Who thought the ECB would be sharply raising interest-rates with Germany in recession?

This morning has brought us back to some extent to a piece of economic orthodoxy. Putting it another way something which was always really rather likely is being presented as a shock of sorts. So let me hand you over to the German statistics office.

“After GDP had already slipped into the red at the end of 2022, the German economy recorded two negative quarters in a row,” says Ruth Brand, President of the Federal Statistical Office.

So Germany is in a recession or as it is now more commonly called a technical recession. This morning’s revised release tells us this.

WIESBADEN – The gross domestic product (GDP) fell by 0.3% in the 1st quarter of 2023 compared to the 4th quarter of 2022 – adjusted for price, seasonal and calendar effects.

So the economy has gone -0.5% and now -0.3% showing that it was a grim winter for the German economy. Actually it has also been a rather grim spell for the statistics office itself as this is a large change.

As reported by the Federal Statistical Office (Destatis), economic output at the beginning of the year was 0.3 percentage points weaker than reported in the rapid release of April 28, 2023 .

Those of a less generous nature may wonder if it came under pressure not to produce a decline in its initial release. After all a bad winter for Germany was hardly a surprise after the energy price shock.


Here we see that the statistics office has now caught up with the analysis on here. For newer readers the high energy prices and falls in real wages ( of the order of 5% per annum) would you think hit consumption and probably in a hard way. Even the ( likely understated) official series told us this.

As reported by the Federal Statistical Office (Destatis), real wages fell by an average of 4.0% compared to 2021, after having already declined in the last two years of the crisis.

Thus something like this below was always likely.

The persistently high price increases also weighed on the German economy at the beginning of the year. This was particularly noticeable in private consumer spending, which fell by 1.2% in the first quarter of 2023 after adjustment for price, seasonal and calendar effects.

In terms of the detail the worst affected areas are below.

The purchasing reluctance of private households was evident in various areas: Private households spent less on food and beverages, clothing, shoes and furniture than in the previous quarter (price, seasonally and calendar-adjusted). In addition, fewer new cars were bought by private households, which is likely to be due, among other things, to the elimination of premiums for plug-in hybrids and the reduction in premiums for electric vehicles at the beginning of 2023.

At this point we have over explained the fall which was reduced by a couple of traditional German strengths. First investment.

Investments in equipment – ​​i.e. primarily in machinery, equipment and vehicles – also increased significantly (+3.2%) at the beginning of the year.

Also trade or net exports.

Positive impetus also came from foreign trade: Compared to the fourth quarter of 2022, a total of 0.4% more goods and services were exported after adjustment for price, seasonality and calendar effects, with trade in plastics and metal products being particularly robust.

However there is a type of warning even in the trade figures.

In contrast, imports fell by a total of 0.9%, which was partly due to weaker imports of mineral fuels such as crude oil and mineral oil products, as well as chemical products.

Does that imply more consumption weakness is on the way?

Also we need to note that the German economy is now smaller than a year ago.

-0.5% on the same quarter of the previous year (price and calendar adjusted)

As this also happened the productivity numbers saw a sharp decline too.

In the first quarter of 2023, the economic output was generated by around 45.6 million employees with a place of work in Germany. That was 446,000 people or 1.0% more than a year earlier.

Looking Ahead

The PMI release from earlier this week was very positive for Germany.

Latest flash #PMI data for #Germany pointed to the strongest uplift in activity in 13 months (PMI at 54.3; Apr: 54.2).

The problem was that they told us there was growth for 4 months which includes 2 where we now know there wasn’t any. This is also a problem for the Bundesbank which told us this in its April monthly report.

The German economy beat last month’s expectations in the first quarter of 2023, probably increasing its activity again somewhat.

If we look further we were told this earlier this month.

The ZEW Indicator of Economic Sentiment for Germany recorded a significant decline in the current May 2023 survey. At minus 10.7 points, it is 14.8 points below the previous month’s value. This means that for the first time since December 2022, the ZEW Indicator is back in negative territory. The assessment of the economic situation in Germany also decreased. The corresponding indicator lost 2.3 points and now stands at a new value of minus 34.8 points.

Yesterday we were told this by IFO

Sentiment in the German economy has suffered a setback. The ifo Business Climate Index fell to 91.7 points in May, after 93.4 points (seasonally adjusted) in April. This marks the first decline after six increases in a row. Driving this development are the significantly more pessimistic expectations. Managers are somewhat less satisfied with their current situation. German companies are skeptical about the upcoming summer.

So we have something of a consensus that manufacturing is about to turn lower, But some debate over services as the bullishness of the PMY survey collides with this from the IFO one.

The index in the service sector remained virtually unchanged. Companies were more satisfied with their current business situation, but were more pessimistic regarding the coming months.


