Germany's economy shrinks in Q3, stirs recession concerns
What's the story
Germany's economy experienced a slight dip of 0.1% in the third quarter of 2023, according to the country's Federal Statistical Office (Destatis). This comes after two quarters of little to no growth, with zero growth in Q1 and a mere 0.1% growth in Q2. Ruth Brand, President of the Federal Statistical Office, said, "After the weak development in the first half of the year, the German economy started the second half of 2023 with a slight contraction."
Details
Consumer spending and exports decline
In Q3, consumer spending, which accounts for about two-thirds of Germany's GDP, dropped by 0.3%. Moreover, German exports fell by 0.8%, while imports saw an even steeper decline of 1.3%. Although inflation decreased to 3.8% in October from 6.1% in August and over 10% last year, rising prices continued to weigh on German consumers during the summer, leading them to cut back on spending.
What Next?
Technical recession looms as Bundesbank predicts further dip
Should Germany experience a further decline in output during Q4, it will formally enter what is known as a technical recession, defined as two consecutive quarters of negative GDP growth. The Bundesbank predicts a continued drop in growth for Q4 but mentioned in a recent statement that "slight growth" will return in Q1 2024. However, economists are worried about a Constitutional Court ruling that deemed transferring €60 billion of unused pandemic-era debt to the climate and transformation fund unconstitutional.
Insights
Will Germany's economy shrink further in 2024?
Sebastian Dullien, Director of the Dusseldorf-based IMK Institute, cautioned that if the federal government opts for public sector cuts to replace the missing billions due to the Constitutional Court ruling, "the risk increases that the German economy will shrink again in 2024." Dullien explained that this would negatively impact consumption and business investments and likely result in a significant increase in unemployment.