Is Germany slip into recession?

Is the recession coming now? What such a downturn would mean and how it could still be prevented. / Germany recession

Exploding energy prices, a cooling global economy and declining purchasing power due to high inflation: According to many experts, the German economy is heading towards a recession. In view of the escalating gas crisis caused by the ongoing delivery stop via the Nord Stream 1 Baltic Sea pipeline, concerns are growing. Is a hard downturn really inevitable? And what does recession even mean?

Downward process that reinforces itself

“We understand a recession to be a phase in the economic cycle in which the economy is shrinking, incomes are falling and unemployment is rising,” explains Sebastian Dullien, Director of the Institute for Macroeconomics and Business Cycle Research (IMK) at the Hans Böckler Foundation, in an interview with tagesschau.de. In a way, this downward process is self-reinforcing as the unemployed have less to buy, which in turn causes other people to lose income and jobs.

According to the economist, an economy is in a so-called technical recession if the gross domestic product (GDP) shrinks for two quarters in a row. “However, a technical recession can also be very weak with a minus of 0.2 or 0.3 percent. That’s not really dramatic.” On the other hand, it is more dramatic if GDP falls more sharply and the downturn lasts longer.

Despite the consequences of the Ukraine war, the German economy still grew surprisingly in the spring: from April to June, GDP rose slightly by 0.1 percent compared to the previous quarter. But that could change this summer. The German Institute for Economic Research (DIW) announced last week that a decline in GDP is to be expected for the third quarter. “Unfortunately, it is becoming more and more likely that we will go through a recession with high inflation at the same time,” said DIW economic expert Guido Baldi.

Germany recession / High energy prices weaken special effects

Jens Südekum, Professor of International Economics at the Düsseldorf Institute for Competition Economics (DICE) at Heinrich Heine University, takes a similar view: “I definitely assume that we will slide into a recession in the third and fourth quarters.” That would have been the case even if gas deliveries had been reduced to 20 percent. The complete stop by Nord Stream 1 made the whole thing even worse. “Currently, the question is no longer whether we will have a recession, but how bad it will be,” emphasizes the economist, who is a member of the scientific advisory board at the Federal Ministry of Economics, to tagesschau.de.

Dullien points to one way of averting it: “It’s not completely out of the question that there will be a ceasefire in Ukraine and that Russia will start supplying gas again. Then you could still escape a recession.” If that doesn’t happen, the likelihood is very high. However, it is unclear whether the downturn will start in the current quarter due to special effects. “This summer, people went on holiday again and spent their money,” said the IMK expert. It could be that that was enough to absorb the burden from the high energy prices.

“We had two opposing forces this summer,” says Südekum. During the corona pandemic, people would have saved more money because of the lack of consumption options. According to the Bundesbank, between April 2020 and March 2021, Germans parked an additional 70 billion euros in their bank accounts. “Actually, this money should now gradually go back to the people, which would have ensured a significant economic recovery. But now the energy price shocks have appeared, which means that the savings are largely gone,” explains the economist.

“Coming quarters will be very tough”

So far, according to Südekum, the companies have not suffered too much thanks to the high consumer demand, as they have been able to pass on their increased energy costs to customers in many areas, such as gastronomy. “Now private demand will cool down because electricity and gas are becoming more and more expensive and everyone is slowly realizing it,” says the economist. “That falls back on the companies, who can no longer pass on their prices in this way.”

In fact, consumer sentiment in Germany recently declined for the third time in a row and fell to a record low. The economic indicator of the GfK market researchers in Nuremberg for September slipped to the worst value since data collection began in 1991. Added to this is the inflation rate of 7.9 percent, which is confronting many people with significant losses in real wages and their savings. “We currently have the recipe for a recession in the second half of the year,” says Südekum. Some companies, especially smaller ones, are already in existential difficulties.

“The coming quarters will be very tough, since the rising energy costs – especially for heating – will reach consumers and they will reduce consumption elsewhere,” Dullien also fears. At the same time, companies are increasingly reducing their production because it is simply no longer worth it given the high energy prices. According to a survey by the German Chamber of Industry and Commerce (DIHK), 16 percent of companies are already planning to reduce the use of energy, which has become expensive. “Less is being produced in the chemical industry, for example – and that with a high order backlog,” says Dullien. One of the largest fertilizer manufacturers has also stopped production.

Germany recession / downward spiral not excluded

In addition, the cooling global economy is having a negative impact on the export-oriented German economy. According to the DIW, the war in Ukraine, delivery bottlenecks, the weakness of the global economy and the resulting uncertainty are reducing incoming orders on the one hand and inhibiting material deliveries and production processes on the other. Germany recession…

In addition, fears of a collapse in the energy supply in Germany are growing. Südekum, who also advises the federal government on economic issues, describes an acute gas shortage as a “worst case”: “In the worst case, the winter will be cold, people will heat a lot and the gas storage tanks, which are currently very full, will run empty very quickly.” If the Federal Network Agency then had to declare the emergency level due to empty storage, there would be a risk of entire production branches in the industry being shut down. In addition, energy prices would continue to rise and smaller shops, for example, would no longer be able to open.

This would result in short-time work for employees and possibly unemployment. “When companies finally go bankrupt and lay off workers, household uncertainty increases again,” explains Südekum. They would eventually save more, consume less, further worsening the recession. “It doesn’t have to come to that. Nevertheless, we have to deal with such a scenario.” Germany recession…

Does the relief package help?

Even with the new €65 billion relief package, economists predict that Germany will no longer be able to escape a recession. “The third relief package does little to change the fact that Germany is likely to slide into a recession in the fall,” Commerzbank chief economist Joerg Kraemer told the Reuters news agency.

“The package will probably not be enough to prevent the economy as a whole from falling into recession,” said ING chief economist Carsten Brzeski. The measures decided on Sunday accounted for less than two percent of German gross domestic product and fell short of the fiscal stimulus provided by the Corona crisis, which amounted to around 15 percent of GDP.

Expert Dullien is also skeptical: “I believe that development can no longer be completely prevented because the time horizon is not long enough.” The extent to which the relief package can cushion the recession also depends on the implementation of the partly unclear measures. For example, with the electricity price brake, it is not clear what volume will be redistributed or when it will come into force. The same applies to a possible gas price cap.

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