My argument that it would be a particularly rough economic winter for Germany based on its energy and real wages situation has been backed up by the official data. The energy situation has improved for now which is welcome. But there is another factor in play and who thought this would be ECB policy with Germany in a recession?

 We covered a lot of ground in the last nine months [prior to today’s meeting], moving from minus 50 basis points to plus 300 basis points. We are continuing this hiking process. As I said, this is a journey. We have not arrived yet. ( ECB President Lagarde )

So a 3.5% rise with promises of more to come. The ECB itself thinks that the past rises will impact as 2023 progresses and moves into 2024.

At the same time, our past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain. ( ECB)

Germany is in recession and the ECB has found itself being forced ( high inflation) to stamp on the economic brake.


Germany now officially in recession, with real GDP below pre-pandemic level while Italy and Portugal are 2.4% and 4.3% above, respectively. ( @fwred )

Tina Turner

Let me just say RIP and thank you for the music.



20 thoughts on “Who thought the ECB would be sharply raising interest-rates with Germany in recession?

      • May I point out two things wrong with Zeihan’s video?
        Net immigration to the UK alone was (officially) 606,000, & Hunt wants another 1000000.
        Why we can’t send people off the cross-channel smuggling route to East Anglia or Kent or wherever to pick fruit & veg at NMW whilst they are being processed escapes me, as they are overwhelmingly fit young men.
        (Actually it doesn’t; the UK govt knows fine well that farmers won’t pay NMW to foreign fruit-pickers % don’t want UK pickers.

        • Two.
          The countries which industrialised later, & who have not yet experienced demographic decay, can use economic policy to keep the birthrate up.
          That World population is exploding is just another lie from the elites, willingly grasped by middle-class misanthropes, much like anthropogenic climate change.

        • I posted the video specifically for his view of
          Regarding East Anglia , where I live, I agree
          with your comments, this, the next or
          another future government will have to allow
          huge immigration numbers unless AI or
          Quantum computers come up with a myriad
          of alternative solutions.

    • Buz,

      UK 2/5/10 year bonds rising quite significantly again today


      The analysts don’t think house prices will fall much at all this year in fact up North they are still doing qquite well but all depends how high interest rates will end up.

      Most mortgages must have doubled the last few months.

      I don’t think many analysts and banks for that matter really know where we will be next year, 6 months ago not many thought we would see bank rates above 1% and some thought we would be in negative rates teritory.

      • I have no formal economics training or education, learning much from on here, especially, but not only, Shaun, from history, from, what seems to me to be commonsense, although counter-intuitives do limit its usefulness, but most of all, I apply what I have experienced from people over 6 decades, to inform their likeliest course of action.

        Now an economist who doesn’t know that rapidly, hysterically, expanding the money supply, as has been done since 2019, and is still continuing, is going to lead to runaway inflation, is either an impostor, a charlatan, or a downright liar.

        It is no surprise at all to me that interest rates are nearing 5% & rising.

        Net Zero is also hugely inflationary, again in essentials.

        Fertilisers are, in the main, made from gas, the limitation of which will cause both food & fuel prices to rise in the long run, & if you ban, or severely limit meat, their manure is the commonest organic fertiliser.
        Chicken manure suffers if they manage to persuade us that we need to cull our poultry because of hen flu, whilst posters designed to put us off eating fish, remove fish, blood & bone (the blood is fish blood & the bone is also fish industry by-product).
        Making wood-burners illegal also removes the ash, an excellent, but not complete fertiliser from the equation.
        So we’re left with seaweed, comfrey, or cover crops, which mean the land, whilst they are growing, is unproductive.

        This Net Zero could have consequences equalling Mao’s “Great Leap Forward.”
        Unsurprising really because the mindset of the authorities & the young seems very similar.

        When I suggest we fight this evil, I mean fight it like your life depends upon it, because it really might.
        Would you trust the elites after they deliberately killed 10s of millions of us with the plannedemic to see the folly of their ways, & to reverse policies when food starts to really run short?

  1. Hello Shaun,

    The German economy is far tougher than I ‘d expected but then again perhaps they GerryMander the results better than we do (!).

    Rueters :

    Millions of British households will see cheaper energy bills from July after regulator Ofgem slashed its cap on prices following a slump in wholesale energy costs. The new price cap of 2,074 pounds

    oh that makes me so happy – NOT!! so instead of paying triple what I previously did its only double ….. and no doubt inflation will fall and the BoE claim all the laurels for it – pah!!

    I’ll bet Rishi will get two swimming pools now after showing us what he tinks of the energy crisis and the water crisis with the first one, so much for climate change !


    PS: Germany closed low emission nuclear power for dirty brown coal ….. eco crisis ? what eco crisis ?

