The economy in Germany has reached a critical phase. The Federal Statistical Office took a closer look at the data on gross domestic product in the first quarter and found that economic output fell by 0.3 percent compared to the previous quarter. In an initial estimate, the statisticians assumed stagnation. GDP had already fallen by 0.5 percent in the previous quarter. When the economy shrinks for two quarters in a row, it’s called a “technical” recession, which raises fears of worse. But how is the German economy really doing?
Little light and much shadow in the forecasts
The data and analysis seem to contradict each other: The ifo business climate index points down. In contrast, the Bundesbank is reasonably optimistic, at least for the current second quarter. The GfK consumer climate has at least improved. That means: the mood of consumers to buy was worse, but it is still not good.
High inflation remains the dominant theme for the entire economy. The price increase is still at a very high level. Energy may no longer be the biggest price driver like it was at the beginning of the Ukraine war. On average, food is becoming more and more expensive.
Consumers are holding back
Consumers react to this with reluctance to buy and have already postponed many purchases. Some are still waiting for high back payments for electricity and gas. All of this has a negative impact on economic performance. There are, for example, private car purchases, which also fell because the federal government reduced its subsidies for e-cars at the turn of the year.
High uncertainties about climate protection and the associated costs for companies, investors and landlords are also contributing to the paralysis of the German economy.
Economy Grimm: Traffic light coalition must reduce uncertainties
The ambiguities about the Plans of the Berlin traffic light coalition for the promotion of heat pumps and energetic refurbishments are also having a negative impact on the construction industry. Residential construction in particular is already suffering from the rapid rise in interest rates, which endangers many projects. So far, the construction industry was still equipped with many orders from the previous year. But little is coming, so it is foreseeable that the construction boom of recent years will now be followed by a downturn. This factor alone could be enough to push the gross domestic product into the red this year.
Essentially, it is now important for the federal government to take uncertainties, according to the economist and business wise, Veronika Grimm, in the BR24 interview. The right framework conditions for investments must be created – especially in the energy sector and other future-oriented industries.
A possible slump in construction could severely jeopardize growth in 2023
On the plus side, the wage increases that are higher than in normal times due to inflation. Together with energy premiums and other special measures, this has strengthened the purchasing power of employees and ensured that consumption is unlikely to collapse so sharply. The export economy has also remained on course for growth so far, despite all the foreign policy difficulties, especially between the USA and China.
Actually, after the difficult Corona years, there is still a lot of pent-up demand for investments and postponed projects throughout the economy. When it comes to travel, at least, people now seem to be catching up on what they’ve been missing out on lately.
The stock market is no longer in a record mood either
However, the scope for large expenditures remains limited due to persistent inflation. And the European Central Bank confirmed this week, on the occasion of its 25th anniversary, that it intends to raise interest rates further because of the high prices. The US Federal Reserve made a similar statement earlier.
On the other hand, the stock market had speculated that interest rate hikes would end soon. The example shows that times are getting harder for investors too.