Germany’s Recession: A Closer Look and Lessons for Australia
In recent times, Germany, the largest economy in Europe and the fourth largest in the world, has been facing a challenging period marked by a recession. This economic downturn has raised concerns not only within Germany but also globally. We made a deep delve into the reasons behind Germany’s recession, its implications for Australia and around the world. In addition, we will also look at the lessons we can learn from this situation. So, let’s explore the factors contributing to Germany’s economic slowdown and how Australia is at the tip of recession, trying not to fall into it.
Chapter 1: Introduction – Understanding Recession
Recession, lay-offs, and negative growth are terms that have become increasingly common in the economic discussions. In simple terms, a recession occurs when an economy experiences two consecutive quarters of economic shrinkage or negative growth. In the case of Germany, the last quarter of 2022 witnessed a growth rate of -0.5%, followed by -0.3% in the first quarter of 2023. Technically, this places Germany in a state of recession. Although these figures may not appear alarming, they indicate underlying issues within the economy.
Chapter 2: Declining Economy – A Major Factor
The first reason behind Germany’s recession is a declining economy. A growing economy is characterised by the free flow of money, optimism among the population regarding future income growth, and increased spending. However, the German economy no longer exhibits these characteristics. Pessimism has taken hold due to two significant factors: the Russia-Ukraine war and the global economic crisis. Germans have become cautious with their spending, focusing primarily on necessities rather than discretionary expenses. While this frugality may be beneficial on an individual level, it hampers overall economic growth.
Chapter 3: Impact of the Russia-Ukraine War
The Russia-Ukraine war has far-reaching implications beyond the two countries directly involved. Germany, historically dependent on Russia for energy needs, has been significantly affected. The conflict has led to increased energy prices, causing inflation to rise sharply. To combat inflation, the central bank has raised interest rates, making it challenging for businesses to secure loans and sustain their operations. This shift from a growth-oriented mindset to a survival mode has further contributed to Germany’s recession. Australia’s LNG exports have increased, putting pressure on local demand and supply. The inflation is heading north and at the same time RBA is trying to reduce growth in activity, spending and income. It is raising interest rates. The overall benefit for Australia is the increase in revenue from iron ore and natural gas as exports rise. But on the other hand the cost of food and fertilisers have skyrocketed, leaving everyday Australians with empty pockets. Either they are able to buy food or pay rent/mortgages. Cooking oil prices have also put a burden on consumers.
Chapter 4: Trade Dependency – A Cause for Concern
Germany heavily relies on exports, with one-third of its economy dependent on foreign markets. The country exports billions of dollars worth of vehicles, machinery, medicine, clinical, pharmaceutical and chemical products annually to Australia. However, both Germany and Australia are facing their own unique economic crises. With the US and China facing their own issues and the protectionist measures implemented by the United States, along with China’s potential market restrictions, have resulted in a steady decline in Germany’s exports to these two nations. This external dependency poses a significant challenge to Germany’s economic recovery.
Chapter 5: The Decline of Europe
Europe, once seen as a benchmark for a good life and prosperity, is experiencing a decline in its economic fortunes. Several European countries have transitioned from ascending economies to descending economies, with the post-World War II golden period coming to an end. Ageing populations and a lack of a young workforce pose challenges for economic growth in Europe. While certain countries within the European Union perform well economically, others, such as Portugal, Italy, Greece, and Spain (PIGS), struggle. With the departure of the United Kingdom after Brexit, Germany’s recession, and France’s economic woes, Europe’s status as a rising economy is diminishing.
Chapter 6: Australia – The Weakest Since COV-19 Lockdowns
In contrast to Germany’s recession, Australia appears a bit under control, with little chances of a recession. The country has witnessed a GDP growth of 0.2% in the March quarter 2023. The GDP is expected to grow by 1.25 % over 2023. With AUD declining and households expenditure remaining sluggish and inflation still rising with no sight of commodity prices going down. The RBA is trying every option on the table to tighten the monetary policy. The recovery appears feasible but in the distant future. Families are not able to save more as the cost of energy, food, fuel and mortgage payments are rising. This will have an impact on retail and white goods business.
Chapter 7: Lessons for Australia
Germany’s recession provides valuable lessons for Australia to consider. Firstly, maintaining a growing economy is crucial, fostering optimism and encouraging spending. Secondly, the importance of maintaining neutrality in global conflicts, as India did during the Russia-Ukraine war, cannot be overstated. Australia has provided supplies to Ukraine in various forms and it is indirectly involved in the Russia-Ukraine war. By preserving good relations with all parties involved, Australia could manage to maintain stability and focus on its own economic growth. Germany used to spend only 1% of its GDP in defence after WW-II, to overcome its current situation it will have to increase its spending in the defence sector. This was recently seen in the biggest defence deal between Australia and Germany on 10th July 2023, where Australia will supply “Armoured Vehicles” to Germany. These will be built in a facility in Brisbane and generate 1000 new jobs in the region.
Conclusion
Germany’s recession serves as a reminder of the fragile nature of global economies. While Germany grapples with its economic challenges, Australia ‘a stumbling economy with a promising future. By learning from Germany’s experience, Australia can navigate potential pitfalls and sustain its growth trajectory. By fostering a healthy economy, maintaining neutrality in global conflicts, and capitalising on its demographic dividend, Australia can position itself as a strong and resilient economic powerhouse.
