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This recessionary mix is ​​particularly toxic

Once there is agreement that the economy is in recession, then the recession is almost over – this has always been the case in Germany in the past.

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This recessionary mix is ​​particularly toxic

Once there is agreement that the economy is in recession, then the recession is almost over – this has always been the case in Germany in the past. One reason is the understandable concern of experts and politicians that a crisis might be brought about in the first place.

In addition, there is the quasi-automatic stabilization of the economy: the currency watchdogs lower interest rates, energy prices fall because demand is weakening, and private consumption is boosted when workers receive wage replacement benefits after layoffs.

The recession of 2022 was also recognized late as such, only since the most recent ifo index have there been any doubts about its inevitability. But what is different this time: the shock absorbers are largely out of action.

To combat inflation, the ECB is raising interest rates instead of lowering them, and while oil has become cheaper, electricity and gas remain extremely expensive.

A mixture of rising interest rates and energy prices can all too easily have a toxic effect, as was shown not least in the mid-nineties in the USA, when the global financial crisis followed; if it can unfold its effect over a longer period of time, there is a risk of upheavals that go far beyond a conventional recession.

The responsibility that falls to financial and economic policy is all the more decisive. There are no easy decisions here. Supporting the balance sheets of companies and private households strengthens demand and thus also the economy - but makes it all the more difficult for monetary policy to break the price dynamic; if interest rates end up rising longer than they otherwise would have, the bottom line may be nothing gained.

In any case, it is questionable whether the currently preferred immediate one-off payments are the tried and tested means at all. Invoices are to be paid immediately, that is correct.

But when deciding whether to book a vacation or buy a sofa – or hire a new employee – what is more important when in doubt is what the actors expect for the next six, twelve or 18 months.

In other words, it is about stabilizing expectations, or at least creating cautious confidence. This is not a trivial task, there are no simple solutions. The important thing is that the politicians don't seem jittery. Of course, the traffic light coalition, keyword gas levy, is far away.

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