Economy: neither recession nor upswing

Dusseldorf Two months ago the headline here was: “The mood is worse than the situation.” An impending recession was considered certain, the only question seemed to be how long it would last and how deep it would be.

After the jump in the ZEW Index Last Tuesday, VP Bank rejoiced that “worries about the economy are disappearing into thin air”. The mood barometer of the Mannheim research institute rose by 40.2 points to 16.9 points compared to the previous month.

Economic researchers, bank economists and business journalists are known for soberly analyzing data and deriving forecasts from it. The problem: When it comes to events of the century, such as a pandemic or the war in Ukraine and the energy crisis, there is no past experience.

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That’s why gut feeling is what’s needed – and it’s a known fact that this can be deceptive. The overall economic consequences of such mega-events tend to be overestimated, since a worst-case scenario, which is quite possible, fortunately usually does not occur. And so the economic forecasts since 2020 have been much more capricious than the actual overall economic development. Drop and recovery were significantly overestimated.

Economic situation subdued

Realistically, the economic situation at the start of 2023 is rather subdued. Almost half of the decent growth of the previous year is based on the statistical surplus from 2021, i.e. from the pre-war period.

Definition: What is a recession?

The high growth in the second half of 2021 meant that the gross domestic product at the end of the year was significantly higher than the annual average – and annual average values ​​are compared when calculating growth. Even with four quarters of stagnation, the statistics would have shown 0.8 percent growth at the end of 2022.

>> Read here: Five reasons that speak against a recession in Germany

The Ifo business climate is considered the most important leading indicator for the German economy. This index has been rising for three months now and another gain in January is likely – a good sign.


It is important to note, however, that the Ifo index reflects the change in sentiment in the surveyed companies and not necessarily the improvement or deterioration of something. The currently rising business climate does not necessarily indicate an upswing, but only that the majority of companies do not expect any further deterioration.

Monetary policy has yet to feed through to the economy

Finally, the macroeconomic consequences of the interest rate hikes are still pending; it usually takes three to six quarters for a monetary policy brake to take full effect. An Ifo survey shows that the restrictive monetary policy is gradually having an impact on the real economy.


It is becoming more difficult for companies to obtain new credit; 30 percent of those companies that conducted loan negotiations in December reported reluctance on the part of the banks – in September it was 24 percent.

Ultimately, the buying behavior of consumers is decisive for the development of the economy. Private consumption controls according to official statistics more than 50 percent of the gross domestic product. The prospects are mixed. According to calculations by the Handelsblatt Research Institute, inflation is likely to fall from 7.9 percent in 2022 to around five percent on an annual average this year – but a drop in inflation does not mean a drop in prices, but only slightly weaker inflation.

So the real loss of purchasing power continues. As great as the joy of some savers seems to be to get one or two percent interest on call money again – in real terms the nest egg continues to lose value.

>> Read here: Comment – Why the economic drama has not become reality

The federal government wants to counteract this loss of purchasing power with its numerous aids. In total, the aid packages will save around 50 billion euros in 2023, plus the energy price brakes. But this government aid, announced as a double boom of 200 billion euros, could possibly fade away as a quiet pop.


After all, energy prices are falling rapidly. The economist Veronika Grimm now only estimates a “high single-digit billion amount” for the gas price brake. A similar magnitude also seems realistic for the electricity price brake.

Economic development probably still weak for several quarters

A big unknown are the collective bargaining rounds for eleven million workers this year. The Verdi union, for example, is demanding a 10.5 percent wage increase for the 2.8 million employees in the public sector at federal and local level.


While qualifications in the public sector always contain a political component, in the private sector there is a balance between employers and employees. If, as was the case recently in industry, there were moderate percentage wage increases plus high one-off tax- and duty-free “inflation compensation premiums”, workers would be left with the consequences of the inflationary spurt in the long run.

>> Read here: Five reasons that speak against a recession in Germany

The HRI estimates that by the end of 2024, the price level will have risen by almost 23 percent within four years. In order to offset this price surge, wages would have to rise by around 5.5 percent across all sectors over four years – which is unlikely given the low productivity growth.


It is more likely that the economy will develop weakly for several more quarters. An end to the war in Ukraine is just as little in sight as an energy strategy. “The possibly harsher winter is next,” warns network agency boss Klaus Müller. It is quite possible that economic output at the end of the coming winter will hardly be higher than before the outbreak of the pandemic in early 2020. Germany then lacked four years of growth.

More: The federal government no longer expects a recession in 2023.

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