Is Germany falling into a recession or just self-comfort? Understanding what a Rezession is

Recently, discussions about recession have been increasing, especially in Germany. Some insist that we are already in a recession, pointing to high inflation rates, unemployment data, and a series of economic indicators; others disagree, citing the continued upward trend in global stock markets and record-high corporate revenues. So, what exactly is a Rezession, and how do we determine if it has truly arrived?

What Does Rezession Really Mean

A recession is not a vague concept. The common international definition is: a significant, widespread, and sustained contraction in economic activity. The most typical criterion is two consecutive quarters of negative GDP growth. A healthy economy should continually grow; if production declines for two consecutive quarters, it signals serious problems.

Germany has another unique way of defining it. Local authorities not only look at GDP data but also examine production potential—that is, the theoretical output level the economy should reach when all equipment and labor are optimally allocated. When the actual output increasingly diverges from this potential, it marks the onset of a Rezession.

Why Do Recessions Occur—Five Major Triggers

Not all causes of recession are the same. Economies in growth phases are more prone to falling into Rezession during economic cycles, but other unforeseen factors can also trigger crises.

Surging Inflation: When prices spiral out of control, central banks raise interest rates to cool the economy and curb inflation. High interest rates increase recession risks, leading to rising unemployment and reduced spending by businesses and consumers. When people worry about the future, they start saving rather than spending, and companies are forced to cut capacity and lay off workers to control costs.

Overcapacity: During boom periods, companies expand production to meet consumer demand. Once demand peaks and begins to decline, excess goods and services go unsold, forcing companies to reduce production and lay off staff. As consumers’ purchasing power diminishes, their spending drops further, creating a vicious cycle.

Uncertainty Clouds: Events like wars or pandemics make consumer behavior unpredictable, exacerbating economic instability. Businesses and individuals freeze spending and investment decisions amid uncertain prospects, causing economic activity to decline, which can eventually evolve into a Rezession.

Sudden Energy Price Spikes: Energy is the engine of the economy. When energy costs soar, the economy suffers severely. Geopolitical tensions causing oil prices to spike hit especially hard for import-dependent countries like Germany.

Speculative Bubbles: When asset prices surge due to speculation, market euphoria, or consumer confidence, bubbles form. Investors rush to buy expecting profits, but once selling begins, supply exceeds demand, prices collapse, and the bubble bursts. The tech bubble of 2000 and the 2008 housing crisis are typical examples.

How the 2008 Financial Crisis Evolved into a Rezession

Take the 2008 housing bubble as an example: banks offered low-interest mortgages to homeowners unable to repay, and these high-risk subprime loans were bundled and sold. When defaults surged, financial institutions faced difficulties. The housing market collapsed, many homes were foreclosed, stock markets plummeted, and major global companies went bankrupt, leading to mass unemployment. Confidence in the financial system was shattered, banks stopped lending, and international trade stalled. Only aggressive government measures managed to reverse this crisis.

Is Germany Really in a Rezession?

By definition, two consecutive quarters of GDP decline constitute a recession. In 2023, Germany experienced growth in Q1, flat in Q2 and Q3, and decline in Q4. Even without two negative quarters, if Q1 of 2024 also shows negative growth, Germany will officially enter a Rezession.

The Ifo Institute for Economic Research forecasts a 0.1% decline in Q1. This means Germany experienced two quarters of GDP decline in the 2023/24 winter—technically meeting the Rezession criteria. Even if two flat quarters are not officially declared a recession, the economy’s weakness is enough to be felt as a recession.

What’s more concerning is that this is happening in Europe’s largest economy—Germany. Once called the “Land of Economic Miracles,” how did it fall into trouble?

The Real Reasons Behind Germany’s Recession

Construction Industry Collapse: Germany’s Construction Purchasing Managers’ Index fell to a three-year low in October 2023, with the pace of residential construction shrinking at the fastest rate since 1999. The ECB’s rate hikes further increased financing costs, forcing many projects to be delayed or canceled.

Long-term Impact of the Ukraine War: The ongoing Russia-Ukraine conflict continues to drive up energy prices in Germany. Although the government introduced energy subsidies, the long-term effectiveness remains uncertain.

Weakening Demand: Cautious sentiment has led to declines in overseas industrial orders and consumer spending, which in turn depresses household purchasing power. High energy costs and additional winter expenses make the situation worse.

In short, high energy prices, high interest rates, and low investment driven by uncertainty are the core drivers of Germany’s current Rezession.

What Does Rezession Mean for Ordinary People

Employment Pressure: During a recession, companies reduce hiring and lay off workers, increasing unemployment and making job hunting more difficult. Bargaining power diminishes, allowing employers to lower wages and benefits, and cut bonuses and raises.

Decline in Purchasing Power: Even if employed, high prices erode income. Wage increases lag behind inflation, reducing real living standards.

Funding Difficulties: Even qualified individuals face stricter lending conditions during a recession. Banks scrutinize borrowers’ financial stability and employment, forcing consumers to delay big purchases like homes and cars.

Psychological Burden: Financial stress affects mental health, which can ultimately drag down the overall economy.

Opportunities for Investors

For investors, a Rezession is not necessarily all bad. Market declines can be opportunities for savvy traders to profit through short selling. As Warren Buffett said, “Be fearful when others are greedy, and greedy when others are fearful”—recessions can be good times to position in undervalued assets.

Safe-haven assets like gold have recently hit record highs. Regardless of whether a recession occurs, geopolitical conflicts and political events (such as the 2024 US elections) will create short-term trading opportunities. For traders, market direction is less important than market volatility.

Outlook

Economists are not optimistic about Germany’s prospects in 2024. Deutsche Bank’s chief economist forecasts a 0.3% decline in GDP, and the head of the Ifo Institute describes Germany’s economic outlook as “quite bleak.”

For ordinary people, now is the time to cherish existing jobs, upgrade skills, or seek part-time work to increase income. Those with savings should pay down debt to avoid further interest rate hikes.

For traders, a recession is a moment to prove their trading skills. Whether markets go up or down, as long as there is movement, there are profits to be made. A true investor does not lose enthusiasm because of an economic downturn—instead, they see opportunities hidden within market volatility.