German economy contracts in 3rd quarter

Germany's economy contracted slightly in the third quarter of 2023, official data from the Federal Statistical Office (Destatis) showed Friday.

Gross domestic product (GDP) fell by 0.1% compared with the 2nd quarter.

"After the weak development in the first half of the year, the German economy started the second half of 2023 with a slight contraction," said Ruth Brand, President of the Federal Statistical Office.

In the first two quarters, economic output effectively stagnated, with the 1st quarter showing zero growth and the 2nd quarter showing 0.1% growth.

Inflation hits two-year low

Despite inflation falling sharply in recent months to 3.8% in October from 6.1% in August and over 10% last year, price rises continued to be a burden for German consumers over the summer, who appear to be limiting their spending.

Consumer spending, which makes up around two-thirds of German GDP, fell 0.3% in the third quarter.

German exports fell by 0.8%, while imports dropped even more sharply by 1.3%

The data means Germany now has one foot in recession. If output shrinks in the fourth quarter too, the economy will officially have entered a technical recession.

Germany's central bank, the Bundesbank, expects a continued dip in growth in the fourth quarter but said in a recent statement that "slight growth" will return in the first quarter of 2024.

Backing up that forecast, the Munich-based IfO Institute said Friday its business climate index had increased by 0.4 points to 87.3. points, compared to the previous month.

The index monitors the mood in German boardrooms through a monthly survey of around 9,000 executives. It has been climbing for three months in a row.

Court ruling threatens growth

Economists, meanwhile, are more worried about a Constitutional Court ruling last week that the German government's plan to divert 60 billion in unused debt from the pandemic era to its climate and transformation fund was unconstitutional.

"Should the federal government decide to actually make [public sector] cuts to replace the billions now missing due to the Constitutional Court ruling ... to offset tax increases, the risk increases that the German economy will shrink again in 2024," said Sebastian Dullien, director of the Dusseldorf-based IMK Institute.

Dullien warned of a burden to consumption and business investments and that unemployment would likely rise noticeably.

Others see the GDP reading as a further sign of a more structural sluggishness in the German economy.

"Today's data will do little to end the debate about whether or not the German economy is the sick man of Europe again," said Carsten Brzeski, chief economist at ING Bank. "In any case, the German economy has become one of the growth losers in the eurozone."

mm/ab (dpa, Reuters)