Private spending is declining
A lack of consumption is causing the German economy to shrink
November 24, 2023, 8:33 a.m
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Germany is on the way to recession. The Federal Statistical Office confirms that economic output fell in the third quarter – and the Bundesbank also sees a decline in the fourth quarter. After all: the gross domestic product is expected to rise again at the beginning of 2024.
The slump in consumption and the weakening global economy slowed down the German economy in the summer. The gross domestic product (GDP) fell by 0.1 percent in the third quarter compared to the previous quarter, adjusted for price, season and calendar reasons, as the Federal Statistical Office in Wiesbaden announced. The authority thus confirmed an initial estimate.
Inflation, which continues to be comparatively high, is putting a strain on consumers. They can afford less for their money. Many people are limiting their consumer spending. The annual inflation rate was 3.8 percent in October after 4.5 percent in September and 6.1 percent in August. Food prices also rose above average in October.
In addition, the German export industry is feeling the effects of the weakness of the global economy. Exports failed as a growth engine in the summer. A total of 0.8 percent fewer goods and services were exported than in the second quarter of 2023. The headwind also comes from increased interest rates. These are depressing demand for construction services, among other things. According to the information, positive impulses for the economy came from companies’ investments in equipment, for example in vehicles and machines.
According to the Bundesbank’s assessment, it will be difficult for the German economy to emerge from the weak phase that has lasted since the beginning of the Russian war of aggression on Ukraine. Economic output is likely to fall slightly again in the fourth quarter of the current year. Economists and the federal government expect that Europe’s largest economy will continue to shrink in 2023 as a whole before things start to pick up again in 2024.
Government consumption is growing for the first time in over a year
Gross domestic product (GDP) shows how well or poorly a country’s economy is developing. Everything that is produced within a certain period of time is included. In addition, the value of services and the spending of consumers as well as investments by companies – for example in machines – are included. All economic sectors are taken into account. The largest item is private consumption. Another component is the so-called external contribution – the difference between what companies sell abroad (exports) and buy from there (imports).
In the spring, Europe’s largest economy grew by 0.1 percent, after only stagnating in the first three months of the year. The main thing that held back in the summer months were consumers who held on to their money in the face of losses in purchasing power as a result of high inflation: private consumer spending – which accounts for around two thirds of gross domestic product – was therefore 0.3 percent lower than in the previous quarter.
The state’s consumer spending, on the other hand, increased for the first time in more than a year, by 0.2 percent. Investment in equipment such as machinery and vehicles grew by 1.1 percent, while construction investment increased by 0.4 percent. Foreign trade, however, shrank: exports fell by 0.8 percent and imports by as much as 1.3 percent.
This means that Germany now has one foot in the recession. If the economy shrinks for the second time in a row in the current fourth quarter, economists will speak of a “technical recession.” The Bundesbank assumes that this will happen: “In the fourth quarter of 2023, economic output is likely to decline slightly again,” says the current monthly report. In their annual report for the federal government, the economists assume that there will also be a minus for the year as a whole – of 0.4 percent.