Germany, the 4th largest economy in the world, has finally slipped into recession, unable to overcome the pressure of high inflation. Not so long ago, Germany was Europe’s powerhouse: wealthy, booming, and politically strong. The mighty have fallen. “Unfortunately, the fundamental improvement in the economy is not in sight,” said Jorg Kramer, chief economist at German lender Commerzbank. “All the important indicators in the manufacturing sector are pointing downward,” he added, predicting German GDP would decline this year and be flat only next year.
Recently issued statistics state that the output in Europe’s largest economy dropped 0.3% in the first three months of the year, following a 0.5% decline at the end of 2022. A recession is defined as two consecutive quarters of declining GDP output. German GDP data showed “surprisingly negative signals,” Finance Minister Christian Lindner said. He added that while comparing Germany with other highly developed economies, the economy was losing growth potential. He also stated “I do not want Germany to play in a league where we have to relegate ourselves to the last positions”. With reference to the forecasts of the International Monetary Fund, a prediction has been made: recession in 2023 will only affect Germany and Britain among European territories. But it is unlikely that the UK has gone into recession as predicted by most economists and has achieved a GDP of 0.1% in the first quarter of 2023 and the end quarter of 2022.
Reasons for the recession
Inflation is the major cause of the recession. Inflation has been climbing since the start of the Russia-Ukraine war in February 2022. Germany was depending mostly on Russia for its energy needs, which included both fuel and gas. Over the past decades, Russia has supplied more than half of German natural gas demands. The energy price has shot up as a result of the demand and unavailability of gasoline. Inflation has affected the purchasing power of the people. Sales of household materials like food and beverages, clothing, footwear, and furnishings decreased in the first quarter of 2023 compared to the previous quarter. Car sales in Germany fell from the beginning of the year, reflecting a reduction in grants and subsidies on purchases of hybrid and electric vehicles.
Impact on the Indian Economy
It is too early to analyse the impact of the economic recession in Germany on the Indian economy. But it is certain that the major export sectors to Germany will be affected, such as clothing, footwear, leather, chemicals, machinery, iron, steel, and electronics. In the 2022–23 fiscal year, India’s exports to Germany included machinery worth $1.5 billion, electronics worth $1.2 billion, smartphones worth $458 million, apparel worth $990 million, organic chemicals worth $822 million, footwear worth $332 million, leather goods worth $305 million, articles of iron and steel worth $474 million, and auto components worth $406 million.
These sales would probably have an impact, and India must find an alternative buyer to compensate for the products manufactured in India. Russia, Latin America, and African countries are the best possibilities, which we would need to find inroads into. We must use our strong international relationships to achieve this goal. If not, the Indian economy and GDP would be affected.