Recession Strikes Germany Due to Reduced Demand Caused by Inflation and Higher Interest Rates

Germany has fallen into a recession as official figures published on Thursday showed a contraction of the economy by 0.3% during the first three months of 2023. This downgraded an initial estimate of zero percent, following a 0.5% contraction in the last quarter of 2022, resulting in Germany’s second consecutive quarter of negative growth, meeting the threshold for a “technical recession”.The slump occurred due to inflation and higher interest rates curbing demand in Europe’s largest economy. The government, however, remains optimistic for significant growth improvement over the course of the year. Household and business spending declined due to the surge in energy prices that arose after the Russian invasion of Ukraine, leaving Germany exposed due to its heavy reliance on Russian energy imports. The persistence of high price increases and the significant impact it had on consumer spending has pushed the country into danger. Additionally, various factors, including the continuation of the war in Ukraine, the expected slowdown in the US economy, and the impacts of the monetary policy tightening, could further drag the economy down. Nevertheless, there is hope for a rebound in consumer spending, which could fuel an economic recovery later in the year. Germany’s previous recession was due to the coronavirus pandemic.