Recession avoided in Germany?

6th February 2023
-IAM, News

Hugues Chevalier, Economist

Last week, Economy Minister Robert Habeck announced a better than expected growth forecast for 2023 at 0.2%, compared to -0.4% three months ago. Germany, and consequently the whole Eurozone, should therefore escape a long recession this year. If a contraction in GDP was to occur, it would be short. This improvement is due to several factors. First, energy prices have turned around and returned to their 2021 level thanks to an exceptionally mild winter. Second, strong exports have supported production. Gas (and oil) prices have indeed fallen, while the halt in deliveries from Russia (more than 40% of German consumption) suggested a worst case scenario for this winter. The fall in energy prices since their late summer peak has obviously led to a fall in inflation (6% expected in 2023, compared with 7.9% in 2022). The fall in consumer prices has led consumers not to reduce their spending and to use the savings accumulated over the last two years during the Covid crisis. On the other hand, in industry, the end of bottlenecks and problems with the supply of raw materials and the fall in shipping prices have enabled German industry to maintain its production levels, whereas a contraction was expected. However, the economic situation is still subject to several major pitfalls, namely weak Chinese demand and the geopolitical risks associated with the war in Ukraine. But the country (and the rest of Europe) seems to have emerged from crisis management for the time being and can look forward to the next few months with more serenity.