Federal Finance Minister Christian Lindner (FDP) fears a “serious economic crisis”, institutes are reducing their economic forecasts and analysts are warning of a global recession. But how great is the probability that our economic power will soon decline?
Corona lockdowns, port closures, energy crisis: As if the situation in China wasn’t already tense enough, in some provinces it’s raining more heavily than it has in decades. A state of emergency has now been declared in southern Guangdong province. Schools and factories have to close. Why is this worth mentioning? Guangdong is China’s most populous province. It includes, for example, the tech center Shenzhen and the metropolis Guangzhou. In Guangdong, more products are manufactured for the world market than anywhere else in the billion-dollar empire. When Guangdong stands still, you can feel it in other corners of the world as well.
For example in Germany: Federal Finance Minister Christian Lindner (FDP) did not explicitly mention the recent delivery problems from Guangdong, but he warned of a “serious economic crisis” in an interview with ZDF due to the general supply bottlenecks, the sharp rise in energy prices and the associated high inflation.
It is now a matter of definition as to when the economy is in crisis and when this crisis is “serious”, but that the post-corona upswing is flattening out is now undisputed even among economists. Both the Munich Ifo Institute and the Handelsblatt Research Institute (HRI) cut their economic forecasts this week. According to the ifo Institute, the German economy is only expected to grow by 2.5 percent this year, and the HRI is assuming only 1.6 percent. For the coming year, the forecasts are now at 3.7 and 0.8 percent respectively.
The range is large, but the trend is clear. Last summer, the ifo Institute forecast 4.3 percent for this year. Now it’s just a little over half. And: Last year, the German economy did not grow as strongly as first thought. In the end it was 2.9 percent. Originally, the Ifo researchers had predicted 6.4 percent.
The ever-declining forecasts and ever-rising prices are fueling fears that the economic upswing could not only flatten out but even end and the economy could slip back into recession. It is technically defined as two consecutive quarters of negative economic growth. This situation is actually not far off in Germany. In the first quarter of 2022, gross domestic product (GDP) grew by just 0.2 percent compared to the previous quarter. The forecasts for the year as a whole can therefore be somewhat misleading, because even if Germany’s GDP stagnates or falls slightly in the remaining three quarters, it would still be higher overall than in the previous year.
The fear of a recession is not unique to Germany. In the US, too, the warnings are getting louder. “It’s naïve to think that everything will be fine once the Fed gets inflation under control,” said star investor Ray Dalio in a post on the LinkedIn careers site. Absurdly, both high inflation and the fight against it could result in an economic crisis.
Both, Dalio argues, could have the same effect: high inflation slows down consumer spending because everything is becoming so expensive and unnecessary spending is being postponed as a result. However, if the central bank increases interest rates sharply, as has happened in the USA, loans will become more expensive. Ergo, people will spend less on cars or real estate, for example, and companies will invest less. “There is nothing the Fed can do to fight inflation without weakening the economy.”
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The same applies to the European Central Bank (ECB). It too is now raising interest rates, albeit less than the Fed, to combat inflation. But she, too, found it difficult to take this step for a long time because it necessarily slows down economic growth. Nevertheless, the step is necessary. More than 60 central banks around the world are now acting in a similar way. That will increase the risk of a global recession, analysts at Citigroup are now saying. You now see the probability of this happening at 50 percent.
“We now see this as a reasonable assumption,” write the analysts, but: “We emphasize that it is very important that inflation will be stubborn in the end.” That in turn could – in addition to political and central bank decisions – primarily from depend on geopolitics. After all, the current high inflation is mainly due to the high prices for energy, raw materials and food. And the price increases are particularly dependent on the war between Russia and Ukraine this year. If it ends quickly, the commodity markets could also quickly relax again. If it drags on, inflation and thus economic growth are also in a bad way.
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