Tuesday, June 6

The consequences of the recession in Germany: risk for Spain and a brake on ECB rate hikes

The weakness of the German economy has two contradictory consequences. On the one hand, it is a direct risk for Spain, since it is “the second client” of our country, according to the ICEX (Spanish Institute of Foreign Trade), only behind France. And, conversely, it could indirectly reduce the damage from the rises in interest rates by the European Central Bank (ECB) if it causes the institution to reduce the aggressiveness of recent months.

The exit from the pandemic and inflation strengthens the large regional economies compared to the small ones


Activity in the eurozone’s leading economy contracted between January and March for the second consecutive quarter, after the GDP (Gross Domestic Product) data was revised downwards this Thursday. According to the theory, it is in a technical recession. In fact, its GDP, after completing the recovery in 2022, has fallen back below the pre-pandemic level.

Germany is suffering especially from the inflation crisis. With a critical impact on its industry, which is highly energy intensive and highly dependent on gas from Russia. And also with a clear reflection in the consumption of families. “Households spent less on food and beverages, clothing and footwear, and furniture,” says the country’s statistical office, regarding its review of the data for the first quarter. They also bought fewer electric cars because of fewer incentives.

technical recession

Its GDP fell 0.3% in the first quarter, after contracting another 0.5% between October and December. In 2022, Germany rolled out a large fiscal stimulus package that sustained activity, but it will be much less this year, with the European Commission already asking that the increase in public spending be controlled and with the new fiscal rules under debate, with forecasts of to be reactivated in 2024.

“The downward revision of the German GDP data means that growth in the euro area is likely to be revised downwards in the first quarter, with the risk of falling into recession as well,” warns the team of analysts at ‘ Bloomberg’.

This context is a challenge for Spain, whose economic growth stands out in Europe due to the ‘boom’ of tourism and the strength of the rest of the foreign sector. Germany is the third source from which most foreign tourists come, close to 10 million a year, behind the United Kingdom and France. But the Germans spend more, between 1,000 and 1,400 euros on average per visitor, according to the INE.

In total, the ‘locomotive’ of the eurozone is the second client of our foreign sector. In addition to tourism, the country mainly buys “intermediate goods” (parts, machinery…) that end up in its industry, where cars and electrical appliances are finished… In total, Germany imports around 34,000 million euros a year, almost three points of Spain’s GDP.

The investment of their companies and families in our country is also very important. It is the ninth economy in which they invest the most, almost 50,000 million in total. Lastly, “another new and potentially advantageous aspect for Spain is the German need to diversify the gas supply, given the intention to do without all or part of Russian gas,” stresses ICEX.

“In August 2022, Olaf Scholz [el canciller de Alemania] It has been in favor of improving the gas connection between the Peninsula and the Continent to facilitate the export of regasified liquefied natural gas (LNG) as well as gas from Algeria. This is a doubly advantageous opportunity since in the long term this infrastructure can also be used to export hydrogen to the continent, an aspect in which Spain is also considered a potential partner”, he concludes.

Rate hikes

So much for the potential direct impact of the recession in Germany. Indirectly, it may have consequences on the ECB’s monetary policy.

This week, the economist David Cano, a partner at AFI, asked about the possibility of lowering interest rates after the historic increase of 3.75 integers since July, summed up accurately: “If the forecasts are met ( inflation in the eurozone of 2%) and moderate economic growth (zone of 1.5%), [el BCE comenzará a bajar los tipos] in 2024. If there is a recession or a ‘banking crash’, in the fall. If inflation does not moderate or GDP advances at more than 2.5%, they will not occur”.

This same week, the Bank of Spain calculated that the increases in interest rates barely lowered inflation by 2 tenths in 2022 in our country, which on average was 8.4% in Spain. According to the same exercise, the institution estimates that the impact of the tightening of the ECB’s monetary policy on economic growth was 6 decimals, despite the fact that the GDP (Gross Domestic Product) increased by 5.5%.

In 2023 and 2024, he projects that the aggressive strategy of the ECB will barely manage to moderate price rises by 5 or 6 tenths, as projected by the governor of the Bank of Spain, Pablo Hernández de Cos. On the other hand, the impact of the increase in the cost of financing will be much greater for economic activity in general, both this year and the next. The increase in the official ‘price’ of money and the end of ECB debt purchases will subtract 1.1 points from growth in 2024, added Hernández de Cos.


Leave a Reply

Your email address will not be published. Required fields are marked *