Is a worldwide recession on the way?

Reading some of the latest financial news, it looks increasingly probable the the US and UK (and others) are entering a period of slowdown which could result in a worldwide recession.

Today the Nationwide Building Society in the UK reported a 6.3% yearly drop in house prices (see here), billionaire investor Eli Broad said the U.S. economy is in the "worst period" of his adult life as a housing market recovery remains 'several years' away. This is worse than any recession we've had since World War II" (see here), and the Bank of International Settlements reported that "a bout of deflation in the world's biggest economies is now a possibility" (see here).

In the Eurozone though, the central bank has been quite restrained about reducing interest rates and therefore protecting itself against rapidly rising inflation. Today, I have seen another article (see here) which says that German unemployment is at the lowest level in 16 years.

My question is simply this, do you think that there is going to be a worldwide recession and if so, how well placed do you think Germany is to ride out the storm?

The higher you fly, the harder you often fall. The US and UK have become accustomed to supporting themselves using other people's money. So it'll hurt them more when the sources of unearned money dry up, the price of commodities increases etc.

As to Germany, it's been a more stable economy. However, some economic features that we've taken for granted here for a decade - notably high unemployment - would have been regarded as something of an economic disaster. Go to the myriad of places with 10% unemployment (or closer to 20% in some places) and you don't need to talk about the "possibility" of a hard economic times. Economic hardship is already here.

We have to look after ourselves. Live through the "good times" and save a bit and don't assume they'll last forever. Build up skills and cash reserves to see us through the hard times. Then what's going on in the wider world matters less.

If it's worldwide then every country will be affected.

But not necessarily to the same extent. As an example, the UK has seen monthly house price gains of 10%, now they're seeing falls of that level. Would it happen in Germany? Probably not.

@Gideon
The question was not whether Germany would be affected but how severely

@HellesAngel
I think house prices are only one of the factors that are going to hit the UK hard over the coming years. The current total personal debt in the UK stands at £1,443bn which equates to an average household debt of £9341 (excluding mortgages (see here))

This is one of the major differences in Germany and the UK in which a large majority of consumer spending in the UK is done on credit and if/once this stops then the whole economy will suffer. For Germany I tend to see people making purchases using cash and if they do use credit cards the bill is paid off in full at the end of each month.

On the way? I think it is here.

Maybe not everywhere is as badly affected as the US/UK but nearly all of the major banks have caught a big cold, which means little money for new investments and reduced consumer spending. Germany is one of the world's leading exporters, so however well Germany itself is doing, it will have problems due to reduced demand. Not just beamers & mercs, but Germany's bread and butter like manufacturing equipment such as machine tools and so on.

OTOH, fuel and raw materials cost increases may mean that outsourced production may no longer be economical, unless you are supplying to a market local to your production.

i think germany will feel the pain almost as bad as anywhere else in a global recession or possible depression. but in a really depressive scenario like say oil climbs over $250 per barrel for an extended period of time and real alternatives will still take years to develop. i think germany can slip somewhat comfortably into a position that might resemble something like hungary or the ddr during the height of communism. consumer goods are scarce, food variety is limited to things like cabbage and beets. but the people are pretty happy, family life is good, people feel safe in their communities, children play happily in the almost car free streets where vegetables grow in the cracks in the pavement.

my image of the u.s. in such a scenario is more like my image of the slums of rio de janeiro or johannesburg with gang warfare, armed partrols firing bullets into people's houses and rich gated communities with private security that isolate themselves from all the misery surrounding them. but you never know, places like the u.s. and the u.k. also seem to have a lot of innovation and motivation to do good things.

my guess is we're already through the worst of a recession that more or less already started last fall, and we'll all be ok for at least the next couple of years.

@RatBoy: Very true, I'm happy not to have too much money invested in the UK as it looks grim over there. Finally the 'experts' have recognised that debt, whether secured or not, is both the engine that can drive an economy and a dead weight to drag it down. I forget the precise numbers but the UK is a society with minimal savings, something that must be corrected but that can only be corrected once the vast debt is paid down. The national obsession with home ownership and house prices, which I've never fully understood but long suspected to be a huge deception, is now acting to further unsettle consumers, and coupled with high food and fuel prices driving inflation is creating a sense of financial gloom over there that won't clear quickly.

The good thing is the electorate will blame Gordon Brown, rightly or not, and vote him out at the next opportunity, which is not to say the Conservatives will be able to solve this problem any faster but the change will be good.

EDIT: To continue jerryg's points: Germans have much less debt, much higher savings but are a population prone to unnecessary pessimism who save when the economy needs them to spend, that's why they always produce relatively conservative growth rates. In short I'd rather be here the next few years than in the UK...

Just playing with that scenario - do you think that the us would not do something to try and detract from a domestic situation like that?
Don't really hungry people go to their neighbors for food, stealing if necessary?
I can't see a major economic crash having only domestic consequences (in terms of those attacking the wealthier).


My guess is we're not.

Inflation has rocketed to 11 and a half % here and what it cost me in weekly shopping and bills two years ago when I was caring for 6 children, is costing that now for one child and myself.

the recession will hit Germany later than the US and the UK since its economy is more exports led. When consumer demand for German goods dries up in those and associated countries, German exporters will feel the pinch. We've already seen the first announcements of job losses in Germany but this hasn't really filtered through yet. The worst is definitely still to come, though it won't be nearly as bad as the UK and the US. Consumers here won't be hit as hard since they are less reliant on cheap credit.

