It is no surprise that the COVID-19 pandemic has damaged many of the world’s biggest economies. Last year in Germany, however, economists started predicting something called a “bottleneck recession”. Many of the materials that German firms need for production of goods are in short supply, hence harming the supply chain of the economy. But when will the German economy bounce back? And what will be the consequences of such a recession?
What are supply bottlenecks?
One of the most important issues to consider here are supply bottlenecks. A simple analogy for a ‘bottleneck’ would be a machine that is not working efficiently, and hence a long waiting period appears until the final result is delivered.
In general, this occurs when price increases (inflation) result in an increase in the price of wages as well as raw materials. This causes a decrease in aggregate supply (amount of total production) of an economy. And because the demand for goods does not change (meaning people still want the same amount of goods as before), firms have to increase prices of the goods. The effect is that the increased cost of production is passed onto the consumers by firms.
Global supply chain bottlenecks have been one of the biggest problems in 2021 for many countries. One of the most affected economies was Germany because exports of cars, machine tools and other goods make up approximately half of its economic output. In the US, economic output depends on only 12% of these types of exports. This sort of dependence on manufacturing and trade makes countries like Germany more susceptible to issues in the supply chain.
Put simply, if factories do not have the necessary raw materials for production of goods, their economic output and amount of exports will decrease and hence harm the economy.
It should be mentioned that economic output may have increased in November of 2021, but it also decreased by that same amount in December 2021, hence canceling out any growth seen in the German economy. And with the current Omicron outbreak, it is unlikely the situation will improve anytime soon. Production cuts, staff shortages and restrictions are all results of rising infection rates. Combine this with increasing costs of energy and the country’s going into the aforementioned bottleneck recession.
However, the future isn’t all uncertain for Germany’s economy. Many think spring will “mark a resumption in the pandemic rebound”. It is expected that “energy prices [will be] digested and supply-chain problems [may be] eased by then” which would lead to growth in the second and third quarters of 2022.
Germany already faced consequences of the supply chain bottleneck in 2021 with its car sales rapidly shrinking and “Volkswagen AG deliveries [dropping] to the lowest in a decade, despite robust orders”
4.1% was the earlier estimate of growth in Germany in 2022, which has now been lessened to 3.6%, mainly because tensions between Russia and Ukraine may result in augmented energy prices, even more so than beforehand.
All of this was and will be the result of the bottleneck recession in Germany. However, such bottleneck issues in many economies can lead to “corrective behavioral changes over time”. Instead of focusing on efficiency, many countries that did go through supply chain bottlenecks this past year, will hopefully focus on making their economies more resilient as well, to avoid such setbacks in the future.
Today, Germany’s economy is still struggling because of supply shortages, with economic growth declining and the inflation rate increasing in 2021. But there is much hope for the next few years. Germany’s economy is expected to pick back up in the spring of 2022 as infection rates will hopefully decrease and make way for the gains that will likely take place in 2023.
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Ewing, Jack. “Fears of a ‘Bottleneck Recession’: How Shortages Are Hurting Germany.” The New York Times, 5 Oct. 2021, http://www.nytimes.com/2021/10/05/world/fears-of-a-bottleneck-recession-how-shortages-are-hurting-germany.html.
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Rees, Daniel, and Phurichai Rungcharoenkitkul. BIS Bulletin No 48 Bottlenecks: Causes and Macroeconomic Implications. 2021.
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