A recession is a period of economic decline. It begins when gross domestic product (GDP) falls twice in succession. For example, it must fall by -0.2% and then by -0.4%.
Germany experienced such a phase in 2023/24. In the second quarter of 2024, the economy fell by 0.1%. Growth of 0.2% to 0.3% is expected for 2024.
Recessions can last for different lengths of time. The first oil crisis lasted 24 months, the 2008-2009 financial crisis only 12 months. Today, high energy and commodity prices have a strong influence on the downturn.
Characteristics of a recession
A recession can be recognized by certain economic signs. These signs show how the economy is changing. They influence many areas of the economy.
Decline in gross domestic product
Gross domestic product (GDP) is an important indicator of recessions. In Europe, we speak of a recession when GDP falls twice in a row. Germany experienced this in the fourth quarter of 2022 and the first quarter of 2023.
Increase in unemployment
The labor market reacts quickly to economic fluctuations. Companies cut costs by reducing their workforce. This leads to more unemployed people and financial problems for many.
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Falling consumer spending
Consumers change their behavior in times of recession. They save more out of caution or necessity. This reduces demand, which affects production and investment.
The ifo Business Climate Index provides an insight into the economy. It is based on surveys of around 9,000 German companies. The index divides the economic cycle into four phases. It shows what could happen in the next six months.
Causes of recessions
Recessions are caused by various factors. These weigh on the economy. Causes can be external shocks, problems on the financial market or political uncertainty.
External economic shocks
Unforeseen events such as natural disasters or pandemics can place a heavy burden on the economy. They can reduce production and increase unemployment. For example, German GDP shrank by 4.6% in 2020 due to coronavirus.
Financial market crises
Problems on the financial market can have serious consequences. Credit crunches can reduce liquidity by up to 30%. The 2008 financial crisis led to global stock market slumps and bank failures.
Political and social influences
Political uncertainty weighs on the economy. High national debt can slow growth by up to 1% per year. Social changes such as demographic change can also have a negative impact on the economy. Structural reforms are necessary to counteract this in the long term.
- External shocks: Up to 5% destabilization
- Financial crises: Up to 30% reduction in liquidity
- Political uncertainty: Up to 1% brake on growth per year
Impact on the economy
A recession has a major impact on the economy. It affects many areas and changes the economic structure.
Changes in production
In times of recession, the economy shrinks. Gross domestic product (GDP) in Germany fell by 0.2 percent in 2024. Industry recorded a decline in value added of 3 percent.
Investments in machinery and equipment fell by 5.5 percent. These figures show the negative impact on growth.
Developments on the labor market
Unemployment rises during recessions. An unemployment rate of 5.5% is expected in Germany in 2023. Falling production and less investment lead to redundancies.
Consequences for the financial sector
Financial stability suffers during recessions. Banks grant fewer loans. This slows down investment and consumption.
The European Central Bank raised key interest rates in 2022. These measures are intended to combat inflation and stabilize the financial system.
| Indicator | 2023 | 2024 |
|---|---|---|
| GDP growth | -0,4% | +1,9% |
| Inflation | 8,8% | |
| Unemployment rate | 5,5% | 5,3% |
Historical recessions in Germany
Germany has experienced many recessions in its economic history. These have had a major impact on the country. By looking at previous crises, we understand how economic problems change.
Oil crises of the 1970s
Two oil crises shook the German economy in the 1970s. The first oil crisis from 1973 to 1975 drove up energy prices sharply. The second oil crisis from 1980 to 1983 made the situation even worse.
Unemployment rose sharply during this period. Economic growth declined significantly.
Financial crisis 2008/2009
The global financial crisis of 2008/2009 hit Germany hard. The collapse of Lehman Brothers triggered a chain reaction. Millions of people lost their savings and jobs.
In 2009, the German economy shrank by 5.7%. Despite the severity of the crisis, Germany recovered relatively quickly.
Corona recession 2020
In 2020, the coronavirus pandemic led to a unique recession. Lockdowns, disruptions in supply chains and a massive slump in demand characterized this period. GDP fell by 9.7% in the second quarter of 2020 – the sharpest decline since records began.
| Recession | Period | GDP decline | Unemployment rate |
|---|---|---|---|
| First oil crisis | 1973-1975 | -1,3% | 4,7% |
| Second oil crisis | 1980-1983 | -1,0% | 8,1% |
| Financial crisis | 2008-2009 | -5,7% | 7,8% |
| Corona recession | 2020 | -4,9% | 5,9% |
These crises show just how different recessions can be. From external shocks such as oil crises to systemic problems in the financial sector and global pandemics – every recession poses unique challenges. Adaptable economic policy measures are necessary.
Measures to combat recession
In times of economic downturns, governments and central banks resort to various measures. The European Central Bank uses monetary policy levers to support the economy. Interest rate cuts and quantitative easing are intended to stimulate investment and facilitate lending.
Monetary policy instruments
Central banks rely on interest rate cuts and quantitative easing to stimulate the economy. These measures are intended to encourage investment and facilitate lending. The ECB has lowered the key interest rate and launched bond purchase programs to stimulate the economy.
Government economic stimulus programs
Governments can intervene with targeted economic measures. In Germany, the federal government is discussing tax cuts and additional funding for health insurance. Economics Minister Michael Glos proposed retroactive tax cuts from January 2009.
Chancellor Angela Merkel emphasizes the priority of preserving jobs. These measures are aimed at strengthening private consumption and stabilizing the economy.
Structural reforms
Structural reforms are crucial in the long term. Labor market reforms and improvements in the education system can strengthen the economy’s resilience. The German government plans to use the EU economic stimulus for innovations in areas such as broadband expansion and climate protection.
Experts are calling for a uniform approach by EU countries to effectively combat the recession. These measures should lay the foundations for sustainable growth and make the economy more resilient to crises.
FAQ
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