The strange recession that is Czechia (from my email)

From the very perceptive Kamil Kovar, these are his words I will not double indent:

“Seeing your recent brief post on recession I was wondering whether you are thinking about writing a longer post on the topic of recessions in general? I find the recent macroeconomic developments very intriguing, as they challenge my previous notions of what is a recession and what pushes us into recession, and would be very interested in hearing what you think.

To be more specific, let me use European developments, which I think are even more thought-provoking from this perspective than US developments. Take an extreme example of Czechia, which combines following facts:

1. GDP has contracted for two quarters in a row, each time around 0.3% non-annualized. It is still below its pre-pandemic peak.
2. Consumption has contracted for 5 quarters in a row, cumulatively 7.6%.
3. Fixed investment has decreased in last quarter as well, albeit after strong recovery throughout the previous year and a half.
4. The reason why GDP did not drop more is because net exports surged from their extremely low values reached during the pandemic period. In last quarter government consumption also helped a lot.
5. Despite all the weakness, labor market is tight, with unemployment rate close to its pre-pandemic historical lows (in case you don’t know, it is ridiculously-sounding low at 2.1%), and employment continuing to grow.

(This as of March; more recent data continued in these trends, albeit GDP overall increased a tad bit. Also, Germany is going through something similar, albeit at much smaller scale). 

It feels like this combination just does not fit in together in terms of standard macroeconomics – if you would tell me only about consumption (2) I would say the country has to be in recession, but investment (3) and labor market (5) are clearly saying no recession. If it would be just labor market, then I could accept that it is case of labor hoarding distorting the picture, but investment also remaining robust is just hard to reconcile with recession. 

So I was wondering in what way, if any, did the last update your beliefs about “what is a recession and what pushes us into recession” in the light of the puzzling macroeconomic data of last year or so…

P.S.: In case you want to read more on the case of Czechia, or my take on what it all means, I had a blog post few months back: 

https://kamilkovar.substack.com/p/it-or-isnt-it-recession-on-regular

My way of reconciling the data with my mental models is that got real shocks pushing us into RBC-style recession, but for whatever reason we did not get the typical demand shocks that lead to a more standard recession.”

TC again: Worth a ponder!