Here’s how Germany, Europe’s largest economy, was first to fall into recession

Lorenzo Bagnato

25 May 2023 - 16:51

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As of May, Germany officially entered a period of recession, worsened by increasing inflation.

Here's how Germany, Europe's largest economy, was first to fall into recession

What has been predicted for so many months finally happened. Germany, Europe’s strongest economy and the fourth largest in the world, officially entered a technical recession. Germany and the United Kingdom have been the two worst-performing G7 nations for months now, it was just a matter of which one was going to recede first.

The data released on Thursday showed a 0.3% GDP contraction in Germany, which followed another 0.5% drop in the previous quarter. At the same time, inflation was still extremely high at 7.2% in April.

What awaits Germany, and likely the whole of Europe, is a long period of stagflation: a term indicating both high inflation and a recession occurring. According to Claus Vistesen, chief economist at Pantheon Macroeconomics, Germany’s GDP will slightly rise in the following months, but there won’t be any real growth either.

Recession will spill to other European countries also because of the ECB’s tight monetary policy. The European Central Bank has expressed many times its intention of continuing with interest rate hikes, likely well into next autumn.

So far, the ECB has raised interest rates by 3.75%, but inflation in Europe is not coming down to the expected level. With higher interest rates, more and more European economies will fall into an inevitable recession.

Why Germany first?

The situation is clearly worsening for every major Western economy. So why did Germany fall into recession first, given its status as an economic powerhouse?

Covid-19 already put a severe toll on Germany, which will not be reversed by the EU’s recovery plan. The plan, called “Next Generation EU” allocates funds according to the level of damage caused by the Covid pandemic. While Germany did suffer a recession because of the virus, it wasn’t as severe as other countries like Italy. Therefore, Germany is set to receive only 78 out of the €750 billion of the fund.

On the other hand, the energy crisis caused by the Russian invasion of Ukraine hit Germany the hardest among the major EU countries. Germany imported over half of its gas from Russia and was planning to shut off its remaining nuclear power plants.

The war left Germany with a dangerous energy shortage, forcing the government to incur massive public debt (and reopen coal power plants).

Therefore, despite being Europe’s biggest economy, Germany is now the first Western country to fall into a recession. But the economy’s grim reaper just started his dreadful duty. And nobody knows who will be next.

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