“Germany Faces Recession Due to High Inflation: Updates on Economy and Recovery Measures”

Jakarta –

Germany fell into the abyss recession because household consumption was depressed due to high inflation. Its economy shrank 0.3% in the first quarter of 2023, following a 0.5% contraction in the fourth quarter of 2022.

“Heavy price increases continued to weigh on the German economy at the start of the year. This was reflected in final household consumption spending, which fell 1.2% in the first quarter of 2023,” the German Federal Statistics Office said as quoted by CNN, Friday (26/5 /2023).

Claus Vistesen, Euro area chief economist at Pantheon Macroeconomics, said consumer spending in the first quarter of 2023 was hampered by last year’s energy price shock.

European energy prices have risen as a result of Russia’s invasion of Ukraine, sending prices soaring to record highs. Moscow then cut gas supplies to European countries, prompting Germany to declare a state of emergency.

The price of natural gas, which tends to decline, has begun to indicate less inflationary pressure on consumers’ pockets. Although still high, annual inflation in Germany started to slow down in April 2023 at 7.2%.

“We think consumer spending is now recovering as inflation eases. We doubt GDP will continue to fall in the coming quarters as we don’t see a strong recovery,” Vistesen said in a note.

There is also data indicating that Germany’s recession will not last long. Surveys showed earlier this week that business activity in the country was expanding again in May 2023, despite a sharp decline in manufacturing.

German Chancellor Olaf Scholz said the economic outlook was very good pointing to the steps the government has taken in recent months to expand renewable energy production and attract foreign workers.

“There is a lot of investment in Germany in terms of battery factories and ships which have increased significantly. Therefore we can be confident,” he said.

On the other hand, Senior European Economist at Capital Economics, Franziska Palmas projects that German output will shrink again in the third and fourth quarters of 2023. It is believed that the high interest rates needed to tame inflation will continue to weigh on consumption and investment.

“The German economy is expected to shrink by 0.1% in 2023, according to the latest estimates from the International Monetary Fund,” he added.

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(aid/zlf)