Germany finally slipped into recession


East News, IMAGO/Jens Schicke

The key problem is inflation. Because of it, the technical recession can turn into a deeper and longer crisis. The entire European Union will be in trouble.

Everyone was breathing a sigh of relief. Not Germany's GDP contraction, but just zero in the first quarter of this year, as reported by the Federal Statistical Office (Destatis) at the end of April, looked almost miraculous.

But the miracle did not happen. After additional data was collected and processed more carefully, German statisticians revised their preliminary estimate and on May 25 it was announced that GDP declined by 0.3% in the first three months compared to the fourth quarter of 2022. The latter, in turn, ended with a minus of 0.5% compared to the preceding three-month period.

According to the accepted scientific definition, a contraction of the economy for two quarters in a row means a recession. Germany experienced its previous one in 2020 due to the pandemic of the insidious coronavirus. At that time, GDP collapsed (after a decade of economic growth) by 4.9% in annual terms.

Experts are now wondering how long and deep the current recession will be. Will it be limited to two quarters of negative growth and a technical recession, or will Europe's largest economy face a longer and more severe crisis? And this, of course, will inevitably affect the whole European Union.

Destatis names a decline in individual consumption "due to the still high rate of price increases" – for food, beverages, clothing, shoes, and furniture – as the main reason responsible for the decline in GDP. Germans bought fewer new cars than usual, which is partly attributed to the abolition of subsidies for the purchase of plug-in hybrids (cars with both internal combustion engine and electric motor. – Auth.) and their reduction in the purchase of electric cars.

The decline in consumer spending was 1.2% (excluding price increases, seasonal and calendar factors), but it was enough to knock out the entire economy.

Why do German economists and statisticians call the current recession merely a "technical recession"? They use this term to describe a situation in which a decrease in GDP is formally recorded, but it does not lead to painful symptoms of the economic crisis: widespread curtailment of production, a sharp increase in bankruptcies, mass unemployment.

Paradoxically, employment in Germany, which has a severe skills shortage, continues to rise. Destatis notes that compared to the first quarter of last year, the number of self-employed rose by 446,000 to 45.6 million.

This means that the main macroeconomic problem is still inflation, and not only in Germany, but in the entire European Union.

In mid-May, the European Commission presented its own GDP growth forecast for "its possessions" this year, highlighting unexpectedly stable core inflation. This figure does not take into account the strongly fluctuating prices of energy and unprocessed foods.

And energy resources in the eurozone have become very cheap, especially natural gas. Because of the Ukrainian crisis and the disruption of Nord Stream, the price of a thousand cubic meters soared to a whopping $3,500 at the end of last summer. Now futures contracts with delivery "one month ahead" on the gas hub TTF in the Netherlands are trading at about $280. And they are moving steadily closer to the $150-$250 range in which they have fluctuated over the past decade. A barrel of Brent oil, which cost about $120 a year ago, is now selling for $75-77. The same is happening with coal.

We are talking, however, about stock prices. It will probably take a few months for German consumers to see the reduction in retail electricity rates. But gasoline at gas stations was already cheaper in the spring than last year.

To summarize, Germany's economy is currently teetering on the dangerous brink. Either it will fail and slide into the abyss, dragging the entire European Union down with it, or it will still hold on to zero GDP figures. Growth, judging by statistical estimates, is out of the question. Neither the revival of the German defense industry, nor the fact that investment activity of German companies has grown and export volumes have increased, can help the situation.

What, as they say, is the bottom line? Food sales in Germany fell by 10.3% in May compared with last year's figures. The traditional "sausage-makers" set another anti-record in meat consumption. There has not been such a decline in Germany since 1989.

Against the backdrop of economic problems, the coalition government is also in trouble. Until recently German Vice-Chancellor and Economics Minister Robert Habeck (Greens) was the public's favorite, but now he has fallen to the bottom of the second ten in the popularity rating of politicians. Not surprisingly, since the "German machine" has been stalling