Germany’s economy has slipped into recession – these are the reasons

Berlin The German economy slipped into a recession in the winter. From January to March, gross domestic product (GDP) shrank by 0.3 percent compared to the previous quarter. This was announced by the Federal Statistical Office on Thursday.

After economic output had already fallen by 0.5 percent in the fourth quarter of 2022, the criteria for a technical recession have now been met. Economists speak of this when there are two consecutive quarters of declining economic output. The main reason for this was high inflation and the resulting decline in private consumption.

The prospects continue to deteriorate. The Ifo business climate index fell again in May after six months. It could easily happen “that we slip below zero for the year as a whole,” said Ifo President Clemens Fuest.

The federal government had recently forecast small growth of 0.4 percent for 2023. Chancellor Olaf Scholz also demonstrated confidence. “The prospects for the German economy are very good,” he said on Thursday in Berlin.

Monika Schnitzer, Chairwoman of the Advisory Council, is also assuming a slight increase in GDP for the current year. “But it can also be a slight minus,” she said. But that is not certain. According to experts, the new economic figures also show signs of a possible improvement in the situation.

This shows that the value added contained in the gross domestic product, i.e. the economic activity of the German economy, especially of companies, increased by 0.9 percent in the first quarter. According to Stefan Kooths, head of economic activity at the Kiel Institute for the World Economy (IfW), the reason for the unusually large discrepancy with GDP is probably a complicated statistical distortion.

“The decline in GDP is likely to overstate the current weak economic development,” summarizes Kooths. In addition, private households and the consequences of inflation play a much greater role in the calculation of GDP than in value creation.

But even the slight increase in value added cannot hide the precarious situation of the German economy. Overall, the German economy is still going “through difficult waters,” said Kooths.

At the end of April, the Federal Statistical Office had still expected stagnation in gross domestic product in the first quarter. Four developments have meant that things have turned out differently.

1. High inflation is causing private consumption to collapse

At first it was just the high energy prices, then almost all consumer prices have risen in recent months. For this reason, the Germans could or wanted to afford significantly less. After private consumption had already dropped significantly last year, it fell again by 1.2 percent in the first quarter. “Consumption has torn everything down,” said the Berlin economist Claus Michelsen.

The exchange prices for electricity and gas have fallen sharply again since last autumn. However, many private households are likely to continue to be burdened by the high prices because they are still feeling the after-effects of last summer’s sharp rise in prices through utility bills or new contracts with energy suppliers. At the same time, government energy price brakes came into effect in March. But even those are likely to arrive late.


However, energy prices alone did not trigger the significant drop in consumption, explains Schnitzer, Chair of Economics. Private households spent less on food and beverages, clothing, shoes and furniture than in the previous quarter.

Schnitzer also refers to the savings rate: According to the Federal Statistical Office, German households saved 13.8 percent in the first quarter, the same amount as in the same period last year. That is, they have not resorted excessively to savings or taken out loans to bridge bottlenecks caused by high energy bills.

2. The turnaround in interest rates goes down well with consumers

And Schnitzer sees factors that have directly curbed consumer sentiment: “The turnaround in interest rates and pull-forward effects could also have had a greater impact.” The interest rate hikes by the European Central Bank (ECB) are apparently increasingly reaching consumers and dampening demand.

There were pull-forward effects, especially for car purchases: Because the electric car subsidy was reduced at the turn of the year, sales figures skyrocketed at the end of 2022 and were correspondingly low in the first quarter of this year.

3. Industry cannot compensate for the slump in consumption

German industry was even more surprising than the slump in consumption. The added value of the manufacturing industry rose by two percent in the first quarter. However, industry was not able to compensate for the decline in private consumption.

The GDP revision of the Federal Statistical Office, which had still assumed stagnation in the first quarter in its original estimate from the end of April, is linked in particular to a particularly weak March in industry. Key industrial production fell 3.3 percent in the month. Bert Rürup, President of the Handelsblatt Research Institute, spoke of a “considerable setback”.


At the end of last year there had been significantly stronger slumps. But they were mainly due to the energy-intensive industries. In March, however, almost all industrial sectors were affected. The sharpest decline was in the automotive industry with a minus of 6.5 percent.

At the same time, new business in German industry fell more sharply in March than it has since the peak of the corona pandemic. Orders fell by 10.7 percent in March compared to the previous month and were thus as sharp as they were last in April 2020.

4. There are hardly any impulses from abroad

The weak performance of German industry is mainly due to the fact that hardly any impetus comes from abroad. In March, German exports fell by 5.2 percent compared to the previous month.

Against the background of the uncertain global economic environment, the export expectations of industrial companies are hardly changing. Above all, the hoped-for economic stimulus for the German export economy through stronger demand from China after the rigid zero-Covid policy had ended there did not materialize.

According to the Federal Statistical Office, the German economy exported goods worth 7.5 billion euros to the People’s Republic in April, which was 9.6 percent less than in the same month last year. “The end of the zero-Covid policy initially led to more infections, with correspondingly negative effects on the economy,” said Ifo President Fuest.

According to the German Chamber of Industry and Commerce (DIHK), almost a quarter of companies expect higher export sales in the coming twelve months in early summer – unchanged from the start of the year – while 22 percent of companies expect exports to fall.

Conclusion: The prospects could still improve

Although the German economy slipped into a technical recession, it did not collapse as severely as some had feared before the winter. And even if the prospect of improvement in the coming months is limited, slight growth cannot be ruled out.

The Bundesbank already anticipates slight growth in the current third quarter. And in contrast to proven barometers like the Ifo business climate index, experimental leading indicators support this prospect.

Private consumption could slowly put its weak phase behind it. The Federal Statistical Office’s index of footfall in German inner cities has been showing a rather positive trend since spring.

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And the container throughput index of the institutes RWI/ISL reflects the current weakness in Germany, but also shows that significantly more freight is being shipped outside of Europe. RWI economics boss Torsten Schmidt therefore does not expect any further declines in industrial activity.

Experts now see politics as being responsible. Experience has shown that political action has little influence on short-term economic development. However, Schnitzer, Chairwoman of Economics, explains: “Economic development is currently characterized by many uncertainties, both nationally and internationally.” The federal government can also make a contribution to reducing uncertainty by agreeing on a clear common line.

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