High inflation and high interest rates continue to suppress German consumption and investment
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The latest economic data show that German economic growth momentum is still insufficient. The analysis pointed out that under the influence of factors such as high inflation, high interest rates and slowing global economic growth, German consumption and investment continued to be suppressed, and the economic outlook weakened.
Growth momentum is still insufficient
Preliminary data released by the German Federal Statistical Office on the 6th showed that after adjusting for seasons and working days, the real turnover of the German service industry (excluding financial and insurance activities) fell by 0.2% month-on-month in November last year, and the nominal turnover fell by 0.4% month-on-month. Compared with November 2021, the real and nominal turnover of the German service industry in November last year rose by 6.1% and 10% respectively.
In addition, data released by the German Federal Statistical Office on the 6th showed that after adjusting for seasons and working days, new industrial orders in Germany rose by 3.2% month-on-month in December last year. Domestic new orders increased by 5.7% from the previous month, and foreign new orders increased by 1.2% from the previous month. New orders from the euro area increased by 9.8% month-on-month, while new orders from the non-euro area fell by 3.8% month-on-month.
Commerzbank chief economist Cramer said that although new industrial orders increased in December last year, based on the slump in November, the trend of new orders is still a significant decline. The boost from dealing with a backlog of orders amid the coronavirus pandemic is expected to wane in the coming months.
In the fourth quarter of 2022, Germany’s gross domestic product (GDP) will decline by 0.2% from the previous quarter. In the first three quarters of last year, Germany’s GDP grew by 0.8%, 0.1% and 0.5% respectively. The performance of the German economy declined slightly in the fourth quarter, and private consumption spending, which supports the German economy, fell from the previous quarter.
A report released by the German government at the end of January expects the German economy to grow by 0.2% this year, an upward revision to positive compared to last autumn’s forecast. However, the report pointed out that factors such as a slowing global economy, high energy prices and high inflation will still weigh on economic growth.
The Bundesbank forecast in December last year showed that the German economy would shrink by 0.5% this year before returning to growth in 2024 and 2025.
Multiple economic challenges coexist
German inflation will reach 7.9% in 2022, the highest since 1990, and was still as high as 8.6% in December. In December 2022, German energy prices rose by 24.4% year-on-year, and food prices rose by 20.7% year-on-year.
The rise in inflation in Germany has been largely driven by high energy prices that have boosted consumer and business spending amid the Russia-Ukraine conflict.
Sweden, which holds the rotating presidency of the European Union, announced on the evening of the 3rd that the EU member states reached an agreement on the price ceiling of Russia’s diesel and other petroleum products on the same day. On the same day, the G7 and Australia issued a joint statement to impose the same price limit on Russian oil products.
The analysis pointed out that the new sanctions have increased the uncertainty faced by European energy prices. At one point, 10 percent of the EU’s diesel came from Russia. Europe is trying to find alternatives from other places than Russia, but these regions are often more distant than Russia. The European Union has previously imposed price limits on crude oil from Russia, and is expected to tighten price limits on diesel and crude oil.
Data show that due to factors such as the crisis in Ukraine, the cost of imported energy in Germany has soared. Germany’s trade surplus will be around 76 billion euros in 2022, the fifth consecutive year of decline. Germany’s merchandise exports and imports in 2022 will be about 1.56 trillion euros and 1.49 trillion euros, respectively, an increase of 14.3% and 24.3% over the previous year.
High inflation continues to weaken the purchasing power of consumers and has become one of the important factors inhibiting economic growth. Large-scale strikes have continued to occur in Europe recently, and people’s demands for wage increases to cope with high inflation are getting louder and louder.
According to the Deutsche Presse Agency, a spokesman for Deutsche Post said that the strike action demanding a wage increase on the 6th caused delays in the delivery of 1 million letters and packages, and the consequences of the strike action in January were even more serious. Trade union representatives said that high inflation has continued to reduce real income. The strike action aims to maintain the real income due to individuals and demand a 15% salary increase to deal with inflation.
In addition, the EU is once again plagued by the refugee problem. According to the Russian Satellite News Agency citing data from the German Federal Office for Migration and Refugees, about 244,000 people will apply for asylum in Germany in 2022, the highest number since 2016 and an increase of 28% over 2021.
The German News Agency reported that the German Ministry of the Interior and Lands will hold a high-level meeting to discuss the difficulties faced by refugee resettlement. Many German state and city governments have recently reported that the rising number of refugees has “overwhelmed” the localities.
The German government expects inflation to be 6% this year. Joachim Nagel, president of the Bundesbank, said recently that it is too early to announce that high inflation will end, and there is no sign of a quick easing of inflation yet. Inflation levels are still high and will only gradually decline in the future.
downward pressure on the economy
Preliminary data showed that the inflation rate in the euro zone was 8.5% on an annualized basis in January. Although it has slowed down for three consecutive months, it is still far above the European Central Bank’s medium-term inflation target of 2%. The inflation rate continued to rise, indicating that the upward pressure on prices was still relatively large.
In order to curb inflation, the European Central Bank continues to raise interest rates sharply. The European Central Bank announced on the 2nd that it will raise the three key interest rates in the euro area by 50 basis points, and reiterated that it will maintain the scale of balance sheet reduction and continue to maintain the pace of monetary tightening.
European Central Bank President Christine Lagarde said that although global supply tensions are gradually easing, the underlying factors that push up inflation in the euro zone have not been eliminated. The interest rate is 50 basis points, and the pace of tightening may also be maintained in subsequent meetings to avoid continued rise in inflation expectations.
Carsten Brzeski, head of macroeconomics at ING, said the ECB may pause or slow down the pace of rate hikes after March.
Andrew Kenningham, an analyst at Capital Economics, said the European Central Bank has not indicated that it will change its stance and expects several more substantial interest rate hikes in the next few months.
According to a Reuters report, three ECB officials said that the March interest rate meeting may decide to raise interest rates by 25 or 50 basis points.
Analysts believe that although the European Central Bank’s continuous and substantial interest rate hikes will help curb rising inflation, it will also raise the borrowing costs of companies and households and curb economic activities. The euro zone economy may be weak in the short term.
Economists at the Bloomberg Economics Department believe that the European Central Bank’s monetary policy may play a decisive role in the direction of the euro zone economy this year. Bloomberg lowered its growth forecast for the euro zone economy in the second half of this year as the European Central Bank’s interest rate expectations rose.
Lagarde said the European economy had shown better resilience than expected in the face of the Ukraine crisis. However, Lagarde also acknowledged that economic activity in the euro zone has slowed significantly since the middle of last year, and is expected to continue due to factors such as weak global demand and uncertainty driven by the Ukraine crisis.
The euro zone economy grew by only 0.1% quarter-on-quarter in the fourth quarter of last year. Some analysts expect economic activity to pick up later this year, but even so, the euro zone’s growth rate of 0.5% this year is expected to be well below the 3.5% growth expected in 2022.
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