How did Germany become a "poor student"?, The "locomotive" of the European economy needs to shut down. EU | Germany | Economy

Germany, known as the "locomotive" of the European economy, has recently encountered a "roadblock" in its economic growth.

According to recent official German data, Germany's GDP has experienced two consecutive quarters of negative growth compared to the previous quarter. In the eyes of the outside world, this has shown preliminary signs of economic recession.

As the largest economy in the Eurozone, Germany's economic contribution and radiation effects to the region are self-evident. As the saying goes, "one engine drives the whole body." The current sluggish economic growth of the "locomotive" has also raised concerns about the economic prospects of the entire Eurozone from the outside world.

Decline: Germany Becomes a "Underclass Student" in Europe?

The recent data released by the Federal Bureau of Statistics of Germany shows that its economy has had a "poor start" this year, with GDP not continuing the trend of 0.8% year-on-year growth in the fourth quarter of last year, and shrinking by 0.5% year-on-year in the first quarter of this year.

From a month on month perspective, the economic growth situation is also not very optimistic.

After adjusting for prices, seasons, and working days, Germany's GDP declined by 0.3% month on month in the first quarter of this year, marking the second consecutive quarter on quarter decline. Previously, the adjusted final value of Germany's GDP growth rate in the fourth quarter of 2022 was a 0.5% month on month decline. In the view of many economists, two consecutive quarters of negative GDP growth indicate that the economy is facing the risk of recession.

Horizontally, Germany's economic performance is also inferior to other major European economies. Data shows that in the first quarter of this year, Germany's economic growth, both year-on-year and month on month, was lower than the overall level of the European Union. Compared to Germany's two "negative growth" economic data, France, Spain, and Italy, among the major economies of the European Union, all recorded positive growth on a month on month and year-on-year basis.

As the largest economy in the eurozone and also the largest trading partner of over half of the EU countries, Germany's poor economic performance inevitably casts a shadow on the growth prospects of the eurozone. As stated by the political news website Politico Europe, "If the largest member state falls into trouble, it may drag all member states down.".

Crux: sustained high prices

"The sustained high fever inflation has led to a rise in prices, which is currently the main obstacle facing Germany's economic growth." Ding Chun, director of the European Studies Center at Fudan University and president of the Shanghai European Society, said in an interview with China News Agency's Guoshi Express that rising prices have suppressed the purchasing power and desire of the German people, leading to a downturn in consumption.

This viewpoint was confirmed in a press release released by the German Federal Bureau of Statistics. The press release pointed out that the sustained high prices continue to be a burden on the German economy at the beginning of this year, especially reflected in the data of a 1.2% month on month decrease in household consumption expenditure. The sluggish consumption is reflected in various fields, with residents experiencing a decline in consumption expenditures on food and beverages, clothing and footwear, and furniture. Meanwhile, government consumption expenditure also decreased by 4.9% month on month.

"Under enormous inflationary pressure, German consumers have been in a slump, dragging down the entire economy," said Andreas Schoeller, an analyst at Deutsche Bank.

Why is there a widespread rise in prices in Germany? This will take time back to the outbreak of the Ukrainian crisis last year. At that time, the German economy had not yet recovered from the COVID-19 pandemic. The "power cut" of energy caused by geopolitical conflicts made the German economy, which was heavily dependent on Russian natural gas, worse.

From an economic and energy structure perspective, compared to the UK and other EU countries, Germany has a higher degree of dependence on external natural gas. Ding Chun pointed out that as the center of the European industrial chain and a manufacturing powerhouse, Germany has a large number of energy intensive industries. The energy supply crisis triggered by the Ukraine crisis naturally has a more obvious and severe impact on the German economy.

Outlook: Shadows enveloping

After a poor start to the economy in the first quarter, the outlook for the next step of the German economy remains uncertain.

On the one hand, Europe is facing an increasing risk of stagflation.

Earlier this month, European Central Bank President Lagarde stated that the current inflation level in the eurozone remains high and may continue for a long time. Lagarde also stated that the European Central Bank's interest rate hike cycle will continue "until there is enough confidence to keep inflation rates within the target.". A recent monetary policy meeting minutes of the European Central Bank also showed that most ECB members support further interest rate hikes to control inflation levels.

According to a survey by the IFO Research Institute, an economic think tank in Munich, Germany, domestic prices will continue to rise in the coming months, with prices expected to rise again in some areas of people's livelihoods, with food and beverages being the most significant.

"In the medium term, inflation rates are expected to remain high, and interest rates may continue to suppress future investments, especially in the construction sector." Christoph Schonke, an economic analyst at the German Central Cooperation Bank, pointed out that due to the overall sluggish global economic growth, it is almost impossible for the German economy to recover in the short term.

On the other hand, external financial risks are also constantly gathering.

Recently, the Financial Stability Assessment report released by the European Central Bank believes that unclear growth prospects, sustained high inflation, and tightening financing conditions will continue to affect the balance sheets of businesses, households, and governments. Some economists believe that in the context of accumulating financial risks, the European Central Bank's insistence on raising interest rates to curb inflation undoubtedly increases the uncertainty of the financial and economic prospects of the eurozone.

According to economists at Deutsche Bank, Germany's gross domestic product is expected to decline by 0.3% in 2023, following previous predictions of economic stagnation. Although the situation is not optimistic, it does not necessarily mean that the German economy will fall into a "recession".

Ding Chun admitted that it is still too early to make a definitive conclusion about whether the German economy has fallen into recession. He stated that the current German economy is still far from a "substantial recession". At the same time, as the core of the European industrial chain and a major economic power, Germany itself attaches great importance to the development of the real economy, and the possibility of falling into a complete substantial recession is not high.

Looking ahead to the later stage, Ding Chun believes that as a manufacturing oriented exporting country, Germany's economy is largely closely related to the external situation. The overall environment and geopolitical situation of world economic recovery will have a significant impact on Germany's future economic situation.