Germany’s Economic Woes: Impact of Russia-Ukraine Conflict

The German economy formally entered a recession in the first quarter of this year as a result of household spending limitations.


According to information made public by the German statistics agency on Thursday, the GDP for the first three months of the year was revised downward from zero to -0.3%.

After Germany’s 0.5% decline in the fourth quarter of 2022, this occurs. Technically, a recession is two consecutive quarters of negative growth.


Particularly since Russia’s invasion of Ukraine and European leaders’ subsequent decision to sever ties with Moscow, Europe’s best-performing economy has been under considerable pressure.

The statistics office reports that families in Germany spent much less in the first quarter, with final consumption expenditure declining 1.2% during that time due to consumers’ cautious spending on goods that include apparel, furniture, cars, and other items.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, stated in a client note that “after all, Germany did fall into recession at the end of last year as the shock in energy prices weighed on consumer spending.”

In the future quarters, the German GDP is not anticipated to decline significantly more, he added, “but we do not see a strong recovery either.”

Rising interest rates and inflation in the area are the backdrop for the most recent economic development. The European Central Bank is anticipated to increase interest rates once more at its meeting on June 15. Since July, the central bank has raised interest rates by 375 basis points.

German Central Bank Governor Joachim Nagel stated earlier this week that the ECB is planning “several” more rate hikes. He is one of the central bank’s most hawkish members.

Germany’s DAX finished 1.92% lower on Wednesday, as the global market mood remained weak amid US debt ceiling discussions, stubborn inflation data, and gloomy forecasts.

The US debt ceiling discussions are still stuck as the June 1 deadline approaches, and markets have lost their euphoria from last week. Democratic President Joe Biden and Republican Kevin McCarthy began discussions on Wednesday to reach an agreement on parameters that would raise the world’s largest economy’s debt ceiling from $31.4 billion to prevent a default.

The Ifo Institute’s business environment index fell for the first time in six months in May.

According to Ifo, local businesses are apprehensive about the approaching summer season, as the Ifo Business Climate Index declined to 91.7 points in May from 93.4 points (seasonally adjusted) in April, indicating a deterioration in German economic mood.


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