June 6, 2023

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The German economy enters a recession as first-quarter GDP data was revised downward

  • Data from Germany’s statistical office on Thursday showed a downward revision of GDP, from zero to -0.3% for the first three months of the year.
  • Germany also recorded a contraction of 0.5% in the fourth quarter of 2022.

Before sunrise, the apartment buildings and office towers of the banking capital of Frankfurt are reflected in the quietly flowing Main River.

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The German economy entered a technical recession in the first quarter of this year, as households tightened spending.

Data from Germany’s statistical office on Thursday showed a downward revision of gross domestic product (GDP) from zero to -0.3% for the first three months of the year.

This comes after Germany recorded a contraction of 0.5% in the fourth quarter of 2022. Two consecutive quarters of negative growth define a technical recession.

Europe’s largest economy has been under a lot of pressure, particularly in the aftermath of the Russian invasion of Ukraine and the subsequent decision by European leaders to sever ties with Moscow.

According to the Statistical Office, German households spent much less in the first quarter, with final consumption spending declining by 1.2% over that period, as consumers were reluctant to spend their money on clothes, furnishings, cars, and so on.

“Germany really fell into recession at the end of last year, as the shock in energy prices affected consumer spending,” Klaus Vestessen, chief eurozone economist at Pantheon Macroeconomics, told clients.

It is unlikely that German GDP will continue to decline in the coming quarters, he added, “but we don’t see a strong recovery either.”

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“We expect further weakness from here,” said Francesca Palmas, chief economist for Europe at Capital Economics.

The latest economic developments are taking place against the backdrop of rising inflation and rising interest rates across the region. The European Central Bank is expected to raise interest rates again at its next meeting on June 15th. The central bank has raised interest rates by 375 basis points since July.

Bundesbank Governor Joachim Nagel said earlier this week that the European Central Bank has “several” more rate hikes ahead. He is one of the most hawkish members of the Central Bank.

Palmas of Capital Economics added, “Higher interest rates will continue to weigh on both consumption and investment and exports may also suffer amid economic weakness in other developed markets. Our expectation is further contractions in the third and four quarters.”

The 10-year German Bund was trading at around 2.46% in early European trading hours.