The German economy contracted in the fourth quarter and is heading for technical recession in early 2023 |  Economy

The German economy contracted in the fourth quarter and is heading for technical recession in early 2023 | Economy

The German economy contracted in the fourth quarter of 2022. Between October and December, the gross domestic product (GDP) fell by 0.2% compared to the previous quarter, according to data published this Monday by the Federal Statistical Office (Destatis ), which had initially predicted a stagnation and not a fall. The slowdown at the end of the year therefore puts the German economy on the brink of technical recession, for which a negative start to the year is expected to pick up again from spring on.

The Wiesbaden statisticians have also revised GDP for 2022 slightly downward, which they had provisionally placed at 1.9%. After correcting with the data for the fourth quarter, German growth stands at 1.8%. The economy held up well through the first three quarters despite the difficult conditions of the Russian invasion of Ukraine, largely thanks to private consumer spending. But at the end of the year, private consumption fell again, says Destatis.

During the peak of the coronavirus pandemic, many Germans had accumulated savings by not being able to spend on restaurants, vacations or cultural events. After the end of the restrictions, many caught up and private consumption propelled the economy despite the energy crisis. However, the pressure on the gas and electricity bill rose from the fall, when most energy companies began to pass on the new prices to their customers, and this reduced the margin to spend on other purchases.

According to the Ifo Institute, private consumption may have fallen further, but a “surprisingly strong rise” in the number of vehicle registrations at the end of the year made up for it. On December 31, some government subsidies for the purchase of plug-in hybrid and electric vehicles were reduced or expired, which triggered new registrations by 20% compared to the previous quarter.

“Since many buyers brought their car purchases forward to last year, we will see a corresponding sharp drop in car sales in the current quarter,” says Timo Wollmershäuser, head of forecasts at Ifo. In addition, “high inflation and rising interest rates will cause the rest of consumer spending, as well as construction output, to continue to fall,” he adds. “High inflation rates have led the German economy into a winter recession,” says the Ifo expert.

The industry will better withstand the challenges of 2023, according to these forecasts. A high order book and the reduction of bottlenecks in energy and intermediate products will boost industrial activity. Overall, Wollmershäuser expects economic output to contract another 0.4% in the first quarter and stagnate in the second.

“High energy prices, record inflation and a noticeable global slowdown in growth will accompany our companies throughout the year,” says the manager of the German Chamber of Industry and Commerce (DIHK), Martin Wansleben, adding other “long-term challenges” for the German economy such as the climate, demographic development and digitization.

The Government forecasts growth of 0.2% in 2023

The German government expects a slight growth of 0.2% for 2023, according to the forecast presented by its Minister of Economy and Climate, Robert Habeck, last week. Last autumn, a drop in GDP of 0.4% was assumed, that is, a recession in the traditional sense, with a fall in economic production on average for the year. The speech is now much more optimistic, with the chancellor, Olaf Scholz, even saying that Germany “has given the last straw to the economic crisis”, a phrase he pronounced in Parliament a few days ago.

“Now we assume that the recession will be shorter and milder, if it happens at all,” Habeck said during the press conference to present the forecast report. “There are no indications of a significant recession, something that many observers considered inevitable,” he congratulated himself. The forecast, therefore, is a technical recession, that is, two consecutive quarters of negative growth. The minister, from the Greens, described the crisis triggered by the Russian invasion of Ukraine as “manageable”.

Several leading indicators have improved recently, such as the Ifo business climate index, which has been rising for four consecutive months. Industrial production has stabilized, and even energy-intensive companies have halted their downward trend. Foreign trade improves month by month. Inflation seems to have peaked. In December it was 8.6%, after having reached a record high of 10.4% in October. The Federal Statistical Office will publish its first estimate for January this Tuesday, which is expected to be below the December data.

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