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Will we slide into a worse recession, Economist?
A daily chat about tomorrow / #27
P: Good morning, Economist.
E: Good morning, Photographer.
P: Europe is in the middle of a recession. Papers say that gross domestic product shrank by 0.1 per cent over the first three months of 2023. The same happened in the last quarter of 2022. A recession is defined as two successive quarters of contraction, it says.
E: You listened well, Photographer.
P: Is that the beautiful future you are always raving about here?
E: Things will probably get better soon.
P: The Economist is gazing into the crystal ball.
E: The Economist knows the economy. Russia's war in Ukraine drove up energy prices and, thus, inflation. Now, the European Central Bank has to choke off the economy by making investments unattractive.
E: The European Central Bank, short ECB, has risen its interest rate, that is the price at which it lends its money. As a result, investments are becoming more expensive, which means less attractive, which means fewer. In 2019, ECB lent their money free of charge; the interest rate was 0 per cent. Now it's 4 per cent.
P: So the economic decline is intentional?
E: It is the necessary evil to stop currency devaluation.
P: That is bitter.
E: But it gives us reason to hope the recession will end. Because the inflation rate has been falling again for some time. This means that the central bank will soon be able to lower its interest rates.
< silence >
P: But you're not quite sure about the further development, are you, Economist?
E: I'm not. Economists and forecasts are not best friends. Nothing is more uncertain than the future.
P: Don't bore me with platitudes. What do you know about the connection between economics and outlook?
E: A paper by the International Monetary Fund describes the evolution of forecasts in the run-up to recessions in 63 countries.
E: The main finding is that, while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over.
P: Look! So it could get worse.
E: You are and will remain a pessimist, Photographer.
P: And you an incurable optimist, Economist.
E: Together, we are a perfect match. Have a nice day.
P: You too.
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