Weakening German Economy Slips into a Recession

Germany’s economic output in the first three months of the year shrank 0.3 percent from the previous quarter, the country’s statistics office said Thursday, tipping the economy into a recession.

Until now, Germany had defied predictions that Russia’s full-scale invasion of Ukraine, and the decoupling from Russian fossil fuels that powered the German economy, would send the country into two consecutive quarters of negative growth, the common definition of a recession. But the economy weakened in late 2022, contracting 0.5 percent. This year, stubbornly high inflation caused consumers to scale back consumption, sending spending down 1.2 percent in the first three months.

“The reluctance of households to buy was apparent in a variety of areas,” the statistics office said. “Households spent less on food and beverages, clothing and footwear, and on furnishings.” They also purchased fewer electric cars, as government incentives were reduced.

Why It Matters: Exports, a big driver of the economy, are down.

Germany is Europe’s largest economy, and its health directly affects the health of the 20-member eurozone and the wider European Union, the world’s third-largest economy, after the United States and China, in terms of output and purchasing power, according to the World Bank.

Initial estimates predicted that the German economy would remain flat in the first quarter, but the update on Thursday fully reflected additional data, including a 3.4 percent plunge in industrial output in March compared with the previous month, driven by drops in exports and the automotive industry.

Germany’s economic growth depends heavily on exports, especially to China, where Volkswagen has been the dominant automaker for years. But a recent surge in the popularity of Chinese-made electric vehicles among customers in Asia caused Volkswagen to report a drop of 15 percent in sales in China in the first three months of the year.

Overall, exports in March dropped 5.2 percent from the previous month, according to government statistics.

German industrial companies were forced to scale back production at the end of last year because of energy prices that reached record levels, driven up by Germany’s need to buy more liquefied natural gas, or L.N.G., which is more expensive than the Russian gas delivered by pipeline.

Background: Inflation and high interest rates aren’t helping.

Inflation remains high in Germany, at 7.6 percent in April, and the European Central Bank has indicated that it may continue to raise interest rates to help bring the rate of price gains closer to its 2 percent target.

At the same time, unions have been battling employers for higher wages to keep up with rising prices. Settlements reached in key sectors, including industrial and service workers, helped to drive wage increases up 6.3 percent in the first three months of 2023.

Still, economists stressed how hard the price spiral was hitting those with the lowest incomes in Germany.

“In many cases, people with low wages and incomes will need at least another five years before the purchasing power of their wages, and thus their standard of living, will return to precrisis levels,” said Marcel Fratzscher, president of the German Institute for Economic Research.

What’s Next: No strong recovery in sight.

The European Commission is predicting that Germany will be the bloc’s weakest member in terms of economic growth this year, managing an increase of only 0.2 percent.

Some economists agree.

“Looking ahead, we doubt that gross domestic product will continue to fall in coming quarters, but we see no strong recovery, either,” said Claus Vistesen, chief economist for the eurozone at Pantheon Macroeconomics.