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Economy: Recession rears its ugly head in Germany

, October 17, 2022, 0 Comments

The German government and leading economists say that Germany is heading toward a recession. What constitutes a downturn and what does that entail?

germany-recession-marketexpress-inGermany’s economy is facing extremely testing times. First, the coronavrius pandemic took a toll, and now the impact of the war in Ukraine is pushing the economy to the brink.

In its latest World Economic Outlook report, the International Monetary Fund says that key European economies will fall into “technical recession” next year, including those of Germany and Italy.

Not to be outdone by that harbinger of gloomy news, the German government has now slashed its growth forecast for this year and predicts the economy will shrink in 2023.

The economy ministry expects Germany’s gross domestic product to grow by 1.4% this year and then decline by 0.4% next year. That’s a far cry from its estimates in late April when it had forecast 2.2% growth in 2022 and 2.5% next year.

Inflation, rising energy prices and supply bottlenecks all add up to a perfect storm for the economy — which, according to economists’ theories, goes up and down in waves. A distinction is often made between four phases:

  • Upswing, also called expansion or prosperity
  • Boom
  • Recession
  • Depression

A recession marks a downturn when, for example, production capacities are no longer being utilized because foreign trade export rates are falling and demand for goods and services is shrinking at home.

This scenario could very soon apply to Germany and elsewhere in Europe because high energy prices for are taking up too much purchasing power — money that consumers then lack elsewhere.

GDP is key guide

The benchmark here is GDP. This is the value of all services and goods produced in a given period.

If GDP shrinks for two quarters in a row, this is referred to as a “technical recession,” which already loomed at the end of 2021 after GDP shrank by 0.3% in the last quarter of the year as a result of the coronavirus pandemic.

In the first three months of 2022, economic output increased by 0.2%. However, Economy Minister Robert Habeck said that GDP is believed to have shrunk in the third quarter, and is expected to do so again in the current fourth quarter — and again in the first quarter of 2023.

If a recession persists over a sustained period, it can turn into a tangible economic crisis. Unemployment and the number of insolvencies rise, goods pile up in warehouses, and financial crises, stock market crashes and bank failures round off a nightmare scenario.

A recession’s antidote: government aid

The government’s task is therefore to prevent the economy from sliding into depression and thus into the lowest phase of the economic cycle. It will try to counter emerging recessions in advance or to keep them as short as possible.

The tools at its disposal include relief packages for companies and citizens, such as government grants and tax cuts — much like what the German government has introduced to tackle the fallout from the energy crisis.