EcoTV Week

Can Germany escape the recession?


Since the beginning of 2022, German growth has never ceased to surprise by its resistance, driven by the end of post-Covid catch-up effects. However, the deterioration of the economic situation is now such that all the engines of growth are weakening and fading one by one. In terms of consumption, investment and foreign trade, all followed a downward trend in the fourth quarter. It therefore seems unlikely that German GDP will continue to grow in the last three months of the year. Despite this, the recession that awaits Germany in 2023 is expected to be moderate and time-limited due to massive public support.


Can Germany escape the recession?

Since the beginning of the year, the German economy has held up well and recorded a 0.3% increase in GDP in the third quarter despite the multiple shocks that hit the country. However, while the end of the catching-up effects supported private consumption in the third quarter, all demand sectors are running out of steam and Germany’s entry into recession seems imminent. 

The engines of growth are extinguished one by one

Indeed, the engines of German growth are being extinguished one by one.

Since the end of 2021, foreign trade has contributed negatively to growth. And the deterioration of the trade balance continues as the German trade surplus in September is now only 4 billion euros against 20 billion at the end of 2019.This phenomenon is linked both to constrained industrial production, which has fallen by more than 2% since the beginning of the year, and to declining demand as new orders to industry have fallen by 12% since the beginning of the year.

On the domestic demand side, household consumption is constrained by double-digit inflation, which erodes purchasing power. This is particularly visible on the consumption of goods with retail sales that have fallen by 5% since the beginning of the year. Regarding investment, companies are reluctant to carry out their investment project because of the uncertainty about future activity. This prudence has led to investment still moving below its pre-crisis level and it is particularly investments in machine tools and heavy equipment that suffer from the sluggish business climate.

In the absence of growth drivers, it seems unlikely that Germany will continue to grow in the fourth quarter.

Recession should be limited thanks to public support

However, the decline in activity should be limited thanks to the determination of the public authorities not to abandon their economy, especially their industrial sector.

The coming into force of the Administered Electricity and Gas Pricing in January 2023 will significantly help households and firms. The German government is going to subsidize 80% of the usual household energy consumption and 70% of the corporate energy consumption. This will significantly ease the production costs of industrial companies and preserve their export competitiveness. In addition, support to households will preserve purchasing power in 2023 in a context where nominal wages across the Rhine are growing much slower than consumer prices.

Finally, public support for activity should also translate into dynamic public consumption as observed since the post-Covid rebound. Indeed, government consumption expenditure has increased by more than 12% since the end of 2019. Without the sharp increase in public consumption, German GDP would only be at its mid-2017 level.

Moderate and time-limited contraction of activity is the most credible scenario

In conclusion, Germany should not be able to escape an economic recession, but at this stage a moderate and time-limited contraction is

the most credible scenario.