- With Germany already in a technical recession, economists are forecasting GDP growth to stagnate for the rest of the year.
- Even if inflation starts to fall, Germany’s central bank estimates that it won’t reach 2% until 2025 at the earliest.
- Germany’s place in the eurozone means its interest rates are set by the European Central Bank, giving the country limited autonomy in fighting stubborn inflation.
Germany entered a technical recession on May 25 and economists have predicted GDP growth will stagnate for the rest of the year, painting a bleak picture for Europe’s largest economy.
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With Germany already in a technical recession, economists are forecasting GDP growth to stagnate for the remainder of the year, painting a bleak picture for Europe’s largest economy.
In May, Germany’s statistical office revised its first-quarter GDP figure to -0.3% from zero after contracting 0.5% in the last quarter of 2022.
But it is not only the fluctuating gross domestic product that indicates that the German economy is faltering.
Here are five charts showing how Europe’s historic engine is faring.
The consumer price index measures the average change in the price of goods and services purchased by consumers and is a solid indicator of changes in the value of money.
According to preliminary data from the German statistical office, the inflation rate in Germany is expected to reach 6.4% in June, up from 6.1% in May. Despite the projected rise, the figure is still a significant drop from its near 50-year peak of 8.8% in October, but is still well above the country’s 2% target.
“It looks like inflation will remain at very high levels for at least the next few months. Perhaps expect inflation to ease to some extent in the second half of the year,” Deutsche Bundesbank President Joachim Nagel told CNBC in March.
While inflation may start to fall, Germany’s central bank estimates it won’t reach 2% until 2025 at the earliest. German consumers have felt the effects of prolonged high inflation as they have had to expand their euro further, but the financial pressures on households are unlikely to ease anytime soon.
Germany’s place in the eurozone means its interest rates are set by the European Central Bank, giving the country limited autonomy in fighting stubborn inflation.
While the government can’t necessarily control inflation, it can mitigate its impact on the German population, Sylvain Broyer, chief EMEA economist at S&P Global Ratings, told CNBC.
“What the Treasury can do in the face of high inflation is ease the pain of inflation for the most vulnerable citizens,” he said.
The government introduced several aid packages in 2022 to help Germans cope with the rising cost of living caused by high inflation, including increased child benefits and one-off payments for students and pensioners.
The European Central Bank has been raising interest rates steadily since July 2022 to bring down inflation across the region. After another hike of 25 basis points on June 15, the key interest rate is currently at 3.5%.
The current surge in inflation can largely be attributed to high global energy prices, a result of post-pandemic pent-up demand and the subsequent post-pandemic recovery. The large-scale invasion of Russia in Ukraine then caused great uncertainty on the market and a further increase in prices.
While some energy sources are beginning to level off at pre-war prices, the energy crisis continues to impact some of Germany’s largest industries.
“Energy-intensive industrial production will be significantly reduced. The automotive sector.” [has also been] “We have been struggling for some time and a significant restructuring is yet to come,” Volker Wieland, endowed professor of monetary economics at Goethe University in Frankfurt, told CNBC.
According to an Allianz report in January, utility costs are expected to continue rising in 2023. Electricity bills are likely to increase by about 35% this year, while industrial electricity prices will increase by about 75%, the report said.
German exports fell unexpectedly in May, totaling 130.5 billion euros ($142 billion), down 0.1% from April, according to preliminary data from Germany’s statistical office. Analysts polled by Reuters had expected a 0.3% mom rise after April’s export figures surprised on the upside.
“Of course, the global interest rate hikes are also dampening demand for products from Germany,” Veronika Grimm, professor of economics at the Friedrich-Alexander University of Erlangen-Nuremberg, told CNBC.
But the drop in exports may not be as bad as headlines suggest, S&P Global Ratings’ Broyer told CNBC, attributing the drop to a price effect reflecting factors like recently lower energy costs.
“The foreign trade numbers for May show that the terms of trade are continuing to recover. The German economy has already recovered half of the terms-of-trade losses suffered over the past two years and the energy crisis,” he added.
China is Germany’s most important business partner. The countries traded goods worth €298.9 billion between themselves in 2022, and Germany has been given a boost by the much-touted reopening of China after the pandemic.
But Europe’s largest economy is reluctant to further strengthen its trade ties with Beijing. The country’s economy minister and vice chancellor, Robert Habeck, said while Germany is open, trade is not a “dumb market” and needs to “be careful”.
Germany has the largest aging population in Europe, with a growing percentage of Germans in retirement, and this demographic is only set to grow in the coming decades.
According to the German statistical office, the number of people of retirement age (67 years and older) will increase by around 4 million by the mid-2030s, taking the total number of pensioners to at least 20 million.
The growing elderly population has heightened concerns about the country’s pension system, which Rainer Dulger, president of the Confederation of German Employers’ Associations, told Germany’s Bild newspaper in October said it was “on the brink of collapse”.
According to the 2021 Aging Report published by the European Commission, contributions to Germany’s public pension schemes under the current system are expected to account for 12.2% of the country’s GDP by 2070. This is an increase of 2 percentage points compared to 2019 and one of the largest projected changes in the European Economic Area.
Combined with a labor shortage crisis that has prompted the country to revise its immigration rules to attract more workers and an enthusiastic commitment to digitization to get the most out of the existing workforce, Germany’s rapidly aging population is having far-reaching implications on the whole country economy.
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