As the German Statistical Office announced on Monday, in the fourth quarter of 2023 the German economy shrank by 0.3%. The same rate of decrease (-0.3%) is now recorded on an annual basis for 2023. For 2022, despite difficulties due to the pandemic and disruptions in supply chains, the German economy had shown a positive growth index, closing the year at + 1.8%.

Until now we knew that in the third quarter of 2023 the German economy had recorded a slight contraction (-0.1%). Therefore, it should also be declared “officially” in a technical recession, as the growth indicator has turned negative for two consecutive quarters, right? “shrinkage” to “stagnation”. Therefore Germany gets a short extension. But most pundits, even on public television, insist on using the term “recession” to convey the overall picture of 2023, despite the technical clarifications from the National Statistics Service.

By mid-2023, the German economy had completed two consecutive quarters with a negative sign. However, the increase in investment activity and the relatively good performance of the construction sector created hopes for better continuity, in fact in the very next quarter the growth index moved into positive territory. Most analysts had predicted a noticeable improvement for the second half of 2023, but the predictions did not materialize.

Increased consumption in the… Mediterranean

Given the problems prevailing in the entire eurozone and the ongoing inflationary pressures, it is not surprising that Germany’s export performance has stagnated or slightly decreased (-0.2% in the period January-October 2023, compared to the corresponding period of previous year). So far, even in the “tough year” 2022 domestic demand in the eurozone’s biggest economy has proved enough to stave off the worst.

This time, however, domestic demand is falling, as inflation is galloping (5.9% year-on-year). A decline in private consumption by 0.8% is recorded by the Statistics Office for 2023. “Germany has nothing to oppose to the decline in demand abroad or high interest rates, the dynamics of domestic demand has disappeared,” he reports to the German News Agency. (dpa) Thomas Ginzel, Chief Economist of VP Bank in Liechtenstein. He believes that “people are cutting back on spending on everyday consumer goods, although they are still spending money on their holidays.” Consequently, he says wryly, “somewhere in the Mediterranean” a respectable portion of German consumer spending has gone.

“From 1951 to date this is only the ninth year that Germany has recorded a recession, this is not an ordinary event,” warns the Frankfurter Allgemeine Zeitung (FAZ). It is noteworthy that Germany does not say to “break away” from the zero or negative indicators and remains behind in the Eurozone, where the growth index is +0.8% on average. As for the USA, it has hopefully reached +2.4%.

Will the raises help?

But there is a “ray of optimism on the horizon,” Fritsi Keller-Gibe, chief economist at the development bank KfW and a former World Bank executive, told Reuters. “New collective agreements have been agreed in many industries where wage increases are outstripping inflation. The increase in real income will primarily benefit private consumption,” he points out.

In theory, that’s how things are. But again, there is no guarantee that the extra income will be channeled into consumption and will not end up in the…piggy bank, waiting for better days. After all, already in the third quarter of 2023 wage increases (+6.3%) were higher than inflation (+5.7%), which however did not stimulate domestic demand.