Ukraine conflict batters confidence in German economy as recession fears mount

Ukraine MP on Germany financing Russian gas sales

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Europe’s largest economy had already been suffering from a number of challenges before Putin’s invasion of Ukraine – with a wave of Covid infections over winter and supply chain issues causing major headaches for German businesses. Inflation, a problem even before the Ukraine crisis, is rapidly spiralling to record levels. According to data firm GfK, consumers in German are now increasingly concerned about the risks to the economy and are modifying their behaviour. Rolf Bürkl, a consumer expert for GfK, said: “In February, hopes were still high that consumer sentiment would recover significantly with the foreseeable easing of pandemic-related restrictions.

“However, the start of the war in Ukraine caused these hopes to vanish into thin air.

“Rising uncertainty and sanctions against Russia have caused energy prices in particular to skyrocket, putting a noticeable strain on general consumer sentiment.”

GfK’s consumer sentiment index is now forecast to fall seven points in April, accelerating the declines already seen.

The index is formed from survey data from consumer interviews measuring areas such as income expectations and likelihood of making a large purchase.

Data for March found expectations for the economy had fallen to their lowest levels since the first lockdown in spring 2020.

Meanwhile, income expectations were at their lowest since 2009 following the financial crisis.

According to GfK, consumers are now seeing their purchasing power “melt away” thanks to steep price rises in energy, with confidence in making a large purchase also falling.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said: “The drop in the GfK consumer sentiment headline, to a joint 22-month low, is a clear sign that the war in Ukraine and higher inflation are weighing heavy on consumer sentiment.”

She added: “Consumers are taking heed, and expect to save more—the willingness to save index jumped in March—which bodes ill for any gains in household spending over the coming quarters.

“Meanwhile, expectations for the economy also slumped, by 33 points to -8.9, lending support to the Bundesbank’s forecast that the German economy entered a recession in Q1.”

Germany already saw its economy shrink in the final months of 2021 with fears this pattern will repeat in the first quarter of this year, putting the country into recession.

The challenges are not unique to Germany though, with survey data for France out today also finding shrinking consumer morale.

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According to the INSEE statistics agency, the share of households who believe living standards will improve in the next 12 months has fallen sharply, while fears around unemployment have also risen.

Inflation has emerged as perhaps the biggest cause for concern, with a growing share worried about rising prices in the next 12 months.

The timing comes as President Macron will hope for positive sentiment in the economy ahead of the upcoming French elections.

Such collapse in confidence is also causing concern for the European Central Bank (ECB), which described it as “quite significant and substantial”.

In an interview this week with Politico, ECB chief economist Phillip Lane warned: “Europe may have to get used to higher prices.”

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