‘Reality’ Sets In As Germany Falls Into Recession

The world’s fourth-largest economy is in a recession. Or it was at the beginning of the year anyway.

Revisions released on Thursday showed German economic output contracted 0.3% in Q1 on the heels of a half-point contraction over 2022’s final three months.

I’m not sure if they hew to the two-quarter rule of thumb in Germany, but for our purposes here (and certainly for the purposes of mainstream financial media outlets, where recessions are monetizable manna from heaven), it’s a recession, and the first since the original COVID lockdowns.

The news came just 48 hours after preliminary PMI data for May suggested Germany’s manufacturing sector contracted at the swiftest pace in 36 months. A survey-based gauge of new orders dropped sharply, suggesting foreign demand “has virtually collapsed,” as Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, put it.

One problem is inflation which, as you might’ve noticed, is elevated across the developed world. “High price increases continued to be a burden on the German economy at the start of the year,” the federal statistics office said Thursday.

Household consumption fell 1.2% in Q1 after an even sharper contraction (-1.7%) in Q4. Consumers’ “reluctance to buy was apparent in a variety of areas,” Germany’s statisticians said, noting that households “spent less on food and beverages, clothing and footwear, and on furnishings in the first quarter.”

By contrast, fixed investment and trade were actually a boon. Government spending fell as state-financed COVID measures rolled off.

This isn’t a disaster by any stretch but it does underscore the notion that although the European economy dodged the worst-case scenario many feared when energy prices spiraled higher late last summer, the situation is nevertheless tenuous, particularly with the war raging and China’s recovery faltering.

“Looking beyond the first quarter, the optimism at the start of the year seems to have given way to more of a sense of reality,” ING’s Carsten Brzeski remarked, adding that “a drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades all argue in favor of weak economic activity.”


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