Germany has slipped into recession as last year’s energy price shock takes its toll on consumer spending.

Output in Europe’s largest economy dropped 0.3% in the first three months of the year, following a 0.5% contraction at the end of 2022, official data showed Thursday.

The Federal Statistical Office downgraded its previous estimate of zero growth in gross domestic product (GDP) compared with the previous quarter. A recession is defined as two consecutive quarters of declining output.

“The persistence of high price increases continued to be a burden on the German economy at the start of the year,” the office said. “This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023.”

Claus Vistesen, chief euro area economist at Pantheon Macroeconomics, said spending by consumers in the first quarter was crimped by “the shock in energy prices.”

European energy prices were already rising when Russia’s invasion of Ukraine in February last year sent them soaring to record highs. Moscow then went on to throttle gas supplies to European countries, prompting Germany to declare an emergency.

Uncertain outlook

Natural gas prices have since tumbled and now stand at levels last seen in late 2021, pointing to easing inflationary pressures on consumers’ pockets. The annual rate of inflation in Germany slowed again in April — the first month of the second quarter — although, at 7.2%, it remained high.

“We think consumers’ spending is now rebounding as inflation eases,” Vistesen said in a note. “We doubt that GDP will continue to fall in coming quarters, but we see no strong recovery either.”

In a sign that Germany’s recession may prove short-lived, timelier survey data showed earlier this week that business activity in the country expanded again in May, despite a sharp downturn in manufacturing.

However, Franziska Palmas, senior Europe economist at Capital Economics, forecast that German output would shrink again in the remaining two quarters of the year.
Writing in a note, she said higher interest rates, needed to tame inflation, would continue to weigh on both consumption and investment, and Germany’s exports might also suffer as demand was sapped by weakness in other developed economies.

China is Germany’s most important trading partner, just ahead of the United States. Exports of German cars to China fell 24% in the first quarter.