The German economy went into recession in the first quarter

Why it matters: Exports, a major driver of the economy, are down.

Germany is Europe’s largest economy and its health directly affects the health of the 20-member eurozone and the enlarged European Union, the world’s third largest economy, after the United States and China, in terms of production and purchasing power, according to the World Bank.

Early estimates predicted Germany’s economy would remain flat in the first quarter, but Thursday’s update fully reflected additional data, including a 3.4% drop in industrial production in March from the previous month, due decline in exports and the automotive industry. .

Germany’s economic growth is heavily dependent on exports, especially to China, where Volkswagen has been the dominant automaker for years. But a recent surge in the popularity of Chinese-made electric vehicles among customers in Asia has led Volkswagen to report a 15% drop in sales in China in the first three months of the year.

Overall, exports in March fell 5.2% from the previous month, according to government statistics.

German industrial companies were forced to cut production late last year as energy prices soared to record highs, pushed up by Germany’s need to buy more liquefied natural gas, or LNG, which is more expensive than Russian gas delivered by pipeline.

Context: Inflation and high interest rates are not helping.

Inflation remains high in Germany, at 7.6% in April, and the European Central Bank has signaled it may continue to raise interest rates to help bring the rate of price increases closer to its target of 2 %.

At the same time, unions fought against employers for higher wages to keep up with rising prices. Agreements reached in key sectors, including industrial and service workers, helped boost wages by 6.3% in the first three months of 2023.

Still, economists have pointed out how badly those with the lowest incomes in Germany have been hit by the price spiral.

“In many cases, people on low wages and incomes will need at least another five years before the purchasing power of their wages, and therefore their standard of living, returns to pre-crisis levels” , said Marcel Fratzscher, president of the German Institute for Economic Research.

And then: No strong recovery in sight.

The European Commission predicts that Germany will be the weakest member of the bloc in terms of economic growth this year, managing an increase of just 0.2%.

Some economists agree.

“Looking ahead, we doubt gross domestic product will continue to decline in the coming quarters, but we don’t see a strong recovery either,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.