Weakening German economy slides into recession
Why it matters: Exports, a major driver of the economy, have fallen.
Germany is the largest economy in Europe and its health directly affects the health of the 20-member Eurozone and the wider European Union, the world’s third-largest economy after the United States and China, in terms of output and purchasing power, according to the World Bank.
Initial estimates predicted the German economy to remain flat in the first quarter, but Thursday’s update fully reflected additional data, including a 3.4 percent decline in industrial production in March compared to the previous month, driven by export declines and the automotive industry.
Germany’s economic growth is highly dependent on exports, especially to China, where Volkswagen has been the dominant car manufacturer for many years. But a recent surge in the popularity of Chinese-made electric vehicles among customers in Asia led Volkswagen to report a 15 percent drop in sales in China in the first three months of the year.
Overall, exports fell 5.2 percent in March from the previous month, according to government statistics.
German industrial companies were forced to cut production late last year as energy prices hit record highs, boosted by Germany’s need to buy more liquefied natural gas, or LNG, which is more expensive than Russian gas supplied by pipeline.
Background: Inflation and high interest rates are not helping.
Inflation remains high in Germany, at 7.6 percent in April, and the European Central Bank has indicated it may continue raising interest rates to bring rate increases closer to the 2 percent target.
At the same time, unions have been fighting with employers for higher wages to keep pace with rising prices. Settlements were made in key sectors, including manufacturing and services, driving wages up 6.3 percent in the first three months of 2023.
Still, economists emphasized how hard the lowest incomes in Germany were hit by the price spiral.
“In many cases, people on low wages and low incomes will need at least another five years for the purchasing power of their wages, and thus their living standards, to return to pre-crisis levels,” said Marcel Fratzscher, president of the German Institute for Economic Research.
What’s Next: No strong recovery in sight.
The European Commission predicts Germany will be the weakest member of the bloc in terms of economic growth this year, rising just 0.2 percent.
Some economists agree.
“Looking ahead, we doubt gross domestic product will continue to fall in the coming quarters, but we don’t see a strong recovery either,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.