Berlin The Ukraine war almost drove Germany into a technical recession. Economic output in the first quarter grew by 0.2 percent, as the Federal Statistical Office announced on Friday.
The corona pandemic and persistently disrupted supply chains caused gross domestic product (GDP) to fall by 0.3 percent in the fourth quarter of 2021. A technical recession is spoken of when there are two consecutive quarters of contracting economic output.
The slight growth in the first quarter comes as a surprise. Many economists had expected a slight decline in economic output. However, the number can still change. “I can well imagine that we are already in a technical recession,” says Michael Grömling, head of economic activity at the German Economic Institute (IW).
Above all, the plus would have enabled higher investments, explained the Wiesbaden statisticians. The strong investments could be due to the fact that companies have restocked in the face of the crisis. “It’s quite possible that there was a lot of bunkering again,” explains Grömling.
But if the 0.2 percent plus were to be confirmed, says Carsten Brzeski, chief economist at ING Germany, the economy would have grown by 3.7 percent over the year.
However, there is much to be said against the fact that this is the case. The signs for the development in the coming months are bad. Compared to the level before the corona crisis, economic output is still 0.9 percent lower. The federal government lowered its economic forecast for 2022 from 3.6 percent growth to 2.2 percent this week.
The full effects of the war were hardly included in the first quarter, explains Sebastian Dullien, Director of the Institute for Macroeconomics and Business Cycle Research (IMK): “The German economy will only show the full force of the war in the figures from the second quarter.” War is not the only economic risk.
1. The war drives inflation and weighs on foreign trade
While January was a comparatively strong month for the German economy, the situation in March in particular weighed on economic development. At the end of February, Russian troops invaded Ukraine. The economic consequence was considerable uncertainty, especially on the energy markets.
Added to this are the sanctions against Russia and disrupted supply chains. The automotive industry, for example, lacks wiring harnesses from suppliers in Ukraine. “Since the end of February, the economic effects of the war in Ukraine have had an increasing impact on economic development,” said the Federal Statistical Office.
In the final quarter of 2021, economic output fell by 0.3 percent.
(Photo: dpa)
The sharp rise in prices for gas, oil, coal and electricity are the main reason for the unfortunate situation in the German economy. Not only do they significantly increase the costs of businesses, but they drive inflation overall. “That should also dampen the economy in the coming months because private consumption is suffering from the high inflation,” said Timo Wollmershäuser, head of economic activity at the Ifo Institute.
Inflation increased compared to the first quarter. According to the first estimate, the inflation rate in Germany in April was 7.4 percent compared to the same month last year. This is the highest level since the fall of 1981. In March, the rate was 7.3 percent. Above all, higher food prices also drove inflation up in April.
In addition to higher domestic costs, inflation is also weighing on foreign trade, which is already being hit by the direct effects of the war. The reason for this is the devaluation of the euro against other currencies.
In March, the prices for goods imported into Germany rose by 31.2 percent compared to the same month last year, as the Federal Statistical Office also announced on Friday. This is the strongest increase since 1974.
The devaluation of the euro means that German importers buy more expensive and exporters sell their goods cheaper. This relationship, the so-called “terms of trade”, is increasingly deteriorating.
However, economic researchers expect the situation to improve in the coming months. The reason for this is the lifting of the corona restrictions. Service providers who rely on face-to-face encounters for their activities are resuming their business; Companies hope to work off their full order books again. The federal government estimates that the German economy is sitting on an order backlog of 100 billion euros.
In addition, private households are estimated to have saved a good 200 billion euros during the Corona period.
A first recovery can already be seen. “This is likely to continue in the coming months and will provide significant support for the economy in Germany,” said Wollmershäuser. The Ifo Institute expects growth of 0.7 percent in the second quarter. Due to the tense geopolitical situation, however, forecasts such as these are subject to considerable uncertainty, as economic researchers emphasize.
2. Embargo would lead to clear recession
In any case, all of these predictions would be meaningless if there were an abrupt halt to the supply of Russian gas – whether by Putin himself or as a result of sanctions from the West. In this case, according to various estimates, GDP would shrink by up to four percent in the current year. A decline in economic output over a whole year is considered a real recession.
3. China’s zero-Covid policy threatens global supply chains
In addition, a well-known economic risk could return. China’s zero-tolerance policy in the corona pandemic is once again threatening the global economy. The state leadership relies on sealing off entire districts in the event of individual corona cases. As a result, numerous global supply chains had already been interrupted because raw materials and preliminary products were not delivered from China.
The world’s largest container port in Shanghai is already acutely affected. The metropolis has been sealed off since the end of March. About 25 million people have been ordered to stay at home. Container ships and tankers are therefore already backing up in front of the port.
The impact of the lockdown on Shanghai compared to the other Chinese megaports clearly shows the enormous impact of the lockdown. Exports from the port of Shanghai have collapsed in recent days and are around 30 percent below the development of the other ports.
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“Should various supply chains collapse again due to China’s Covid policy, the damage to the global economy would be considerable,” said Vincent Stamer from the Kiel Institute for the World Economy.
The material shortage in German industry hardly improved in April. According to a survey by the Ifo Institute, three out of four companies complained about bottlenecks and problems with the procurement of preliminary products and raw materials, after 80 percent in March.
4. With the construction sector, an important pillar of the economy is gone
A lot is still being built in Germany. But industry representatives fear slumps in the new construction business due to the sustained rise in prices for building materials. In construction, the Ifo business climate has fallen to its lowest level since May 2010.
The sector’s business expectations have never been so pessimistic since reunification. In a survey by the Main Association of the German Construction Industry in mid-April, nine out of ten companies complained about price increases.
“The construction industry, which has been a pillar of the economy in recent years, is collapsing – supply bottlenecks and massive price increases are having an effect,” said Ifo President Clemens Fuest. So far, the construction sector has often developed largely independently of the general economic situation. During the corona pandemic, the industry supported the economy, which was otherwise collapsing in many areas. But the current upheavals no longer seem to stop at construction.
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