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Germany tips into recession with analysts warning economy won’t get much better

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Germany slipped into an official recession over the winter, triggered by family finances being crushed by sky high energy bills, official figures out today show.

Revised estimates from the country’s statistics agency, Destatis, revealed gross domestic product (GDP) contracted 0.3 per cent in the first three months of this year.

The organisation previously thought output flatlined over the period.

Today’s downgrade means Germany’s economy has shrunk for two straight quarters, meeting the rule of thumb recession definition. GDP slumped 0.5 per cent in the final quarter of last year.

Consumer spending dropped 1.2 per cent at the beginning of the year, the main factor driving production lower. That was a slight improvement from the 1.7 per cent drop in the final months of 2022.

Germany has been particularly exposed to the energy price shock caused by Russia’s full-scale invasion of Ukraine.

A large chunk of its economic output is generated by its industrial and manufacturing industries, which have for years relied on cheap energy from Russia. Rising gas prices have forced firms to trim activity and households to conserve their cash.

Compounding the energy price shock’s squeeze on the economy has been the European Central Bank’s (ECB) aggressive interest rate rises to tame inflation across the 20-member eurozone.

President Christine Lagarde and the rest of the governing council have sent borrowing costs up to 3.25 per cent from minus 0.5 per cent in under a year. The bloc had negative interest rates for several years.

ECB officials are tipped to raise rates at least one more time this year. Eurozone inflation has slimmed to seven per cent from a peak of nearly 11 per cent. In Germany, the rate of price increases is running at 7.6 per cent.

Analysts warned Europe’s economic powerhouse’s performance won’t get much better as the year progresses.

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

“We think consumers’ spending is now rebounding as inflation eases, and the 4.9 per cent crash in government spending will mean-revert too. By contrast, we think investment is now falling, as higher interest rates and tightening credit standards bite, and the surge in net exports also is petering out,” he added.

Earlier this week the International Monetary Fund hiked its forecasts for UK GDP growth this year to 0.4 per cent from a 0.3 per cent contraction. That means Germany is now tipped to be the worst performing economy in the G7 this year.

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