Jobaaj Stories
Germany is currently facing a recession due to the impact of last year's energy price shock on consumer spending.
Official data reveals that the country's output declined by 0.3% in the first quarter of this year, following a 0.5% contraction at the end of 2022. The Federal Statistical Office has revised its previous estimate of zero growth in gross domestic product (GDP), indicating a recession as output has declined for two consecutive quarters.The high price increases experienced have been a significant burden on the German economy, particularly affecting household consumption expenditure, which fell by 1.2% in the first quarter of 2023.
Claus Vistesen, chief euro area economist at Pantheon Macroeconomics, explains that consumers' spending was constrained by the shock in energy prices during this period.
Energy prices in Europe were already on the rise when Russia's invasion of Ukraine in February last year caused them to skyrocket to record levels. This led to Germany declaring an emergency as gas supplies were throttled. However, natural gas prices have since fallen and are now at levels last seen in late 2021, which is expected to alleviate inflationary pressures on consumers.
While the annual inflation rate in Germany slowed in April, standing at 7.2%, consumer spending is anticipated to rebound as inflation eases. However, it is unlikely that GDP will continue to decline in the coming quarters, although a strong recovery is not expected either.
China is Germany's most crucial trading partner, followed closely by the United States. In the first quarter, German car exports to China experienced a significant decline of 24%. Despite this, Germany's recession appears to have been relatively shallow, defying earlier, more pessimistic forecasts by top economic forecasters, who predicted a 2.2% contraction in GDP if Russian natural gas supplies were abruptly cut off.
According to the International Monetary Fund's latest forecast, the German economy is projected to shrink by 0.1% in 2023.
- Kratika Agarwal
Also read, India to become a Hydrogen Hub.
