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The key manufacturing sector is also proving to be a problem: A deepening downturn is casting doubt on the rebound many anticipate for the coming quarters. Image Credit: AP

Berlin: Germany suffered its first recession since the start of pandemic, extinguishing hopes that Europe’s top economy could escape such a fate amid the war in Ukraine.

First-quarter output shrank 0.3 per cent from the previous three months following a 0.5 per cent drop between October and December, the statistics office said Thursday. Its initial estimate, last month, was for stagnation.

“The reluctance of households to buy was apparent in a variety of areas,” the office said in a statement. “Households spent less on food and beverages, clothing and footwear, and on furnishings.” They also purchased fewer electric cars as incentives were reduced.

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Elsewhere, there was a plunge in government expenditure, while investment was up -aided by construction in unseasonably warm weather.

The result is a setback for Germany, which despite escaping the bleakest scenarios feared in the aftermath of Russia’s attack has nevertheless succumbed to a recession that Chancellor Olaf Scholz appeared to rule out in January.

Companies like Zalando SE reflect the weak consumer sentiment. The fashion retailer saw inventory levels driven higher in the first quarter by falling demand.

The key manufacturing sector is also proving to be a problem: A deepening downturn is casting doubt on the rebound many anticipate for the coming quarters.

Indeed, industrial weakness is taking a toll on the business outlook. A gauge of expectations by the Ifo institute fell for the first month in eight in May, while a survey by lobby group DIHK pointed to zero GDP growth for 2023.

Murky outlook

A Bundesbank report this week offered some optimism - suggesting the economy may grow “slightly” this quarter as large order backlogs, an easing of supply bottlenecks and lower energy costs support manufacturers.

But goods demand is cratering as consumers faced with elevated inflation prefer to splurge on leisure and travel. That’s making economic growth increasingly uneven - a trend some analysts say isn’t sustainable.

“The optimism at the start of the year seems to have given way to more of a sense of reality,” ING economist Carsten Brzeski said in a report to clients. “A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favor of weak economic activity.”

For economists at Commerzbank, a second-half recession now looks likelier than the rebound most of their colleagues continue to forecast.

Inflation isn’t helping. It still exceeds 7 per cent and isn’t expected to retreat quickly as rising wages feed strong underlying pressures, according to the Bundesbank.

The European Central Bank’s efforts to bring price gains back to its 2 per cent target risk further damping demand. Bank loans are already getting pricier and interest-rate hikes aren’t yet complete, risking a stronger drag on growth.