Germany is heading into recession after the economy contracted in the first quarter

Germany fell into recession, and according to revised data, gross domestic product in Europe’s largest economy fell in the first quarter of the year.

Federal statistics office Destatis said the German economy shrank 0.3 percent in the three months to March, revising its initial estimate of zero growth. Some economists had expected the decline after German industrial production suffered its biggest drop in 12 months in March.

The second consecutive quarterly decline in GDP – after a downwardly revised 0.5 percent contraction in the last quarter of last year – meets the definition of a technical recession.

The main reason for Germany’s disappointing first-quarter performance was a drop in household consumption, which fell 1.2 percent from the previous quarter as high inflation eroded people’s spending power.

“Households’ reluctance to buy was reflected in a number of areas: households spent less on food and drink, clothing and footwear, and home furnishings in the first quarter of 2023 than in the previous quarter,” Destatis said in a statement.

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Car sales in Germany have fallen, reflecting a drop in subsidies and subsidies for the purchase of plug-in hybrid and electric vehicles since the start of the year.

German public spending was also 4.9 percent lower. However, private sector investment picked up in the first quarter compared to the weak second half of 2022, boosted by 3.9 percent due to increased construction activity due to mild weather.

Trade contributed positively as German imports fell by 0.9 percent and exports rose by 0.4 percent in the first quarter.

Among the world’s major economies, Germany will have the weakest performance this year, according to the IMF, which forecasts that the country’s output will decrease by 0.1 percent.

The decline over the past six months means that German GDP remains below pre-pandemic levels, in contrast to the overall eurozone economy. According to Destatis, first-quarter production was 0.5 percent lower than a year earlier.

Consumers in Germany were hit by higher inflation and rising borrowing costs, which contributed to retail sales falling 8.6 percent in March compared to the same month last year, after adjusting for inflation.

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German companies are increasingly gloomy about the year ahead, according to the Ifo Institute’s business confidence index, which fell for the first time in seven months in May.

Europe’s largest economy has been rocked by weakness in its sprawling manufacturing industry, which is suffering from lower factory output, falling demand, weak exports and falling order books.

In the first quarter, manufacturing output increased by 2 percent compared to the previous quarter, but according to Destatis, “there was a dampening effect in March.” Growth was weaker in the larger service sector, the statement said.