The fear of a recession is spreading, in the US and in the euro area. Politicians are calling for measures worth billions to be taken to prevent such a slump in the economy. What is forgotten is that recessions are often as unavoidable as they are necessary.
The global economic prospects are clouding over, which is also reflected in the purchasing behavior of consumers.
Is she coming, isn’t she coming, or is she already there? For weeks there has been speculation on both sides of the Atlantic about the risk of a recession. From a purely technical point of view, this bogeyman is already a reality, at least in the USA. The US economy has been shrinking for two quarters in a row, which is commonly referred to as a recession. Things are a little different in the euro area. There, the gross domestic product (GDP) has increased surprisingly strongly in the course of the year to date, despite the Ukraine war and energy shortages.
Economic management rarely succeeds
However, the diverging economic data from the USA and Europe should not be overinterpreted. Many special factors, such as the different effects of the Omikron wave a year ago or inventory adjustments due to supply bottlenecks, play an important role and distort the data. America’s economy is probably in better shape than a glance at GDP would suggest. In the euro area, on the other hand, the continued growth feigns a confidence that hardly corresponds to the mood.
What both economic areas have in common is that numerous politicians are now calling for generous economic policies to be used to prevent a severe economic slump. The reflex is obvious, because recessions are painful: they lead to layoffs, rising unemployment, lower living standards, losses, bankruptcies, dwindling tax revenues and much more. So it is understandable that you want to fight such consequential costs with all means.
But economic management rarely succeeds. It usually takes a long time before a problem is identified, a measure is decided on and the whole thing is finally implemented. When the measure finally takes effect, the consequences are often counterproductive. This was recently shown in the USA, where a gigantic spending program by the Biden government began to stimulate the economy at the time when various corona protection measures were lifted. This led to the economy overheating and made a significant contribution to boosting inflation.
Elon Musk’s criticism
Doing nothing is usually better. And today, too, we must warn against fiscal activism and a premature end to monetary tightening. After all, recessions, like upswings, are natural and unavoidable phases of economic cycles. They also have their good sides: economic exaggerations are corrected, unprofitable investments written off, inefficient structures broken up, and scarce funds flow back to where they bring the most benefit to the economy. The system renews itself from within.
Elon Musk, never at a loss for a provocation, wrote in a recent tweet: “Companies that inherently have a negative cash flow, i.e. destroy value, have to die so that they no longer consume resources.” He’s right. In recent years, many heavily indebted companies have only been kept alive artificially because, thanks to low interest rates, they hardly had to pay anything for their debts. If rising interest rates mean that such “zombies” make way for more efficient companies, it’s no big deal.
This is not intended to play down recessions. And of course it is important that the welfare state in such times helps all people who are in need through no fault of their own in a targeted and uncomplicated manner. Nevertheless, recessions are sometimes necessary to correct economic imbalances: Without the – highly unpopular – drastic cure of the early 1980s, the USA, for example, would not have gotten its inflation problem under control. And without drastic corrections, the consequences of years of money glut will hardly be manageable this time either.