Germany, known for its robust economy, is currently facing a recession caused by the unexpected consequences of Russian sanctions. As the fourth-largest economy globally, Germany has been severely impacted by a decline in the Euro and an unforeseen contraction during the first quarter of 2023. This consecutive decline has pushed Germany into a technical recession, which would have implications for the rest of Europe.

The root cause of Germany’s economic downturn lies in the rampant inflation triggered by the energy price shocks experienced in 2022. The Russia-Ukraine war led to a surge in oil and gas prices, placing significant pressure on Germany’s production costs. Consequently, the country’s exports suffered, and domestic consumption weakened due to rising prices. These combined factors have undermined national growth and resulted in a decline in Germany’s GDP.

Data from Eurostat released on Thursday showed the Eurozone economy was in a technical recession in the first three months of 2023, after downward revisions of growth in both the first quarter of 2023 and the fourth quarter of 2022.

The Eurozone as a whole also faced an unexpected setback, with the economy contracting by 0.1% in the first three months of 2023. This figure deviated from flash estimates published on the 16 ^th of May, which projected a modest 0.1% growth. Additionally, the data from the final quarter of 2022 was revised lower revealing a 0.1% decline instead of remaining flat.

The technical recession declaration took some time as statistical offices adjusted their data. The revision was principally due to a second estimate from Germany’s statistics office showing that the eurozone’s largest economy was in a recession in the first quarter of 2023. However, the minimal 0.1% decline in both quarters, coupled with a robust labour market, makes it challenging to classify the current environment as a recession. Nevertheless, the stagnant economy represents a clear departure from the post-pandemic boom experienced in recent times.

Overall, the Eurozone economy is presently characterized by a state of uncertainty and sluggish progress. The impact of monetary policy, fading post-pandemic spending, and the energy crisis are starting to weigh heavily on economic activity.

As European leaders debate ways to reduce economic reliance on China, evidence suggests that such strategies can have unintended consequences. China has reduced its purchases of foreign goods, particularly from G-7 nations, to focus on its domestic market. This shift has negatively affected major industrial economies like Germany, as China represents their fourth-largest export market, accounting for approximately 7% of all German exports.

Against this backdrop, European stock markets have been in a holding pattern, with investors seeking direction ahead of key central bank meetings. Both the European Central Bank (ECB) and the U.S. Federal Reserve are set to have policy-setting meetings in the coming week. The ECB is widely anticipated to raise interest rates by 25 basis points, with President Christine Lagarde emphasizing the need to address inflationary pressures.

In conclusion, Germany’s recession, driven by the repercussions of Russian sanctions and energy price shocks, has had significant implications for the Eurozone economy. The technical recession status, though minimal, marks a departure from the post-pandemic boom. The upcoming European Central Bank meeting is awaited with anticipation as investors seek clarity amidst a complex economic landscape.

Source: Tradingview

From a technical perspective, the strong rally from the September 2022 low of 11,862 took the share market to a fresh all-time high of 16,331 in mid-May 2023. Since then, momentum waned, and the index has been trading sideways searching for direction. While at this stage there is no reversal signal evident on the price chart, the first red flag has emerged. A large bearish divergence between the price and the Relative Strength Index indicator has formed, suggesting that the rally is running out of steam and a deeper correction could unfold soon.

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