German economy entered recession as inflation hurts consumers

Germany has slipped into recession as last year’s energy price shock takes its toll on consumer spending. Output in Europe’s largest economy dropped 0.3% in the first three months of the year, following a 0.5% contraction at the end of 2022, official data showed Thursday. The Federal Statistical Office downgraded its previous estimate of zero growth in gross domestic product (GDP) compared with the previous quarter. A recession is defined as two consecutive quarters of declining output. “The persistence of high price increases continued to be a burden on the German economy at the start of the year,” the office said. “This was particularly reflected in household final consumption expenditure, which was down 1.2% in the first quarter of 2023.”

The euro dropped on Thursday as Europe's largest economy Germany was confirmed to be in a recession, while the dollar hit a two-month peak, benefitting from safe-haven demand as worries mounted about a US default. The latest concern was raised by ratings agency Fitch, who put the United States' "AAA" debt ratings on negative watch, a precursor to a possible downgrade should lawmakers fail to agree to raise the debt limit.The German economy is expected to shrink by 0.1% in 2023, according to the latest forecast from the International Monetary Fund.

A report by five German economic institutes in April 2022 said the country’s GDP would contract by 2.2% in 2023 if its supply of Russian natural gas was suddenly shut off. China is Germany’s most important trading partner, just ahead of the United States. Exports of German cars to China fell 24% in the first quarter. In August, Russia closed its Nord Stream 1 pipeline, Germany’s main source of Russian gas, for maintenance and then extended the closure indefinitely. The annual rate of inflation in Germany slowed again in April — the first month of the second quarter — although, at 7.2%, it remained high. A country is deemed to be in recession when its economy shrinks for two consecutive three-month periods, or quarters. Europe's largest and World's economy  Germany was also badly affected when Russian gas supplies dried up after the invasion of Ukraine,