German Economy Contracts for a Second Consecutive Quarter

Bob Mason
Updated: May 25, 2023, 11:47 GMT+00:00

The German economy contracted by 0.3% in Q1, with household spending weighing. Consumer sentiment figures also failed to impress.

Household spending weighs on German economy - FX Empire

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It was a relatively busy start to the day on the European economic calendar. After disappointing manufacturing sector PMI and business sentiment numbers, German GDP and consumer sentiment figures were in focus this morning.

Today’s GDP numbers had to align with the European Commission’s upward revision to euro area growth forecasts for 2023 and the more hawkish ECB monetary policy outlook.

However, the German economy contracted 0.3% in Q1 versus a prelim 0.1% contraction. In Q4, the economy contracted by 0.4%. Year-over-year, the German economy contracted by 0.2% versus prelim figures that showed growth of 0.2%. The economy expanded by 0.3% year-over-year in Q4.

According to Destatis,

  • Household final consumption expenditure declined by 1.2%, with inflation weighing on spending.
  • Weak spending was evident across several areas, including food & beverages, clothing & footwear, and furnishings.
  • Government final consumption expenditure fell by a more marked 4.9%, quarter-on-quarter.
  • However, investment increased in Q1, with foreign trade also contributing positively.

While the GDP numbers had more significance, German consumer sentiment also drew interest. The GfK German Consumer Climate rose from -25.7 to -24.2 for June versus a forecasted -24.0.

According to the May survey,

  • Income expectations improved for an eighth consecutive month. The indicator increased by 2.5 points to -8.2 points.
  • However, the propensity to buy and economic expectations waned in May.

The larger-than-expected contraction in the German economy and consumers less willing to spend will be of concern for the ECB. A weaker propensity to buy indicator followed a marked decline in household spending during Q1.

EUR/USD Reaction to German GDP and Consumer Sentiment

Ahead of the stats, the EUR/USD rose to an early high of $1.07569 before falling to a pre-stat low of $1.07329.

However, in response to the economic indicators, the EUR/USD rose to a post-stat high of $1.07402 before sliding to a low of $1.07282.

This morning, the EUR/USD was down 0.13% to $1.07359.

EUR/USD slides on German GDP numbers.
250523 EURUSD Hourly Chart

Next Up

Investors should track ECB member commentary throughout the day. ECB Executive Board member Luis de Guindos is on the calendar to speak today.

Looking ahead to the US session, it is a busier day on the US economic calendar. US jobless claims, second estimate GDP numbers for Q1, and pending home sales figures for April will be in focus.

We expect the jobless claims and GDP numbers to have more impact. An unexpected fall in initial jobless claims and an upward revision to GDP estimates would fuel bets on a June rate hike.

However, the FOMC chatter and US debt ceiling-related news also need consideration.

According to the CME FedWatch Tool, the probability of a 25-basis point Fed interest rate hike in June stood at 36.4%, up from 28.1% on Tuesday. The FOMC meeting minutes did not write off a June interest rate hike, with concerns over inflation raising bets on a June move.

About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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