Germany narrowly avoided recession in the first quarter, production unexpectedly fell

The first data and estimates of GDP growth for the first quarter of this year are slowly trickling in. Eurostat has so far collected and published data for twelve EU member states, among which, of course, the most interesting is Germany, which seems to have narrowly avoided recession at the beginning of this year.

According to the first estimate, the German economy in the first quarter neither grew nor fell compared to the previous quarter, when it was down by 0.5 percent, thus alleviating fears that Germany would plunge into recession and drag other European countries down with it.

These twelve EU countries, on average, showed GDP growth of 0.3 percent, while the average for eurozone members (data for ten countries) is only 0.1 percent.

Among the countries for which data has been published, nine are in the positive, with Portugal standing out with a growth of 1.6 percent, being the only recorded country whose GDP in the first quarter was greater than one percent. Italy, which had a minus of 0.1 percent in the last quarter of last year, recorded a growth of 0.5 percent in the first quarter. Spain and Latvia also grew by the same amount, while Belgium (0.4 percent), France and Sweden (0.2 percent), and Czech Republic (0.1 percent) showed more modest growth.

The largest recorded decline so far was in Lithuania (three percent), which, according to current data, is the only EU member state that has recorded a decline for two consecutive quarters, which is considered entering a recession. Right behind it is Ireland, whose GDP value lost 2.7 percent, and the third country with a GDP decline (0.3 percent) in the first quarter is Austria.

Croatia is not included in this data. The State Bureau of Statistics announced that it will publish the first estimate of quarterly GDP for the first quarter of this year on May 29. The chief economist of the Croatian Employers’ Association, Hrvoje Stojić, recently estimated that Croatian GDP will grow by less than two percent in the first quarter.

Negative effects of rising interest rates

As HUP states in its analysis this week, after a sharp decline in commodity exports in March of -5.2 percent month-on-month and new orders (-10.7 percent), industrial production in Germany recorded a stronger decline than expected of as much as 3.4 percent month-on-month (consensus: -1.0 percent).

The collapse in production reflects a significant decline in the automotive industry (-6.5 percent), the construction sector (-4.6 percent), and a renewed decline in energy-intensive industries despite further drops in energy prices. This has largely negated gains made in several previous months, so in a subsequent negative revision of GDP movements in the first quarter of 2023, it could still turn out that Germany was in a shallow recession during the winter half of 2022/2023 (the second consecutive quarterly decline in GDP).

In light of the significant decline in all the mentioned indicators in March, it is impossible to shake off the suspicion that special factors such as large-value orders (in the aerospace industry, rail transport, military vehicles, etc.) played an important role in the March decline in activity. Even if, however, we are surprised by a counter-recovery in the April data, it is hard to expect that they will compensate for the losses in March activities.

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photo Destatis

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It can be said that industrial production is increasingly facing the negative effects of the massive increase in interest rates by leading central banks. This has been the case in the construction sector for some time. With a certain time lag, rising interest rates will significantly ‘cool’ domestic demand, so despite the stabilization of factory orders in recent months, their return to the downward trend that began last spring is evident.

Production could indeed be supported by the execution of ‘on-hold’ orders due to recent shortages of key raw materials and industrial supplies. However, a good portion of these orders is being ‘consumed’ quickly, so industrial production cannot avoid a decline in the continuation of the year.

Given the expected decline in German production of 0.5-1 percent in 2023, a blow to the strongly integrated industrialized economies of the CEE region is inevitable. This year, it is realistic to expect a decline in industrial production in the broader CEE region averaging around 2 percent to 3 percent in the Baltic economies.

Due to significantly lower gross added value of industry in Croatia (17.7 percent of GDP) compared to the CEE region average (26.5 percent) and a smaller share of energy-intensive production, Croatia can expect a somewhat smaller decline of around -1 percent.