The Briefing

Is a recession on its way?

All the answers you need, easily explained

September 22, 2022
Reading time 3 min.

1. What exactly is a recession?

Let’s take an example: imagine you’ve always liked to buy bucket hats. Now, because of the recent inflation, all hats have become more expensive. So you make the choice to stop buying them — or, to put it another way, your demand for bucket hats has decreased. This has consequences for the bucket hat store, as less sales mean they’re getting less income and so its economic output falls.

If a nation’s economic output — the value of all sales of goods and services — doesn’t grow, or even falls, then that country is in a recession.

2. How will I notice a recession?

You’ll notice a recession by the fact that people are buying less — and companies are therefore earning less. This can have various consequences, including companies going into insolvency, and people being laid off or put into part-time work. If people are earning less, then naturally they tend to spend less. So the whole thing can be a bit of a vicious cycle, at least in theory.

3. Why is it happening?

A recession is currently looming because we are in a period of inflation, which means that you can't get as much for your money as you used to. Therefore people start buying less. Everything is also getting more expensive for businesses — the bucket hat shop might be facing more expensive manufacturing costs, so it can’t afford to produce as much, and therefore its economic output falls. To sum it up: inflation can herald a recession.

4. What does Covid-19 and war have to do with it?

The federal government responded to the corona pandemic with some pretty tough rules and many stores had to close, which lowered economic output — although the government also provided lots of aid packages.

The war in Ukraine has made electricity and gas more expensive for consumers and businesses. In combination with supply shortages, Covid-19, and inflation, everything is getting more expensive and so people aren’t spending as much money right now.

5. Is Germany in a recession?

Germany isn’t in a recession right now, but it might be soon. Experts have calculated that we’ve narrowly escaped a recession. For one to occur, the economy will need to shrink for at least 2 quarters of the year (i.e. 6 months). That hasn't yet happened, but researchers believe the economy will shrink, and the gross domestic product will fall, by the end of September. This means we could see a winter recession. Not good news!

6. Who is benefiting right now?

Gas and electricity producers are benefiting right now because they're charging much higher prices for their supplies without having higher costs. Also, companies that make food and everyday items are doing well, as those products will always continue to be needed and bought.

7. What am I supposed to do with my money now?

If you don't want to invest it, then do nothing. If you do want to invest it, look for investments that are designed for a longer period of time. That way you'll stay on the safe side. Especially in times of crisis, investing in broad-based and global equity funds can often pay off in the long run.

Good news: Inflation is being fought by the European Central Bank raising interest rates. That’s good for everyone who has savings in their bank account, because you’ll receive interest payments on your money.

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