Inflation reduces the disposable income of people in Germany. This has consequences for consumption as an important pillar of the economy. A turnaround could become apparent towards the middle of the year.
According to economists, inflation will dampen consumer spending in Germany this year. Private consumption is therefore likely to fail as an important pillar of the economy for the time being. “The high inflation reduces the disposable income of private households and leads to a decline in private consumer spending in the current year,” forecast the Kiel-based economic research institute IfW in its on Wednesday. The Ifo Institute made a similar statement.
Since real wages are likely to fall further against the background of inflation, private consumption in particular is likely to continue its decline, explained the Ifo. The turning point will come in the course of the year: “Rising real wages will support the domestic economy by the middle of the year at the latest,” said Ifo economic researcher Timo Wollmershäuser. In addition to noticeable collective wage increases, gradually falling inflation rates should also contribute to this. “Inflation has peaked,” said Wollmershäuser. On average for 2023, he expects a value of 6.2 percent.
Wholesale affects consumer prices
Data from the German wholesale sector also showed that inflation may have passed its highest level. Inflation there weakened again in February and, at 8.9 percent, was no longer in double digits for the first time in almost two years. In January, the annual rate was still 10.6 percent. Wholesale is one of several economic stages that affect consumer prices.
The Ifo assesses the economic prospects for this year as rather gloomy and expects a decline in economic output of 0.1 percent. The Munich researchers are somewhat more pessimistic than the federal government and some other economists. The government recently expected gross domestic product to increase by 0.2 percent. The IfW predicts growth of 0.5 percent. The prospects for Europe’s largest economy have brightened slightly.
Can a second-round effect be expected?
According to Stefan Kooths, chief economic officer of the IfW, the wage increases of a good five percent this year and almost six percent in the coming year should not have any “second-round effects” on inflation.
If rising inflation leads to higher wage agreements and thus wage costs, this in turn can fuel inflation. Wages and prices would push each other up and inflation would perpetuate – the so-called second-round effect.
Last year, the lifting of most corona restrictions boosted private consumption despite higher inflation. Adjusted for price increases, consumer spending by private households rose by 3.4 percent year-on-year. According to the Federal Statistical Office, the pre-crisis level in 2019 was missed by 1.3 percent. Measured in current prices, consumer spending increased by 10.7 percent. The difference reflects inflation, which averaged 6.9 percent over the past year.
Spending on services, which include gastronomy and travel, for example, increased by 8.3 percent on a price-adjusted basis compared to 2021, when many restrictions to combat the pandemic were still in place.
Savings rate down
The consequences of the sharp rise in energy prices were clearly evident. Expenditure by private households rose by 19.3 percent in current prices for electricity and 13.9 percent for gas. Adjusted for price increases, expenditure on electricity fell by 0.5 percent and on gas by 26.4 percent. Due to the warmer weather and savings, private households would have used significantly less gas than in the previous year, the Wiesbaden authority explained.
The savings rate fell by almost 4 percentage points to 11.4 percent compared to the previous year and was again approaching the pre-crisis level. For every 100 euros of disposable income, an average of 11.40 euros was set aside. Many people had more money during the pandemic than in normal times, for example because vacation trips were canceled and leisure facilities were closed.