This morning has brought us back to some extent to a piece of economic orthodoxy. Putting it another way something which was always really rather likely is being presented as a shock of sorts. So let me hand you over to the German statistics office.
“After GDP had already slipped into the red at the end of 2022, the German economy recorded two negative quarters in a row,” says Ruth Brand, President of the Federal Statistical Office.
So Germany is in a recession or as it is now more commonly called a technical recession. This morning’s revised release tells us this.
WIESBADEN – The gross domestic product (GDP) fell by 0.3% in the 1st quarter of 2023 compared to the 4th quarter of 2022 – adjusted for price, seasonal and calendar effects.
So the economy has gone -0.5% and now -0.3% showing that it was a grim winter for the German economy. Actually it has also been a rather grim spell for the statistics office itself as this is a large change.
As reported by the Federal Statistical Office (Destatis), economic output at the beginning of the year was 0.3 percentage points weaker than reported in the rapid release of April 28, 2023 .
Those of a less generous nature may wonder if it came under pressure not to produce a decline in its initial release. After all a bad winter for Germany was hardly a surprise after the energy price shock.
Consumption
Here we see that the statistics office has now caught up with the analysis on here. For newer readers the high energy prices and falls in real wages ( of the order of 5% per annum) would you think hit consumption and probably in a hard way. Even the ( likely understated) official series told us this.
As reported by the Federal Statistical Office (Destatis), real wages fell by an average of 4.0% compared to 2021, after having already declined in the last two years of the crisis.
Thus something like this below was always likely.
The persistently high price increases also weighed on the German economy at the beginning of the year. This was particularly noticeable in private consumer spending, which fell by 1.2% in the first quarter of 2023 after adjustment for price, seasonal and calendar effects.
In terms of the detail the worst affected areas are below.
The purchasing reluctance of private households was evident in various areas: Private households spent less on food and beverages, clothing, shoes and furniture than in the previous quarter (price, seasonally and calendar-adjusted). In addition, fewer new cars were bought by private households, which is likely to be due, among other things, to the elimination of premiums for plug-in hybrids and the reduction in premiums for electric vehicles at the beginning of 2023.
At this point we have over explained the fall which was reduced by a couple of traditional German strengths. First investment.
Investments in equipment – i.e. primarily in machinery, equipment and vehicles – also increased significantly (+3.2%) at the beginning of the year.
Also trade or net exports.
Positive impetus also came from foreign trade: Compared to the fourth quarter of 2022, a total of 0.4% more goods and services were exported after adjustment for price, seasonality and calendar effects, with trade in plastics and metal products being particularly robust.
However there is a type of warning even in the trade figures.
In contrast, imports fell by a total of 0.9%, which was partly due to weaker imports of mineral fuels such as crude oil and mineral oil products, as well as chemical products.
Does that imply more consumption weakness is on the way?
Also we need to note that the German economy is now smaller than a year ago.
-0.5% on the same quarter of the previous year (price and calendar adjusted)
As this also happened the productivity numbers saw a sharp decline too.
In the first quarter of 2023, the economic output was generated by around 45.6 million employees with a place of work in Germany. That was 446,000 people or 1.0% more than a year earlier.
Looking Ahead
The PMI release from earlier this week was very positive for Germany.
Latest flash #PMI data for #Germany pointed to the strongest uplift in activity in 13 months (PMI at 54.3; Apr: 54.2).
The problem was that they told us there was growth for 4 months which includes 2 where we now know there wasn’t any. This is also a problem for the Bundesbank which told us this in its April monthly report.
The German economy beat last month’s expectations in the first quarter of 2023, probably increasing its activity again somewhat.
If we look further we were told this earlier this month.
The ZEW Indicator of Economic Sentiment for Germany recorded a significant decline in the current May 2023 survey. At minus 10.7 points, it is 14.8 points below the previous month’s value. This means that for the first time since December 2022, the ZEW Indicator is back in negative territory. The assessment of the economic situation in Germany also decreased. The corresponding indicator lost 2.3 points and now stands at a new value of minus 34.8 points.
Yesterday we were told this by IFO
Sentiment in the German economy has suffered a setback. The ifo Business Climate Index fell to 91.7 points in May, after 93.4 points (seasonally adjusted) in April. This marks the first decline after six increases in a row. Driving this development are the significantly more pessimistic expectations. Managers are somewhat less satisfied with their current situation. German companies are skeptical about the upcoming summer.
So we have something of a consensus that manufacturing is about to turn lower, But some debate over services as the bullishness of the PMY survey collides with this from the IFO one.
The index in the service sector remained virtually unchanged. Companies were more satisfied with their current business situation, but were more pessimistic regarding the coming months.
Comment
My argument that it would be a particularly rough economic winter for Germany based on its energy and real wages situation has been backed up by the official data. The energy situation has improved for now which is welcome. But there is another factor in play and who thought this would be ECB policy with Germany in a recession?
We covered a lot of ground in the last nine months [prior to today’s meeting], moving from minus 50 basis points to plus 300 basis points. We are continuing this hiking process. As I said, this is a journey. We have not arrived yet. ( ECB President Lagarde )
So a 3.5% rise with promises of more to come. The ECB itself thinks that the past rises will impact as 2023 progresses and moves into 2024.
At the same time, our past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain. ( ECB)
Germany is in recession and the ECB has found itself being forced ( high inflation) to stamp on the economic brake.
Meanwhile….
Germany now officially in recession, with real GDP below pre-pandemic level while Italy and Portugal are 2.4% and 4.3% above, respectively. ( @fwred )
Tina Turner
Let me just say RIP and thank you for the music.