Investment in Germany

Germany - Investment

Economy contracts in Q1 at sharpest pace since 2009

The economy shrank 2.2% quarter-on-quarter in the first quarter, thus entering a technical recession for the first time in seven years and marking the sharpest contraction since the global financial crisis as lockdown measures at home and abroad weighed heavily on both domestic and foreign demand. Moreover, on a year-on-year price-adjusted basis, the economy shrank 1.9%.

On the domestic front, private consumption plunged (Q1: -3.2% quarter-on-quarter; Q4: 0.0% qoq), while fixed investment contracted for the fourth consecutive quarter, albeit at a softer pace than in the fourth quarter of last year (Q1: -0.2% qoq; Q4: -0.4% qoq)q)—a sharp fall in investment in machinery and equipment more than offset stronger construction investment. On the other hand, government consumption growth accelerated from 0.1% in the fourth quarter to 0.2% in the first quarter. Stock-building contributed positively to the economy, preventing a larger slide in the first quarter.

On the external front, lockdowns across the world dragged significantly on trade. Exports nosedived 3.1% quarter-on-quarter (Q4: -0.6% qoq), marking the steepest contraction in 11 years. Imports, meanwhile, dropped 1.6% qoq (Q4: +0.1% qoq) as domestic demand received a body blow. Despite falling imports, net exports subtracted 0.8 percentage points from GDP.

The economy is expected to contract at an even steeper pace in the second quarter despite a cautious easing of some measures at home. While the economy is expected to bounce back in the third quarter, the outlook remains uncertain and the German government is mulling over unleashing additional fiscal stimulus measures.

FocusEconomics Consensus Forecast panelists see the economy contracting 5.8% in 2020, which is unchanged from last month’s forecast. For 2021, the panel forecasts GDP growth of 4.8%.