Germany fell into technical recession in Q4 and Q1, according to revised data released in the past week. Granted, the decline in GDP in the first quarter was distorted by a one-off crash in government spending, as Covid expenditures on testing and vaccination rolled off, but the other details were soft, and the outlook is darkening. Consumers’ spending fell for a second straight quarter as soaring prices depressed real incomes. We think spending is now rebounding as inflation eases, but this boost to growth will be partially offset by falling business investment. Capex performed strongly at the start of the year, but leading indicators suggest that this upturn is now petering out. Credit standards have tightened significantly, and demand for new loans has fallen. In addition, survey data suggest that the inventory cycle is turning. With the upturn in net trade likely fading too—after very strong gains in Q4 and Q4—we think economic growth in Germany will remain subdued in Q2 and Q3. We see GDP growth close to zero in both quarters, with risks tilted towards a further decline,
extending the recession.
Claus Vistesen, Chief Eurozone Economist
