Germany is in a technical recession, and the momentum of the "locomotive of the European economy" is no longer there?

21st Century Business Herald reporter He Liuying reported

On May 25, local time, the German Federal Statistical Office released data showing that after adjusting for prices, seasons and working days, German GDP fell by 0.3% in the first quarter of this year. Meanwhile, the adjusted final value for the fourth quarter of 2022 declined 0.5% sequentially.

Negative GDP growth for two consecutive quarters means that the German economy is in a technical recession.

German Finance Minister Christian Lindner said the German GDP data showed "surprising negative signals" and said the German economy was losing its growth potential compared to other highly developed economies.

The German Federal Statistical Office also mentioned in a press release that at the beginning of this year, Germany's economic development lagged behind international performance. In contrast, Eurostat data on May 16 showed that the EU's GDP grew by 0.2% month-on-month in the first quarter, the eurozone increased by 0.1%, and the member countries Spain and Italy both increased by 0.5% month-on-month.

As the "locomotive of the European economy", the German economy has suffered heavy setbacks in black swan events such as the Russian-Ukrainian conflict and the energy crisis. Even though German Chancellor Scholz repeatedly expressed confidence to the market, at the beginning of this year, he stressed that "we will not fall into recession", but a technical recession has become a reality.

In its World Economic Outlook report released in April, the International Monetary Fund (IMF) predicted that Germany would shrink by 0.1% this year and achieve 1.1% growth next year, ranking low among European economies.

The German economy fell into a technical recession

In the first quarter of this year, Germany's gross domestic product fell by 0.3% month-on-month, and combined with the economic performance in the fourth quarter of last year, the German economy has fallen into a technical recession.

According to the German Federal Statistical Office, the continued high prices and falling consumer spending have affected economic performance. Adjusted for price, seasonal and workday changes, household final consumption expenditure in Germany fell by 1.2% q-oq in Q1, with lower spending in food and beverages, clothing and footwear, and furniture. In addition, government final consumption expenditure also fell by 4.9% compared to the previous quarter.

Higher food and energy prices continue to have a dampening effect on consumption. In April, Germany's overall CPI slowed down, but remained at a high level of 7.2%, with food prices rising by 17.2% year-on-year and energy product prices rising by 6.8% year-on-year.

According to the experts interviewed, it is difficult for German inflation to cool down in a short period of time. Germany's PPI rose 0.3% month-on-month in April, the largest increase since September 2022; Year-on-year growth of 4.1%, slightly above expectations. "Last year's double-digit PPI will continue to be transmitted to the CPI, bringing high inflation." Liu Ying, member of the Chongyang Institute for Financial Studies and director of the cooperative research department of Chinese Minmin University, told the 21st Century Business Herald reporter.

With the fall in energy prices, the German manufacturing industry achieved a year-on-year growth of 3.2% in the first quarter of this year compared with last year. According to the Bureau of Statistics, this is due to a significant increase in the production of motor vehicles and trailers. However, the total value added of energy-intensive industries such as chemicals and metal manufacturing is still significantly lower than last year's level.

Overall, although German industry has recovered from last year, it has not fully recovered from the downturn. In March, German industrial output rose 1.8 percent year-on-year (workday-adjusted) and fell 3.4 percent month-on-month (seasonally and workday-adjusted). In terms of orders, the number of new industrial orders in Germany fell by 10.7% month-on-month in March, the biggest decline since April 2020.

Weak consumption combined with sluggish industry has led to uncertainty in Germany's economic recovery. According to Claus Vistesenc, chief eurozone economist at Pantheon Macroeconomics, German GDP is unlikely to continue to decline in the coming quarters, "but we also do not see a strong recovery".

Economic performance "left behind" in EU

Germany, which has been ahead of the major EU economies for many years, is now unexpectedly "left behind".

According to Eurostat data on May 16, in the first quarter of this year, the EU and the euro area achieved 0.2% and 0.1% GDP growth respectively, and from the perspective of member countries, Italy, Belgium, Denmark and other countries performed better, achieving 0.5%, 0.4% and 0.3% month-on-month growth respectively, all better than Germany's economic performance.

Among European economies, why did Germany fall into the trough faster? The experts interviewed pointed out that black swan events such as the Russian-Ukrainian conflict and the energy crisis have had a particularly great impact on it.

