Recession in Germany: What does that mean?
May 25, 2023
Germany's economy is facing extreme testing times. First, the coronavirus pandemic took a toll, and now the impact of the war in Ukraine is pushing the economy to the brink.
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 usually 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 exports are falling and demand for goods and services is shrinking at home.
GDP is the 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, the situation now looks much different. Both in the last quarter of 2022 and the first quarter of this year Germany's economy contracted.
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.
This article was originally published in German. It has been updated to reflect the latest news about Germany entering a technical recession.