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Recession Hits Germany

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CEM REPORT, ECONOMY | Germany’s economy slipped into recession in the first quarter of 2023 (Q1’23).

Data issued by the country’s statistics office on Thursday revealed that the gross domestic product (GDP) declined by 0.3 per cent in Q1’23.

This makes it the second quarter in a row Germany would be recording a decline. Although two straight quarters of negative growth often mean a technical recession.

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Given Germany’s status as Europe’s biggest economy and the world’s fourth-largest, experts are concerned that Germany’s economic status will reflect on other economies in the eurozone. A recession in the eurozone could shape policy direction as the European Central Bank warms up to tighten interest rates again.

According to data from Germany’s statistics office investment in equipment and machinery grew by 3.2 per cent in relation to the last quarter of 2022, and investment in construction advanced by 3.9 per cent quarter on quarter.

Although private sector investment and construction expanded at the beginning of 2023, the growth, however as a result of increase in prices, consumers reduced spending. Generally, households scaled back spending on food, furniture and clothing.

Household spending in Germany last quarter slid 1.2 per cent, while government spending declined by 4.9 per cent relative to the preceding quarter. Much of household spending power was weakened by an increase in the costs of food.

Germany depends largely on Russia for natural gas, however, with several sanctions over its invasion of Ukraine, Germany has become vulnerable.

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According to business surveys, Germany is expected to record growth this quarter even though the effects of increased borrowing costs and a fragile increase in many of its export markets mean it is probable that another contraction is imminent in the third quarter.

“Higher interest rates will continue to weigh on both consumption and investment, and exports may also suffer amid economic weakness in other developed markets,” Franziska Palmas, an economist at Capital Economics, said.

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