German economy is stagnating, inflation is falling

In the first quarter, the German economy narrowly avoided the long-feared winter recession due to falling consumer spending. The gross domestic product (GDP) stagnated from January to March compared to the previous quarter, as the Federal Statistical Office announced on Friday. Economists surveyed by the Reuters news agency had expected growth of 0.2 percent, after a revised minus of 0.5 percent (previously: -0.4 percent) in the fourth quarter. With two negative quarters in a row, there is talk of a recession, which has now just been avoided.

A better performance prevented the falling consumer spending of consumers, who are not in the mood for shopping due to the loss of purchasing power due to high inflation. Government consumer spending also decreased. “On the other hand, positive impetus came from investments and exports,” the statisticians explained. They want to announce details in May.

Inflation rate falls more than expected

In April, the German inflation rate fell to its lowest level in eight months. Consumer prices were on average 7.2 percent above the level of the same month last year, as the Federal Statistical Office announced on Friday in an initial estimate. This is the lowest value since August 2022. The inflation rate was 7.4 percent in March and 8.7 percent in January and February. Economists surveyed by the Reuters news agency had only expected a decline to 7.3 percent.

The relief that inflation is falling is no reason to give the all-clear, said Friedrich Heinemann from the ZEW economic research institute, commenting on the preliminary figures: “As expected, the base effect is now causing the inflation rate to fall further. The massive jump in prices after the outbreak of war was more than a year ago and is falling out of the year-on-year comparison. In addition, the fall in energy prices is also having an inflation-dampening effect.”

However, so far there has been no relaxation in core inflation, which is calculated without energy and food prices and which has recently risen even further, Heinemann points out. “The initial impulse that set the flywheel of inflation in motion has expired. But the flywheel continues to turn vigorously for the time being.”

Rate hikes are likely to have a negative impact

“Inflation continued to fall somewhat in April because food prices rose more slowly for the first time in a year and a half,” said Commerzbank chief economist Joerg Kraemer. “This downward trend should continue, which will contribute to a further decline in the inflation rate in the coming months. But according to our estimate, core inflation excluding food and energy remained at 5.8 percent in April, which is far too high,” emphasized Kraemer.

A technical recession in the winter half-year is off the table for the time being, commented the Commerzbank chief economist on the GDP figures for the first quarter. “However, I advise caution with a view to the second half of the year.” Many companies have already processed a good part of the orders that were left behind during the Corona crisis. In addition, the European Central Bank (ECB) has raised its interest rates sharply. “In the past, such interest rate hikes were always followed by recessions in Germany,” said Kramer.

Chief economist Alexander Krüger from Hauck Aufhäuser Lampe Privatbank is therefore not expecting a thoroughgoing upswing. “In the weak growth environment, the losses in prosperity that have already been suffered will therefore persist,” said Krüger.

The German Institute for Economic Research (DIW) assumes that the economy will gain momentum at least in the current spring quarter. Above all, the increasing industrial production – also in the energy-intensive branches of the economy – should contribute to growth.

Falling real wages, high inflation and rising interest rates

“But that shouldn’t lead to euphoria,” said the co-head of the DIW economic team, Geraldine Dany-Knedlik. It is true that the recently lower energy prices and stronger foreign demand have strengthened production. “However, high inflation and the resulting low real wages are weighing on the disposable income of private households,” said the expert.

Ralfcircul from Helaba expects further interest rate hikes from the ECB: “Since France, Italy and Spain published good growth figures on balance today, the ECB should feel encouraged not to declare the interest rate cycle over yet.” He expects interest rates to rise by 0.25 percent next week. “In addition, a further tightening should be taken into account, especially since the inflation rates are still far too high and in some cases even rose in April.”

Labor market weakens, spring revival fails

The sluggish economy and the refugees from the Ukraine have turned the fresh spring wind that can often be felt on the German labor market into a mild breeze this year. The number of unemployed fell by only 8,000 to 2.586 million in April – last year at the same time there was still a decline of 53,000. The unemployment rate stagnated at 5.7 percent, as the Federal Employment Agency announced on Friday in Nuremberg. In April last year it was still 5.0 percent.

Nevertheless, Robert Habeck spread optimism a few days ago. The Federal Minister of Economics expects growth of 0.4 percent this year. In 2024, gross domestic product is then expected to increase by 1.6 percent. “After the Corona crisis, the German economy is proving to be adaptable and resilient, even in the energy crisis,” said the Green politician at the presentation of the federal government’s spring projection.

tko/hb (rtr, dpa)