C:Germany suffered its first recession since the start of the pandemic, dashing hopes that Europe’s leading economy could avoid a similar fate after the war in Ukraine sent energy prices soaring.
Output shrank 0.3% in the first quarter from the previous three months, following a 0.5% drop in the October-December period, the statistics office said on Thursday. Its initial estimate, last month, was for stagnation.
“Households’ reluctance to buy was evident across the board,” the office said in a statement. “Households spent less on food and beverages, clothing and footwear, and furnishings.” They also bought fewer electric cars because incentives were cut.
Elsewhere, government spending fell, while investment rose due to construction in unseasonably warm weather.
The result is a setback for Germany, which despite avoiding the bleakest scenarios feared since the Russian invasion, is still facing a recession that Chancellor Olaf Scholz seemed to rule out in January.
“We must turn the corner on economic policy and stop neglecting our competitiveness,” Finance Minister Christian Lindner said in Berlin, adding that this included “speeding up planning and approval procedures and strengthening the idea of technological freedom so that: use our creative potential.”
Markets trailed Thursday’s readings despite their implications for the broader activity of the 20-nation euro zone.
In Germany, companies like Zalando SE reflect consumer sentiment. The fashion retailer saw inventory levels rise in the first quarter due to falling demand. Domestic car orders, meanwhile, fell by about a third between January and April, according to the VDA auto industry association.
The main production sector is also becoming a problem. the deepening recession casts doubt on the recovery many expect for the coming quarters.
Indeed, industrial weakness is hurting the business outlook. The Ifo institute’s gauge of expectations fell in May for the first month in eight months, while a survey by lobby group DIHK showed zero GDP growth in 2023.
A report from the Bundesbank this week offered some optimism, suggesting the economy may grow “slightly” this quarter as a strong order backlog, easing supply bottlenecks and lower energy costs support manufacturers.
But demand for the goods is increasing as consumers, faced with high inflation, choose to splurge on leisure and travel. It makes economic growth more and more unequal. a trend some analysts say is unsustainable.
“The optimism at the start of the year seems to have given way to a sense of reality,” ING economist Karsten Brzeski said in a note to clients. “Falling purchasing power, thinning industrial orders, the impact of the most aggressive monetary tightening in decades and an expected slowdown in the US economy all point to weak economic activity.”
For economists at Commerzbank, a second-half recession now looks more likely than the recovery that many of their peers continue to predict.
Inflation does not help. It is still above 7% and is not expected to retreat quickly as wage growth feeds strong underlying pressures, according to the Bundesbank.
The European Central Bank’s efforts to bring price growth back to its 2% target level threatens to dampen demand further. Bank loans are already becoming more expensive and interest rate hikes are not yet complete, risking a further drag on growth.
— With assistance from Joel Rinneby, Christian Seidenburg, Christoph Rauwald, Monika Raimont, Konstantin Kurkulas, and Camille Kovalche.
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