic-related lockdown. Consumers are also more pessimistic about the outlook for the German economy than previously. “It appears that consumers are uncertain about how the German economy will develop in the coming months,” GfK market researchers said. Companies as well are currently expressing skepticism about the next few months. The business climate index calculated by the German ifo Institute in monthly surveys recently fell to 91.7 points from 93.4 points in the previous month.
Bundesbank and finance ministry expect slight growth this year, strong growth in 2024
The German Bundesbank also expects only slight growth in Q2. “In the second quarter of 2023, economic output is likely to increase slightly,” it states in its latest monthly report. Clearing supply bottlenecks, high-order backlogs and lower energy prices should ensure a recovery in the industry. “This should also support exports, especially as the global economy has regained some momentum,” states the German Bundesbank. The German government expects GDP to grow by 0.4 per cent this year. In 2024, a stronger increase of 1.6 per cent is expected.
Retail sales on downward course
In view of the loss of purchasing power and fluctuating energy prices, the experts at the German Federal Ministry of Finance believe that retail sales will continue downwards for the time being.
In March, retail sales recently declined by 1.3 per cent compared to the previous month; adjusted for inflation the drop is as high as 2.4 per cent, according to the Federal Statistical Office – the sharpest decline in five months. Compared to March 2022, the drop is 10.3 percent. “This is the sharpest YoY monthly decline in sales since the start of the time series in 1994,” the statisticians emphasised.
However, the slump may be over soon. “In the further course of the year, a gradual but moderate recovery of activity in the retail sector can generally be expected,” the latest monthly report of the Ministry of Finance states. As soon as a drop in inflation coupled with wage increases and tax relief measures bring real gains in purchasing power again, consumers’ purchasing mood should pick up as well, the ministry’s experts write.
Highest Point of Inflation Has Likely Passed
The German Institute for Economic Research (DIW) and the Munich-based ifo Institute believe that the peak of the inflationary wave in Germany has already passed. The ifo Institute’s barometer for price expectations in the coming three months fell from 21.5 to 19.0 points in May, the German researchers announced last Friday on their monthly business survey.
This would mark the lowest level in more than two years. Economists polled by Reuters news agency expect inflation to drop to 6.5 per cent in May, the lowest level in more than a year.
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