'We Are Fighting A Crisis': Why Europe's Largest Economy, Germany, Has Slipped Into Recession

After multiple warnings from the IMF, World Bank, and various economists about the global recession, Europe¡¯s largest economy has become a big victim of the same.

Germany Slips Into Recession

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Germany, the world¡¯s fourth-largest economy and Europe¡¯s largest economy, has been confirmed to be slipping into recession. This comes after last year¡¯s energy price shock amid the Ukraine-Russia war, which has taken a toll on consumer spending. Household spending in Europe's economic engine finally succumbed to the pressure of high inflation.

Germany¡¯s GDP dropped 0.3% in the first three months of the year (January¨CMarch 2023), following a 0.5% decline at the end of the fourth quarter of 2022 (Oct¨CDec), official data showed on Thursday. A country is considered to be in recession when its GDP falls for two successive quarters.

German GDP data showed "surprisingly negative signals," Finance Minister Christian Lindner said on Thursday. He added that, compared with other highly developed economies, Germany's economy was losing potential for growth.

"I don't want Germany to play in a league in which we have to relegate ourselves to the last positions," he said, referring to the forecasts of the International Monetary Fund, which predicted a recession in 2023 only in Germany and Britain among European countries.

"We Are Fighting A Crisis"

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Robert Habeck, Germany's economy minister, said his nation's previous high dependency on Russia for energy supply led to the recession, but the growth forecasts were much bleaker. "We're fighting our way out of this crisis," Habeck said at an event in Berlin on Thursday.

The Federal Statistical Office downgraded its previous estimate of zero growth in gross domestic product (GDP) compared with the previous quarter, as per a CNN report.

¡°The persistence of high price increases continued to be a burden on the German economy at the start of the year,¡± the office said. ¡°This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023.¡± European energy prices were already rising when Russia¡¯s invasion of Ukraine in February last year sent them soaring to record highs. Moscow then went on to throttle gas supplies to European countries, prompting Germany to declare an emergency.

Also Read: 5 Signs That You Are Not Financially Prepared For A Recession

A Shorter Recession Expected?

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In a sign that Germany¡¯s recession may prove to be short-lived, timelier survey data showed earlier this week that business activity in the country expanded again in May, despite a sharp downturn in manufacturing.

German Chancellor Olaf Scholz described the outlook for the economy as "very good," pointing to measures his government has taken in recent months to expand renewable energy production and attract foreign workers. "There is a lot of investment in Germany in terms of battery and ship factories, which is increasing significantly, and we can therefore be confident," he said at a press conference in Berlin, as mentioned in the Reuters report. However, Franziska Palmas, senior Europe economist at Capital Economics, forecast that German output would shrink again in the third and fourth quarters.

In a note, she said higher interest rates, needed to tame inflation, would continue to weigh on both consumption and investment, and Germany¡¯s exports might also suffer as demand was sapped by weakness in other developed economies.

China is Germany¡¯s most important trading partner, just ahead of the United States. Exports of German cars to China fell 24% in the first quarter. The German economy is expected to shrink by 0.1% in 2023, according to the latest forecast from the IMF.

Also Read: RBI Governor Says 'India Has Lower Risk Of Recession'

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