Questions & Answers: Economic situation: It’s not just inflation and higher interest rates that are a burden

Questions & Answers: Economic situation: It’s not just inflation and higher interest rates that are a burden

The German economy is currently doing poorly compared to other countries. Is Germany once again the “sick man of Europe,” as the British magazine “The Economist” recently headlined?

The German economy is stuck in the doldrums. According to the International Monetary Fund, Germany is the only G7 industrial country whose economy will shrink this year. According to an initial estimate by the Federal Statistical Office, gross domestic product fell slightly by 0.1 percent in the third quarter compared to the previous quarter.

Economic development is also dampened by inflation. The statisticians will also publish the first figures on consumer prices in October on Monday (2 p.m.).

Why does inflation dampen economic development?

Significantly increased prices are putting a strain on consumers. They can afford less for their money. In a recently published survey commissioned by the German Savings Banks and Giro Association, 61 percent of a total of more than 4,800 respondents said in the summer that they had restricted their consumption in the previous twelve months.

Private consumption is an important pillar of the economy. “Above all, the high prices for food are weakening the purchasing power of private households in Germany and are ensuring that private consumption will not be a pillar of the economy this year,” expects Rolf Bürkl from the Nuremberg market researcher GfK. According to preliminary data from statisticians, consumer spending fell in the third quarter.

How has inflation developed?

Inflation remains a burden despite a significant decline in Germany. Consumer prices in September were 4.5 percent above the level of the same month last year – after 6.1 percent in August. Before the start of the Ukraine war in February 2022, Germany was heavily dependent on cheap Russian gas until Russia stopped deliveries. Energy prices skyrocketed, driving up inflation overall. Food prices in particular are now putting pressure on consumers.

What role do ECB interest rate increases play?

In the fight against inflation, the European Central Bank has raised interest rates ten times in a row since July 2022. Recently, the euro currency watchdogs stopped tightening the interest rate screw in view of the lower inflation rates. Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. At the same time, more expensive loans are a burden on the economy because loan-financed investments become more expensive. Some companies are therefore reconsidering their investments. Private house builders as well as large investors are holding back on construction projects.

What else is weighing on the German economy?

The export-oriented German economy is feeling the effects of the weakness of the global economy. “Weaker foreign trade hits the German economy disproportionately and more severely than some other nations,” said Economics Minister Robert Habeck recently. The global economy is recovering only slowly from the consequences of the pandemic, the Russian war against Ukraine and inflation – according to the IMF, growth is historically weak. “The global economy is limping along, not sprinting,” said IMF chief economist Pierre-Olivier Gourinchas recently.

What supports the German economy?

The labor market appears to be robust. According to the Federal Employment Agency, demand for workers remains high. There is a shortage of staff in many places. Leading economic research institutes expect only a moderate increase in unemployment to 2.6 million people this year in view of the “notorious” and likely to worsen personnel shortages in many areas. The number of unemployed will probably fall slightly in the next two years.

“Compared to other countries, Germany is doing well overall, not just in terms of employment and debt sustainability,” said Bundesbank President Joachim Nagel in an interview at the beginning of September. “Germany is not the sick man of Europe. I think that is a misdiagnosis that many people are all too easily caught by. We should be more self-confident.”

What is the state of Germany’s public finances?

According to Finance Minister Christian Lindner, Germany continues to be seen internationally as a pillar of the financial system despite its weak economic development. “We are something of an anchor of stability, because our debt is decreasing and the debt ratio is decreasing,” said the FDP politician recently.

Source: Stern

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