Neither cold nor hot. But just right. Like Goldilocks’ porridge, which required the right temperature, central banks have recently been expected to temper interest rates just enough to bring inflation down to the desired two percent, but without cooling the porridge too much and causing a recession. The possibility of achieving this not at all simple task, which has been dubbed soft landing, has been provoking debates among economists for a year and a half and very different forecasts about the possibility of realizing Goldilocks’ scenario. Predictions have ranged from hard landing, or certain recession, stagflation, to successful inflation containment, and various economic parameters from this side and the other side of the Atlantic are forcing a revision of forecasts and a shifting of the date for victory over inflation month by month. The temperature of the porridge has not yet been hit, and political polarization and war on European territory do not help in achieving the right recipe. Recent data from the U.S. suggests that the FED may have found the right measure, while the stumbling of the German economy in Europe increasingly and loudly brings back the hated word that starts with the letter ‘r’.
Path Downwards
– As the largest economy in the euro area, Germany has not avoided recession in any interest rate hike cycle in the last 50 years. The main business climate indices (PMI indices of purchasing managers, IFO) for the euro area for July and August, as well as factory orders for Germany, are sending us negative signals, especially for the manufacturing industry. Even worse, the culmination of the impact of the tightening of monetary policy by major central banks on global demand for German goods is yet to come. Over the last decade, Germany’s structural position has continuously deteriorated in areas such as taxes, energy, labor availability, and generally business regulation, which is why Germany has fallen to a distant 18th place (from sixth place in 2010) according to the Country Index for Family Business among 21 developed industrial powers. Germany was already in a technical recession at the turn of last year into this year, and after a brief stagnation in the second quarter, we expect a return to technical recession during the second half of this year. The recession could last until spring next year. After a GDP decline of about 0.5 percent this year, we expect a GDP decline of 0.3 percent in 2024. Given that aggregate demand also falls in a recession, inflation will certainly slow down in the short term – from an expected average of six percent this year to (on average) 2.5 percent in 2024 – explained HUP’s chief economist Hrvoje Stojić.
