Germany's economic crisis is more severe than expected

The German economy shrank more than expected in the spring. Economic output declined by 0.3 percent between April and June compared to the beginning of the year, the Federal Statistical Office announced on Friday.

Production in manufacturing and construction, in particular, performed worse than expected, the statisticians explained. In their flash estimate three weeks ago, they had predicted a decline of 0.1 percent. Gross domestic product (GDP) grew by 0.3 percent in the first quarter.

Corrections between the flash estimate at the end of the quarter and the detailed calculation are common. In the three to four weeks between the two, the statistics office receives additional data that allows for a more precise assessment of the situation.

However, the revision that the official surveyors of the German economy had to conduct at the end of July was not an everyday occurrence. They corrected the figures for the past four years – in some cases significantly.

For 2021, they indicate a 0.3 percentage point stronger economic recovery from the effects of the pandemic. Gross domestic product (GDP) grew by 3.9 percent instead of 3.6 percent. For 2022, the growth figure was revised upwards from 1.4 to 1.9 percent.

Hardly anyone would object to better figures, but there have also been corrections in the other direction. In the crisis year of 2023, the economy shrank not slightly by 0.1 percent as previously expected, but significantly by 0.7 percent. And a more significant decline of 0.5 percent is now forecast for 2024, instead of the previous 0.2 percent. Thus, the German economy has not experienced stagnation, but a full-blown recession.

This news, although released via press release at the end of July, didn't make much of a splash in the media. However, online, especially in right-wing filter bubbles, accusations quickly arose. There was talk of doctored figures, trickery, and manipulation. The main beneficiary of the allegedly doctored statistics, according to right-wing critics, was former Economics Minister Robert Habeck (Green Party).

However, there is no evidence that the then traffic light government could have influenced the Federal Statistical Office. The Wiesbaden-based agency also emphatically rejects such claims. "Accusations that we have a political agenda cannot be true, especially because we work according to European guidelines," the Handelsblatt quotes Michael Kuhn, the head of the GDP group at the statistics office.

The office justifies the significant revision with the extreme price developments following the Russian invasion of all of Ukraine, which had a massive impact on companies' cost structures. However, the structural statistics with the detailed analysis are usually only available 18 months after the end of a reporting year.

In addition, the price adjustment has been based on a new calculation basis in order to allocate existing prices more precisely, according to a statement. "This aspect in particular was challenging for the reporting years 2022 and 2023, with their very strong price changes, and contributed significantly to the comparatively high GDP revisions," the statistics office writes.

The chairwoman of the German Council of Economic Experts, Monika Schnitzer, defends the agency. "I find all the fuss surrounding this revision incomprehensible," the Munich-based economist told the RedaktionsNetzwerk Deutschland (RND). "Such statistics and their revisions are compiled using scientifically sound methods that are internationally standard," Schnitzer said. "To assume political calculation here, as some have done, is highly problematic."

While GDP figures are important for the economic experts' forecasts, everyone in the expert community knows that revisions can occur, Schnitzer said. "That's perfectly normal. Especially when there are particularly large shocks like the pandemic or the energy crisis, it takes longer to get a complete picture of the economic situation." When new information emerges, revisions are necessary.

The question remains as to when Germany will finally leave the economic crisis behind. Despite the sobering figures, economists at least see hope for a slight recovery in the second half of the year. For example, sentiment in many companies has recently improved. Tax revenues and social security contributions have also increased. By the end of the year, the first billions of euros from the federal government's special debt for defense and infrastructure are expected to reach companies. Christoph Swonke, economic analyst at DZ BANK, suspects that the government's economic stimulus package should actually provide a boost in the coming months.