Eat the rich.

i think the government might introduce emergency measures, like a new deal style program if the economy takes a nose dive. i don't see things turning very bad, but the potential is certainly there. i guess one question would be, what should we (or the government) be doing when times are good to put sufficient safeguards in place to prevent massive volatility in the social fabric in case the shit really ever hits the fan? that doesn't seem to ever have been much of a priority. for example the message to go out and shop more, spend your tax rebate checks on more consumer goods seems to just tighten the downward spiral.

Isn't a strong Euro making it difficult to find a market for exported goods outside the Eurozone? There certainly will be less revenue from tourists: I know lots of people in the UK are foregoing a holiday on the continent because it's just too expensive with the current exchange rate.
Though conversely, if German manufacturers are sourcing their raw materials from outside the Eurozone, they must be getting them cheaper.

yes, all are true. But it it takes time for these effects to filter through the economy which is why Germany tends to lag the US by a good few quarters during a down-turn. It also means that often the recession isn't as harsh either because the up-turn in the US economy takes the edge off (companies will ride out the recession if they see the green shoots, so less drastic effects on employment, cost cutting etc).

My company for example is facing massive problems in US dollar linked countries. For the countries where we invoice in dollars, our revenues (and therefore margins) converted into Euros are plummeting and in countries where we invoice in Euros, we've virtually priced ourselves out of the market so volumes are plummeting.

Many German manufacturers use "natural hedging" by using suppliers or manufacturing in currencies where they have the largest currency exposure. Now would be a good time for Euro-land companies to invest in USD based production capacity due to the exchange rate.

I didn't mean economically, I meant politically.
However, if we are looking at the economic possibilities, given the attitude towards "welfare mothers" and people on "handouts", what are the odds of a new-deal style program being easily implemented? There was quite a bit of resistance to the first new deal ("pull yourself up by your bootstraps" mentality dominated until it became clear that some people no longer had the metaphorical boots).
Domestic social volatility has historically been "cured" by turning the focus of the population outwards - to the "others" - instead of addressing the underlying domestic issues. That's what concerns me.

In many societies you will fall into that category Are you on the menu?

I have heard anecdotally, the points made in the last two posts. As Owain says, I hear about companies who have a lot of business in USD who are having a hard time. Those relying on oil are hit with a double whammy. I've also heard of other companies that can't source some commodities at all at the moment, it's not just a matter of higher price.

Conversely, some companies are taking the chance (and the risk) to invest heavily in the US whilst the Euro is so strong vs USD.

There will be a worldwide slowdown and in some countries even a recession. The short term outlook for Germany is mixed, the medium to long term outlook is good. Positive long term factors are the fact that German private households are net savers and that the nation as a whole has a positive net international investment position which means that Germany has no net debt towards foreign countries.



Negative factors for the short term outlook in Germany are that it has a persistent trade surplus and that exports make up a large part of its total GDP. This is an unhealthy imbalance which make Germany very vulnerable to outside shocks. Many people believe that a persistent trade surplus is positive but it actually isn't. It is just a slightly lesser evil than is a persistent trade deficit. The only truly positive situation is to have balanced trade flows with roughly the same amount of imports and exports.

Why is a persistent trade surplus negative? Because it is equivalent to a persistent export of capital outside of the country which depresses national wages and keeps internal investments and credit availability low. Germany did for decades export capital to foreign countries in order to allow these countries to buy German goods. Any money flowing back to Germany was then immidiately exported again in order to allow foreign countries to continue ordering even more German goods. While this is great for the individual companies who are active in the export business, the negative result for the national economy is a permanent drought of capital inside Germany. Of course, Germans are accumulating plenty of papers with "we owe you" statements from foreigners but the persistence of the trade surplus means that Germans do never cash in on those promises and instead keep continuing giving credit to the outside world. And the very real and rising danger is that foreigners will simply default on their debt owed towards Germany. Much like i.e. the US currently does through devaluing of its currency and through sending out emails stating "Dear German bank, hereby we inform you that your AAA rated US investment was actually a C. Which means that you can kiss a lot of your money goodbye. Sorry about that. Cheers, USA".

Why do Germans continue to play their part in such an unhealthy global trade scheme? Because most Germans have a too pessimistic view of Germany's future and a too optimistic view about the future of other countries. If such views are widespread from the individual consumer up to the executive level in German banks, it becomes a self fulfilling prophecy. Banks move billions of Euros outside of Germany in order to invest it into countries "with better growth prospects". Those countries showered with excess capital are then looking around on international markets for products to buy. As a result orders are coming in from these countries, prompting the CEOs of Siemens and Daimler to conclude that "demand is strong from outside of Germany". And this is how the vicious circle closes.

If this vicious circle of ever rising capital and merchandise exports is broken, i.e. because it becomes all too obvious that many foreigners will not repay their debt owed, it will get very ugly for a short time in Germany because it will trigger major shifts within economy. Export oriented companies and jobs will be hit hard and people will have to move into other companies and jobs. In the long term it would be good for Germany though because capital, investment and credit availability would increase as would wages and consumption.