Germany May Avoid a Winter Recession With Early-Year Growth

Kamil Kowalcze and Alexander Weber
·2 min read
1

(Bloomberg) -- Germany may have just dodged a recession by recording a small increase in output at the start of the year, according to the country’s top forecasters.

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Europe’s biggest economy probably grew by 0.1% in the first quarter after shrinking by 0.4% in the previous three months, according to estimates by five institutes that advise the government.

“The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared in the fall,” Timo Wollmershaeuser, head of forecasts at the Munich-based Ifo institute, said Wednesday in a statement. “The main reason for this is a smaller loss of purchasing power as a result of a significant drop in energy prices.”

Having flirted for months with a downturn that looked certain after Russia attacked Ukraine just over a year ago, the news underscores how successfully the government in Berlin has weathered the energy crisis that followed President Vladimir Putin’s attack.

Chancellor Olaf Scholz’s administration has sourced natural gas from elsewhere, rapidly cutting dependence on Russia. It’s also assembled three aid packages, worth almost €100 billion ($110 billion), to offset the impact of soaring heating bills on households and companies.

As those measures cushion the blow of higher fuel prices and as rising wages support demand, the institutes only expect inflation to retreat slowly, however.

Looking ahead, optimism is building. The institutes predict gross domestic product will rise by 0.3% across for the whole of 2023, followed by a 1.5% advance in 2024.

Recent turmoil in the banking sector could weigh on economic growth, however, Wollmershaeuser warned.

“We’ve noticed that lending conditions have tightened,” he told journalists in Berlin. “There’s a risk that more will come our way.”

Despite such concerns, the European Central Bank raised interest rates by half a percentage point last month, with some officials signaling that further tightening will probably follow.

While higher borrowing costs have reached the construction sector “relatively quickly,” there’s been little impact on inflation so far, according to Wollmershaeuser.

“It takes a little time for the impulse to arrive,” he said. “But we see it in surveys that companies don’t want to raise prices as much as they did in the past months. That should lead to a decline in the core rate.”

Data earlier Wednesday brought further signs of green shoots. German factory orders rose for a third month — a promising sign for manufacturers that have been faring less favorably than the services sector of late.

(Updates with comments from press conference starting in eighth paragraph.)

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