Inflation and the energy crisis are pushing the German economy into a recession. Let’s understand the details:
What is the current Inflation level in Germany?
Germany reported 10% CPI in September YoY which is the highest increase since WWII. Inflation has been on the rise since the beginning of the year primarily due to Russia Ukraine war.
German Wholesale Price Index increased 19.9% YoY in September. WPI is another important indicator for tracking inflation. WPI basically means a change in price before the goods are sold at the retailer. The US uses PPI (Producer Price Index) which is equivalent to the Wholesale Price Index.
German Energy Crisis
One of the major factors of inflation within the EU in general and specifically in Germany is the energy crisis. Historically Germany relied heavily on Russia for cheap gas for industry and household usage including electricity production and heating. However, as Russia turned off the gas and winter is on the way Germany had no other option but to think of alternatives but a shortage of gas also caused the prices of gas to climb drastically high. Energy is the wheel of the economy and higher energy prices indirectly translate to pretty much everything being more expensive.
The largest German chemical producer BASF which also relies heavily on gas for the production of chemicals announced a cost-cutting program due to rising energy costs.
German Economy Minister lashed out at the US for selling expensive gas which is 7 times the price of gas in the US.
What German Government is doing to tackle inflation?
The government has introduced a few measures which have been quite effective:
– 300 Billion Euro cushion to help industry and household to deal with higher gas prices.
– Interest Hikes: ECB has also introduced interest hikes to encounter inflation however the recent CPI data doesn’t indicate any slowdown in inflation.
– 9 Euro tickets: During the Summer government introduced 9 Euro tickets to travel throughout Germany to prevent using cars and reduce oil consumption.
German Economy Forecast for 2023?
Forecast from IMF “World Economic Outlook” indicates that Germany will slip into recession in 2023 and expects to shrink by 0.4 percent.
Economy Minister and Vice Chancellor Robert Habeck suggested that inflation will average around 8 percent during 2022 and 7 percent in the next year which is far above the ECB target of 2 percent.
Conclusion
There are a few things that could make the current outlook even worse are the possibility of a nuclear war or at least the current Ukraine-Russia war escalating further won’t do any good. Opec+ introduced an oil production cut which will further increase oil and energy prices worldwide. Winter has not arrived yet and how cold the winter will be might make things worse too.