Germany has slipped into recession, with revised data showing gross domestic product in Europe’s largest economy contracted in the first quarter of the year.
Germany’s economy contracted by 0.3% in the three months to March, the federal statistics agency Destatis said, revising its preliminary estimate of zero growth. Some economists had expected a decline after German industrial production suffered its biggest drop in 12 months in March.
The second straight quarterly drop in GDP met the definition of a technical recession, following a downwardly revised 0.5% contraction in the final quarter of last year.
Germany’s disappointing performance in the first quarter was largely driven by a drop in household consumption, which fell 1.2% from the previous quarter as high inflation eroded people’s purchasing power.
“Household reluctance to buy is evident in multiple areas: In the first quarter of 2023, households spent less on food and beverages, clothing and footwear, and furniture than in the previous quarter,” Destatis said in a statement. “
Car sales in Germany fell, reflecting a reduction in grants and subsidies for the purchase of plug-in hybrid and electric vehicles since the start of the year.
German government spending also fell by 4.9%. But private sector investment rebounded in the first quarter from weakness in the second half of 2022, rising 3.9 percent, boosted by milder-weather construction activity.
Trade made a positive contribution, with German imports falling 0.9% in the first quarter and exports rising 0.4%.
Germany is expected to be the worst performer of the world’s major economies this year, according to the International Monetary Fund, which forecasts the country’s output will shrink by 0.1%.
The slump over the past six months means German gross domestic product remains below pre-pandemic levels, unlike the broader euro zone economy. Output in the first quarter was down 0.5% from a year earlier, Destatis said.
German consumers have been hit by rising inflation and higher borrowing costs, which contributed to an 8.6 percent drop in retail sales in March from a year earlier when adjusted for inflation.
German companies have become more pessimistic about the year ahead, according to the Ifo institute’s business confidence index, which fell in May for the first time in seven months.
Europe’s largest economy has been weighed down by weakness in its sprawling manufacturing sector, which has been hit by falling factory output, plunging demand, weak exports and a dwindling order backlog.
In the first quarter, manufacturing output rose 2% from the previous quarter, but Destatis said there was “a dampening effect in March.” Growth in the larger services sector was weaker, the report said.