What’s going on here?

Data out on Thursday showed that Germany, the industrial titan of Europe, belly-flopped into a recession last quarter.

What does this mean?

Germany’s economy shrank by 0.5% in the last quarter of 2022, so when reports for the first quarter of this year showed zero growth, economists heaved a sigh of relief. See, stagnation isn’t pretty, but it’s better than the true bogeyman – a “technical recession”, when an economy shrinks for two straight quarters. But there’s been a plot twist: revised figures just revealed a 0.3% contraction in the first quarter of this year. Cue the dramatic music – because that means Germany’s in its first recession since the pandemic.

Source: MarketWatch

The main culprit was household consumption, with spending on everything from food to finery taking a nosedive as consumers tightened their belts. But even in other areas, the writing was on the wall: after all, indicators for the all-important manufacturing sector have been flashing red for some time now.

Why should I care?

The bigger picture: The worst is yet to come.

This isn’t just a short-term hiccup for Germany. The country’s firms are already catching a chill, with business confidence slipping for the first time in seven months in May – and the IMF’s tipped Germany to emerge as the worst-performing big economy this year. With a series of rate hikes on the horizon too, households and businesses are set for an even tighter squeeze. That’s bad news for the eurozone: as the biggest economy in the bloc sinks, the rest of the crew could be dragged down with it.

Zooming out: Misery will have company.

The US is expected to join the recession club by the second half of the year – with the debt limit debacle only adding to its woes. See, that situation’s essentially a lose-lose: a prolonged political standoff would hurt the economy, but any deal will probably come with spending cuts that’ll do serious economic damage too.