    • forbin,

      “Millions of British households will see cheaper energy bills from July after regulator Ofgem slashed its cap on prices following a slump in wholesale energy costs. The new price cap of 2,074 pounds

      oh that makes me so happy – NOT!! so instead of paying triple what I previously did its only double ….. and no doubt inflation will fall and the BoE claim all the laurels for it – pah!!”

      I highlighted the same with milk prices recentlythey may have fallen a few pence after rising circa 50 pence the last couple of years.

      Unflortunately it is the average person who has to suffer horrendous inflation which amounts to a large percentage of income where as it only amounts to a small percentage for the higher income famillies.

      The rich have benefitted quite well the last decade with inflation on house prices and also shares.

      • What a load of tosh,the white Europeans are being deliberately replaced to destroy national identity and any form of patriotism.the future Europeans will therefore be much easier to control when there are no countries, borders, individual governments, anyone thinking proposed changes would be against the national interest. The people responsible control all the EU governments and now openly talk about their plans, Google it, it’s no longer a conspiracy theory.

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  4. Great blog as usual, Shaun.
    Sorry for the late comment, but I would rather post late than not at all. It was good of you to attend Inflation Seminar 2023 last week. I was not there and have only looked at the one-page blurb accompanying it. While it clearly distinguished between macroeconomic measures of inflation like the CPI and the CPIH and the quite different alternative represented by the HCIs, the HCIs weren’t put in a broader context as a special kind of household-oriented measure, like the RPI. And surely there is no need to look for one index to rule them all and in the darkness bind them. We need one measure of consumer price change to use as a macroeconomic measure, one as a household-oriented measure (I think we both agree that a revised version of the HCIs would be ideal) and we also need an inflation measure compatible with the National Accounting measure of household final domestic demand. For the most recent inflation update, I believe the RPI excluding mortgage interest and council tax adjusted for the formula effect gives the best available macroeconomic measure. It showed an annual inflation rate of 10.1% in April, down from 12.5% in March. So, its inflation rate stayed in double digits, while its most obvious alternative, the RPIX adjusted for the formula effect, dropped down to single digits, going from 12.0% in March to 9.8% in April. Of course, either would be a far better measure than the CPI (8.9%), which excludes OOH, or the CPIH (7.8%), which excludes housing prices. While all inflation measures showed a big decline in the annual inflation rate in April, the small but volatile dwelling insurance and ground rent component found in the RPI did not, rising from 15.2% in March to 17.2% in April, largely due to an increase in the month-to-month inflation rate in April to 3.1%.
    While it is sad that the ONS stopped calculating monthly OOHPI series based on net acquisitions with its 2020Q4 update, perhaps it is time for the ONS to consider replacing these with NA series that better reflect the needs of the UK. The ECB’s 2001 road map gave 2026 as the target date for official quarterly HICP-H series for all euro area countries, including Greece, but it seems there is some doubt if this target date can be met, and it could not happen until 2028. The availability of monthly indices seems pretty nebulous. This is worrisome since when the EU nixed the inclusion of OOH in the HICP in 2018, one of the big reasons for doing so was that there were no monthly OOHPIs! So it is may be better for the ONS to develop its own OOHPI(NA) series, according to its own rules, as the ECB has had its foot on the brake more often than the accelerator, and the future may not be any better than the past.
    My own experimental variant of the Canadian CPI with an NP1 approach to , introduced in 1985, and which ended up with an estimation period from January 1982 to August 2000, was the first official consumer price series that was a macroeconomic series published for any country in the world, and my paper specifically mentioned that this series better met the needs of the Bank of Canada than the official CPI. It used a ‘gross weight, gross price’ variant of the net acquisitions approach rather than the ‘net weight, gross price’ variant dictated by Eurostat for its quarterly OOHPIs. This is a better model for the ONS, and will go some way to satisfying the criticism that the NA approach underweights OOH. Of course, by including net land purchases in the expenditure weight it would take the index further away from being a strict measure of consumption expenditures, but there is no real reason it should be. It isn’t intended to be used for upratings, and in terms of the lean vs. clean debate, it would be a very good index to lean against the formation of housing bubbles.

    • Hi Andrew and thank you

      The Better Statistics event was a success I think in several ways. The simplest is that it gives some publicity to the issues of inflation measurement. Next is that Jill Leyland spoke and was able to put the case for the HCIs and that links in a way to my first point in that they also need wider publicity. Also the ONS representative was less supportive about CPIH ( I doubt many reading this will be surprised that I raised a question about it and asked what purpose it serves?).

      It carried on in some ways from the User Group Committee meeting with the ONS which had been 2 days before. It led to me posting on Statsusernet on the issue of weighting methodology as it has become even more opaque. Also with the swings in ebergy pricessomething that is very material this and last year.

      I agree that gross weights and prices would improve the NA system.

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