Germany’s Economy Enters Technical Recession following GDP Decline: Causes, Consequences, and Forecasts

Economists confirmed, in exclusive statements to the “Sky News Arabia Economy” website, that the German economy has lost growth potential, compared to other developed economies, with the country entering a technical contraction, that is, two consecutive quarters of decline, noting that the decline in gross domestic product will negatively affect all segments. society, and this is evident in the decline in purchasing power, the high rate of unemployment, and the decline in household consumption spending.

According to German official data, the largest economy in Europe recorded a technical contraction in the first quarter of 2023, as the country’s gross domestic product decreased by 0.3 percent between January and March 2023, after it also declined by 0.5 percent between October and December 2022, so Germany entered accordingly. In a technical contraction, this is a precedent since the pandemic that caused a decline in GDP in the first and second quarters of 2020.

Inflation remained a drag on the German economy at the start of the year, as this was reflected in household consumption, which fell by 1.2 percent on a quarterly basis after adjusting for price and calendar effects, according to the German Statistical Office.

What is slack?

While a technical recession is defined as two consecutive quarters of contraction, however, in general, there is no agreement specifically on defining a recession, as the National Bureau of Economic Research in America defines it as “a significant decline in levels of economic activity, which lasts for a few months, and is represented by a decrease in levels of production, employment, real income and other indicators”, and often begins when the economy reaches its peak activity, and ends when the economy reaches its lowest levels.

On the other hand, the World Bank sees it represented in “the contraction of the economies of many major countries at the same time, in addition to other indicators indicating weak global economic growth, represented in the prolonged decline in domestic product, the high rate of unemployment with the decline in aggregate demand for goods and services.”

The German economy is losing growth potential

In his interview with Sky News Arabia, economist Ali Hammoudi said, “German GDP data showed surprisingly negative signs, as the German economy lost growth potential, compared to other developed economies.”

Hamoudi added: “It is clear that the German consumer suffered a lot under the weight of massive inflation, which led to the decline of the entire economy, as the continuation of high price increases represented a burden on the country’s economy at the beginning of the year, and this was reflected in particular in the final consumption expenditure of households, which decreased.” by 1.2 percent in the first quarter of 2023, and consumer spending in the first quarter is often affected by the energy price shock.

What about the second quarter?

And with the economic recession unavoidable in the first quarter of this year, the most prominent question will be whether the economy will witness a recovery in the second quarter of the year?

Economist Hammoudi answers this question by saying: “The decline in purchasing power, the decline in industrial orders, the tightening of monetary policy, and the expected slowdown in the US economy are all drivers that contribute to the weakness of German economic activity, but nevertheless the economy is expected to grow modestly in the second quarter.” Where there could be a recovery in industry that might offset sluggish household consumption.”

Low purchasing power and high unemployment

In turn, the international economic advisor, Amer Al-Shobaki, says: “Germany entered a technical recession after the economy contracted for two consecutive quarters, and the decline in GDP is the decline in industrial and commercial production, which will be reflected in all segments of society, and this is evident in the decrease in purchasing power and the high unemployment rate, which is one of The most prominent repercussions of the recession, as Germany must prepare for high unemployment rates after two quarters of contraction.

How did Germany reach recession?

The period of recession in the past two quarters of the German economy was followed by high energy prices, which led to the exit of many investments from Germany, the cessation of many industries, and the bankruptcy of many companies. Inflation in Europe, according to Shobaki.

The European Central Bank raised the interest rate 7 times since last year, with the aim of controlling inflation, to reach the level of 3.75 percent, so that inflation in the euro zone countries slowed sharply from double-digit readings late last year, as data from the European Union’s statistics office “Eurostat” showed. Inflation reached 7 percent last April.

In its latest statement, the ECB kept its interest rate options open as its fight against inflation continues, but did not mention the need for further increases.

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Second quarter forecast

Regarding his expectations for the German economy for the second quarter of this year, Al-Shobaki adds, “Despite the decline in gas prices, which appear to be the lowest since 2021, and reasonable oil prices at $75 for Brent crude, Germany will suffer in the second quarter of this year as a result of the rebounds of high energy prices.” On the rest of the commodities, meaning that if prices fell in the second quarter, its negative impact on the German economy will remain for the second quarter, in addition to the repercussions of high interest rates, which do not seem to be a glimmer of hope by the European Central Bank to reduce them because the inflation rate is still far from the European Central’s target of 2 percent.”

Al-Shobaki affirmed that the state of uncertainty in the German, European and even global economies will continue until mid-2024, “when the coming months will be accompanied by high interest rates.”

Wrong energy policies

For his part, Tariq Al-Rifai, CEO of the “Quorum Center for Strategic Studies” in London, expects that the pressure on Germany will be more severe during the coming period in terms of inflation and economic recovery due to the wrong government policies towards energy, indicating that many industrial companies have ended their business in Germany or transferred operations to China and other countries.

Al-Rifai explains that “Germany is the European country most affected by the energy crisis, and as one of the most important industrialized countries in the world, the German industry today is facing its worst crisis in many years, due to the government’s policies to phase out fossil fuels and replace them with green energy means to open the door to dependence on It significantly depends on importing energy from Russia, but due to the current economic embargo on Russia, Germany imports energy from abroad at a higher cost.”