Recession as a rescue: Bad news with a positive effect

So recession coming soon. Economic output is expected to shrink by 0.3 percent in the coming year. A few ugly harbingers of the coming contraction are already showing. The department store group Galeria will close more stores if no new state aid comes.

The auto supplier Schaeffler wants to cut 1,300 jobs. The designer bag retailer Fashionette is running out of customers in the winter of displeasure and is warning its shareholders of a drop in sales.

Should the state, social security funds and the Reconstruction Loan Corporation also buy the country out of this crisis? Better not. Because these examples show why recessions ultimately have positive effects (provided they are not too severe).

Permanent State Aid

When the economy shrinks, those parts of the business or companies that are also struggling for other reasons disappear from the market. Retail in city centers is suffering more and more from online trading. Galeria has been doing badly for years, the company keeps needing state aid, new loans and rent reductions: maybe the company cannot be saved?

Automotive suppliers like Schaeffler need fewer workers because of electromobility, and compared to combustion engines, electric motors have hardly any individual parts that have to be purchased. And the market for designer bag retailers is, to put it mildly, well populated even in good times. It would therefore be wrong to prevent an adjustment here.

The side effects of the recession are likely to be moderate. This has a lot to do with the energy and heat packages that citizens and companies will be paid from December onwards. They should be able to handle the rest.

Haberdashery department, deserted

Recessions cost prosperity, but they also help distribute scarce resources better and more efficiently. Labor shortages are likely to continue and worsen in the coming years, despite recession and stagnation.

So it wouldn’t make much sense for employees to continue bravely holding out in the deserted haberdashery department of a galeria branch. It would make more sense now to switch to one of the discounters that are urgently looking for employees (and don’t even pay less).

Insolvencies and business closures are painful in individual cases, but make economic sense. Unproductive companies leave the market, which creates space for more productive companies that need employees and materials, and can serve offers and requests. This creates the basis for economic recovery and new growth.

A recession also has a dampening effect on inflation: if demand drops so much that at some point a new balance between supply and demand is created, the upward pressure on prices also decreases. That is why the central banks are now raising interest rates. In doing so, they slow down demand and investment. They accept the decline in economic output and the recession in order to stabilize the value of money.

It usually takes quite a while for inflation to actually drop significantly. The Council of Experts for the Assessment of the Overall Economic Situation believes that inflation will again be very high in the coming year. But nobody should be under any illusions: there is no shortcut.

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