Germany suffers worst economic contraction in four decades

The global recession is hammering exporting giant Germany harder than any time since records began 40 years ago, with data on Friday showing a first-quarter output slump of 3.8 percent.

Germany suffers worst economic contraction in four decades
Photo: DPA

The quarter-on-quarter contraction in Europe’s biggest economy, accounting for a third of eurozone output, was even steeper than the 2.2-percent fall recorded in the final three months of 2008, the statistics office said.

Germany entered recession, defined as two quarters running of falling gross domestic output (GDP), two quarters earlier than France, in the third quarter of 2008. France narrowly avoided the same fate then with growth of 0.1 percent.

The worse-than-expected German result – economists had forecast a drop of 3.2 percent – was the worst since records began in 1970 and sent the euro lower against other currencies.

Europe’s leading stock markets shrugged off the news, closing mixed or slightly firmer on the view that the data, however bad, might prove to be the bottom of the downturn. The Frankfurt market closed little overall.

Compared to the first quarter of 2008, the figures looked even worse, with Germany producing 6.7 percent less goods and services, or 6.9 percent when adjusted for calendar effects skewing the figures. The preliminary figures will be finalised on May 26.

UniCredit Economist Alexander Koch said the “ugly” figures mark the low point, with business sentiment in Germany, and in almost all other major economies, bottoming out.

“This very bad news, which was broadly expected, had demonstrated the large dependence of the German economy to foreign trade,” said Natixis economist Costa Brunner. “But the good news is that the worst is behind us.”

Measures worldwide to get banks lending again, rock-bottom interest rates, lower commodity prices and signs that the worst may be over in manufacturing should support Germany from July onwards, Brunner said.

Several pieces of hard data released this month have also given cause for hope in Germany, with both industrial orders and exports in March showing their first increases after dropping for several months straight.

Chancellor Angela Merkel’s government shares this optimism, predicting 0.5 percent growth in 2010, albeit after a slump of six percent this year – the worst slowdown since World War II. But the problems facing the conservative Merkel, who is running for re-election on September 27 heading a fractious coalition with the centre-left, are far from over.

Government estimates on Thursday showed the recession rapidly blowing a massive hole in Germany’s public finances, with tax receipts falling off a cliff while government spending rockets skywards.

Germany’s growing debt mountain is expected to figure highly in campaigning for the elections, as is unemployment, which is expected continue rising well after the hoped-for recovery begins.

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.