The German economy grew by just 0.1 percent in the second quarter – and even that surprised economists positively. For the winter, the signs point to a step backwards. Several indicators point to a downturn.
Ideally, an economy grows steadily. This leads to more productivity, more workers are needed, the unemployment rate falls as a result, and prosperity increases. But in times of crisis, economies shrink. If the gross domestic product (GDP) falls two quarters in a row compared to the previous quarter, economists usually speak of a recession. In Germany, this was last the case in the first half of 2020. Due to the corona pandemic and the necessary lockdowns, GDP fell by 1.4 percent in the first quarter and then by 9.5 percent in the second.
Experts are now fearing a similar scenario again for the winter, either for the third and fourth quarters of this year or for the fourth quarter of 2022 and the first quarter of 2023. Several indicators speak in favor of this.
High prices for oil, natural gas and electricity have two effects on an economy. First, they increase production costs for many products and services. Almost every company consumes oil, gas or electricity to varying degrees and is therefore affected by price increases. If a company does not react to this with lower production, it has to increase prices or accept losses.
On the consumer side, high energy prices reduce disposable income, i.e. the amount that is still available for consumption after paying for essential things such as rent, heating, electricity and food. Less disposable income means less consumption, so companies also have to produce less. Result: GDP falls.
The inflation rate in Germany did not fall significantly in August either. On the contrary, the Federal Statistical Office even expects an increase from 7.5 to 7.9 percent. The higher prices are a consequence of the high energy prices. Firstly, these themselves pull up the consumer price index, but on the other hand they also indirectly make many other products and services more expensive, for the production of which energy is indispensable.
Since the disposable income of Germans is not rising at the same rate as prices, they can afford less than before. This in turn means that companies have to produce less. Trade and manufacturing in particular are feeling the effects. The production index determined by the Federal Statistical Office was lower in June 2022 than in June 2021 – so less was produced than a year ago.
Apart from high prices, it is often overlooked that there is still a shortage of many raw materials and preliminary products worldwide. The supply chain crisis that began in the Corona crisis is still ongoing. It is also fueled by new corona lockdowns in China. Even if the situation has improved, in a survey by the Ifo Institute in August, 62 percent of industrial companies still complained about material shortages. Machinery, electronic device manufacturers, beverage manufacturers, print manufacturers and the automotive industry are most affected. Without materials, production also declines in the long term. After all, a company cannot live off its inventory forever. As a result, the business expectations of the manufacturing industry in Germany are down. At -29.2 points, it is now below 0 for the sixth straight month. This means that companies expect the situation to be even worse in three months’ time than today.
The price crises have not been felt on the consumer side for a long time. Many Germans had saved a lot of money during the Corona crisis because, due to the restrictions imposed by the pandemic, they couldn’t spend it on many things, from dining out to concert tickets to vacations. For this reason, many were still willing in the first half of the year not to limit their consumption despite higher prices.
That has now changed. According to calculations by the Ifo Institute, savings have fallen significantly since March. A surplus of 73 billion euros compared to the normal savings behavior of the past few years turned into a 95 billion euro deficit. The bottom line: in the coming months, Germans will lack the money to continue consuming as before, instead we will act more sparingly. “Against this background, consumption should no longer make a positive contribution to growth in the winter half-year,” says Oliver Rakau, Germany’s chief economist at the British economic research institute Oxford Economics, in an interview with Wirtschaftswoche.
Although the sanctions against Russia because of the Ukraine war still hurt Russia the most, they also have consequences in this country. The Institute for Labor Market and Occupational Research (IAB) assumes that 240,000 jobs will be lost in Germany in the coming year because of them. Assuming they persist over the long term, that would be another 150,000 annually.
Losing jobs are a sign that the affected companies are not doing well. A loss of 240,000 jobs is a sign that the entire economy has been hit, even if it mainly affects companies that have so far done well in trade with Russia.
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