Liu Ying said that Germany's energy is highly dependent on Russia, and after the Russian-Ukrainian conflict and the sanctions and counter-sanctions imposed by Europe and the United States against Russia, the energy supply from Russia has been greatly reduced, and the German manufacturing industry developed by high-quality and cheap Russian energy has been seriously impacted, especially energy-intensive industries such as steel, aluminum, chemicals, and cement.

Entering 2023, European energy prices have fallen significantly, but "today's energy prices are still facing the problem of risk premium, including the US government debt ceiling and the liquidity crisis of small and medium-sized banks." Commodities have their financial and investment attributes, and external risk factors may stimulate energy prices to remain relatively high. Liu Ying added.

Meanwhile, Germany, an export-oriented economy, recorded a trade surplus of €79.7 billion in 2022 after a historic trade deficit last year, the lowest since 2000. "Germany is relatively dependent on foreign countries, and the current weak global demand is putting greater pressure on it, especially in the manufacturing sector." Ding Chun, professor of the Institute of World Economics and director of the Center for European Studies at the School of Economics of Fudan University, told reporters.

In order to curb high inflation, including Germany, the euro area has raised interest rates seven times so far last year, and has raised interest rates by 375 basis points so far, which continues to have a restraining effect on eurozone economic growth. The ECB is now widely expected to continue raising interest rates at its June monetary policy meeting. What Germany is facing now is a major mountain of rising interest rates, a complex international environment, an incomplete lifting of the energy crisis, and an ineffective cooling of inflation. Under the haze of recession, companies are increasingly pessimistic about the future. In May, the ifo business confidence index reported 91.7 points, down significantly from 93.4 points in April, and also fell again after rising for six consecutive months.

Can it maintain its status as an "economic locomotive"?

Looking ahead, Germany's economic growth is hardly optimistic.

In its World Economic Outlook report released in April, the IMF predicted that the eurozone would grow by 0.8% this year and 1.4% next year. Among member states, the report expects Germany to experience a recession of 0.1% this year and 1.1% next year, while for comparison, the report expects GDP growth of 0.7%, 0.7% and 1.5% for France, Italy and Spain, respectively.

The European Commission's recent Spring 2023 Economic Forecast believes that Germany's GDP will grow by 0.2% this year, and growth is expected to rebound to 1.4% in 2024, driven by the recovery of consumption and investment. At the same time, the EU expects France, Spain and Italy to achieve economic growth of 0.7%, 1.9% and 1.2% respectively this year.

It is clear that Germany's economic expectations this year are inferior to most European economies, both by international organizations and EU institutions.

German economic research institutions are more optimistic about their own economic expectations. Not long ago, four authoritative economic research institutions in Germany released a joint economic forecast report, adjusting the German economic development forecast for 2023 from a recession of 0.4% predicted last autumn to a growth of 0.3%. The report believes that due to the sharp fall in energy prices, Germany's economic setback in the winter half of 2022/2023 may not be as severe as feared in autumn.

Meanwhile, the Bundesbank has a positive attitude towards industrial repair, noting in its May monthly report that easing supply bottlenecks, a large order backlog and falling energy prices are supporting a sustained recovery in industry. However, from the leading indicators, the preliminary value of Germany's manufacturing PMI in May was 42.9, continuing to hover below the boom and bust line.

Germany's economic growth is hard to hide this year, but in the long run, will Germany lose the crown of "European economic locomotive"?

In her view, Germany's current economic downturn is mainly limited by the impact of geopolitical conflicts, namely the Russian-Ukrainian conflict and the impact of sanctions and counter-sanctions between Russia and Europe, "In the context of the continued existence of these factors, it is expected that the German economy will still be under greater pressure in recent years", but this does not mean that Germany's permanent economic downturn.

Ding Chun also believes that Germany should not easily lose its status as Europe's "economic locomotive", "because it is at the core of its manufacturing industry in terms of the proportion of its manufacturing industry in the European economy, the integrity of the industrial chain, and its technical capabilities." ”

In Ding Chun's view, Germany's subsequent economic trend may depend on four main aspects, one is whether Germany and the EU have a more correct policy response to the current stagflation, the second is the change in the geopolitical situation, the third is how it digests the adverse impact of the international environment, and finally international cooperation with China and other countries, such as strengthening exports in economic and trade aspects.

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