Germany Economic Forecast

Germany entered a technical recession in Q1, according to revised data released in late May. GDP contracted slightly less than in Q4, driven by a lower but sustained fall in private spending. Public spending dipped, while, more positively, fixed investment and exports rebounded. The economy was likely weighed on by high inflation, with consumers spending less on food and drinks, clothing and footwear, and cars. Turning to Q2, our panelists expect the economy to rebound. Data released for the quarter thus far has been positive. The composite PMI, plus business and consumer confidence, rose through May, and inflation fell in April. In other news, the government unveiled plans to cap power prices at six cents per kilowatt-hour for industrial firms until 2030, costing around EUR 4 billion annually. The move should support industrial output ahead but will strain public finances.

Harmonized inflation fell to 7.6% in April from 7.8% in March as food prices rose less. Inflation this year is to remain above the 10-year average of 2.1% but cool compared to last year as the base effect toughens and domestic demand stagnates. Key factors to monitor include natural gas prices and the government’s power price cap scheme.