Germany in recession as EUs biggest economy drops for second quarter

IMF discusses inflation trends in the global economy

The German economy shrank unexpectedly in the first three months of this year, marking the second quarter of contraction that is one definition of recession.

Data released Thursday by the Federal Statistical Office shows Germany’s gross domestic product, or GDP, declined by 0.3 per cent in the period from January to March. This follows a drop of 0.5 per cent in Europe’s biggest economy during the last quarter of 2022.

Two consecutive quarters of contraction is a common definition of recession, though economists on the euro area business cycle dating committee use a broader set of data, including employment figures. Germany is one of the 20 countries that use the euro currency.

Employment in the country rose in the first quarter and inflation has eased, but higher interest rates will keeping weighing on spending and investment, said Franziska Palmas, senior Europe economist for Capital Economics.

“Germany has experienced a technical recession and has been by far the worst performer among major eurozone economies over the past two quarters,” Palmas said, predicting further weakness ahead.

Last month, the government wrongly said the economy would grow by 0.4 per cent — up from a 0.2 per cent expansion predicted in late January — a forecast that may now need to be revised downward.

Economists said high inflation hit consumer spending, with prices in April 7.2 per cent higher than a year ago.

GDP reflects the total value of goods and services produced in a country. Some experts question whether the figure alone is a useful indicator of economic prosperity given that it doesn’t distinguish between types of spending.

The eurozone economy scraped out meager growth of 0.1 percent in the first quarter, according to initial estimates, with inflation eroding people’s willingness to spend as their pay fails to keep pace.

The US also has reported disappointing growth estimates that kept alive fears of a recession in the world’s largest economy.

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The International Monetary Fund predicted this week that the United Kingdom would avoid falling into recession this year after previously expecting it to be one of the worst performing among the Group of Seven leading industrial nations.

IMF Managing Director Kristalina Georgieva said Tuesday that “we’re likely to see the UK performing better than Germany, for example.”

In an update to recent forecasts, the latest IMF report said: “Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.”

The IMF said the change reflects “higher-than-expected resilience” in both demand and supply, referencing improved confidence in reduced post-Brexit uncertainty and declining energy costs.

Chancellor Jeremy Hunt said the IMF report shows a “big upgrade” for the country’s growth prospects and credits the Government’s “action to restore stability and tame inflation”.

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He said: “It praises our childcare reforms, the Windsor Framework and business investment incentives.

“If we stick to the plan, the IMF confirms our long-term growth prospects are stronger than in Germany, France and Italy – but the job is not done yet.”

IMF economists made no change to the growth forecast for 2024, with the economy set to grow by one per cent next year.

They said: “Growth is projected to rise gradually to one percent in 2024, as disinflation softens the hit to real incomes, and to average about two per cent in 2025 and 2026, mainly on the back of a projected easing in monetary and financial conditions.”

But the report does endorse the UK plugging skills shortages with immigrants, amid debate in Westminster about government policy ahead of the publication of new data this week on net migration.

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