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German economy enters recession as first-quarter GDP data is revised lower

Before sunrise, the residential buildings and office towers of the banking metropolis in Frankfurt are reflected in the quietly flowing Main River.
Picture Alliance | Picture Alliance | Getty Images

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

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

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

Europe’s largest economy has been under significant pressure, particularly in the wake of Russia’s invasion of Ukraine and the subsequent decision of European leaders to cut ties with Moscow.

According to the statistics office, German households spent a lot less in the first quarter, with final consumption expenditure falling 1.2% over that period, as consumers were reluctant to spend their cash on clothing, furnishing, cars and so on.

“Germany did fall into recession at the end of last year, after all, as the shock in energy prices weighed on consumers’ spending,” Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said in note to clients.

He added that it is unlikely that the German GDP will continue to fall in the coming quarters, “but we see no strong recovery either.”

Franziska Palmas, senior Europe economist at Capital Economics, said: “We expect further weakness from here.”

The latest economic development takes place against a backdrop of high inflation and high interest rates across the region. The European Central Bank is expected to raise rates again at its next meeting on June 15. The central bank has lifted its rates by 375 basis points since July.

German Central Bank Governor Joachim Nagel said earlier this week that the ECB has “several” more rate increases ahead. He is one of the most hawkish members of the central bank.

“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 forecast is for further contractions in the third and four quarters,” Capital Economics’ Palmas added.

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

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