Why Germany could narrowly avoid a recession in 2023

AFP - [email protected] • 26 Apr, 2023 Updated Wed 26 Apr 2023 16:52 CEST
Why Germany could narrowly avoid a recession in 2023
A woman takes several euro notes out of her wallet. Photo: picture alliance/dpa | Jonas Walzberg

According to economic forecasts released on Wednesday, Germany has swerved a second quarter of economic downturn as the mood among consumers also brightens up.


The German government lifted its growth forecast for 2023 as rebounding industrial production and slowing inflation helped Europe's top economy weather an energy crisis.

The manufacturing powerhouse is forecast to grow 0.4 percent in 2023, the economy ministry said in its latest projections.

The prediction highlighted a steady improvement in Germany's fortunes since Russia's invasion of Ukraine last year triggered the energy crisis and sparked fears of recession.

The government's last forecast in January was for 0.2 percent expansion, and back in October it had predicted a contraction of 0.4 percent in 2023. Economy Minister Robert Habeck said the improved forecast was "truly remarkable", given the difficult backdrop.

"The German economy has proven to be adaptable and resilient," he told a press conference, adding that a "gradual recovery" was under way.

READ ALSO: Inflation in Germany eases due to lower energy prices

Germany was particularly hard hit by Moscow's invasion of Ukraine and its subsequent reduction of gas deliveries, as the country's export-oriented economy had come to rely heavily on cheap Russian energy.

But Berlin introduced massive relief measures to cushion consumers and businesses, and rushed to diversify its energy supplies. Relatively mild winter weather also meant that gas storage was not depleted as quickly as some had feared.

Habeck praised the "enormous savings efforts by German consumers and German industry" that helped the country to get through the winter without energy shortages.

But he also warned that such efforts must continue: "It was just a few weeks ago when we did not know how we would get through the winter. Our memories should not be short."


China reopening boost 

Gas prices have fallen heavily in recent months, helping to bring down inflation from a decades-high peak of 8.8 percent in October. It stood at 7.4 percent in March.

In addition, lower energy prices and the reopening of China's economy after long Covid shutdowns have boosted Germany's vast industrial sector in recent months.

The economy ministry noted that indicators such as industrial production and business climate surveys indicated improving economic prospects later in the year.

The ministry forecast the recovery would gather pace next year, with the economy to grow 1.6 percent.

It predicted inflation would come in at 5.9 percent this year, and 2.7 percent in 2024.

Despite the brightening picture, the German economy still faces many challenges.

A customer buys groceries at the weekly market in Berlin

A customer buys groceries at the weekly market in Berlin Schöneberg. Photo: picture alliance/dpa | Christoph Soeder

In particularly, Habeck lamented the "dramatic" shortage of skilled workers.

According to the federal Institute for Employment Research, just under two million job posts were unfilled at the end of 2022 in Germany.

The economy ministry also said that high inflation was still set to weigh on the economy throughout the year, with consumers' purchasing power hit.

The impact of slowing inflation would only be felt later in the year, it said.

On Friday, preliminary first quarter growth data will be released, which is expected to show the economy eked out weak growth and dodged a recession.

The economy suffered a shock 0.4 percent contraction in the final three months of last year as the fallout from the Ukraine war hit home.

More optimism

Survey results released on Wednesday also show that German consumers are starting to take the difficult economic conditions in their stride.

German consumer morale rose sharply heading into May, a survey showed on Wednesday, as concerns eased about the impact of high inflation on Europe's top economy.

Pollster GfK said its forward-looking survey of around 2,000 people climbed 3.6 points to reach minus 25.7 points, the seventh consecutive monthly increase.


Improving sentiment was driven by lower energy prices, government relief measures aimed at tackling high costs, and recent wage deals struck between various industries and workers, GfK said.

"More and more households are assuming that feared losses in purchasing power due to inflation will turn out to be much milder," the pollster said.

READ ALSO: Why the German economy is expected to grow in 2023

The survey found respondents were more optimistic about their income prospects and the broader economy.

But GfK consumer expert Rolf Buerkl cautioned that the gauge was "still below the pre-pandemic level seen about three years ago".


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