Recession – the second worst period in the economic cycle

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Germany's economy has slipped into a recession. This is not particularly dramatic at first. Still, one wonders: What does it mean when the downturn looms?

Squeezed out – that's how some industries feel when the recession hits

First the corona pandemic with all its consequences – for example the dramatic supply chain problems, then the Ukraine war: In recent years the German economy has been rock hard. Prices and interest rates are rising, delivery bottlenecks and energy shortages are putting a strain on the economy – and according to the theories of economists, it is going up and down in waves. Four phases are often distinguished:

  • Upswing, also called expansion or prosperity
  • boom
  • recession
  • depression

The Recession stands for the downturn,  if, for example, production capacities are no longer fully utilized because export rates are falling in foreign trade and demand for goods and services is falling in the domestic market. This could very soon be the case, not only in Germany, because the high prices for energy take up too much purchasing power – money that consumers then lack elsewhere.

GDP reigns supreme

The benchmark is the much-cited gross domestic product, or GDP for short. The term represents the value of all services and goods produced in a given period.

If GDP shrinks for two quarters in a row, this is called a “technical recession” – which was already threatening at the end of 2021 after GDP had shrunk by 0.3 percent in the last quarter of the year as a result of the corona pandemic. In the first three months of 2022, however, economic output increased by 0.2 percent. In the spring of 2023, however, the situation will be different. Because the German economy shrank in both the last quarter of 2022 and the first quarter of the current year.

Economic depression as a horror scenario

A recession lasts for a longer period of time , it can grow into a real economic crisis. Then there is talk of an economic depression: Unemployment and the number of insolvencies rise, goods build up in warehouses, financial crises, stock market crashes and bank failures complete the horror scenario.

Antidote: government aid programs

< p>It is therefore important for the state to prevent the slide into depression and thus into the low phase of the economic cycle. He will therefore try to counteract emerging recessions in advance or to keep them as short as possible. Reliable means of doing this are relief packages for companies and citizens, such as government grants and tax cuts.

The article was first published on 09/15/2022 and updated on 05/25/2023.