German economy crisis warning as inflation soars to six percent

4 mins read

Flash figures released today found harmonised index of consumer prices (HICP) inflation had climbed 0.3 percent on last month marking the fastest rise in almost 30 years. A key driver of Germany’s inflation has been higher energy costs and supply chain disruptions filtering through into consumer prices. Christopher Dembik, Head of Macro Analysis at Saxo Bank, said: “Germany is facing a perfect storm: the energy crunch, supply chain frictions, skyrocketing inflation and ‘pay me my worth’ demands from workers on top of the fourth wave of the pandemic.” The inflation figures come following a series of data sets pointing to increasing difficulties facing the EU’s largest national economy.

Both consumer and business confidence have taken a hit with sentiment towards the economy overshadowed by supply chain issues and a fourth wave of Covid.

The threat of Covid has intensified in recent days with fears over the new Omicron variant causing market turbulence around the world since Friday.

Last week, as Olaf Scholz was named the successor to Angela Merkel as Chancellor, German GDP growth was revealed to have slumped short of expectation with growth of only 1.7 percent for the third quarter.

It’s been followed by predictions GDP growth could further decline in the next quarter or even begin to contract.

He explained: “The risk of stagnation or recession has increased.

“We are cautiously more optimistic for the other European economies.

“They seem less inclined to re-introduce strict restrictions and they are less exposed to the global trade turmoil.

“Think France or Italy.”

With Germany constituting nearly a third of the EU economy, rising inflation and poor GDP growth represent a major challenge.

Despite soaring inflation across Europe, the European Central Bank has largely dismissed any suggestion of raising interest rates.

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Speaking this morning European Central Bank board member Isabel Schnabel suggested it would be premature to raise interest rates, predicting inflation had reached its peak in November.

She told German broadcaster ZDF: “Most forecasts actually assume inflation will fall below 2%, so there really are no signs of price rises getting out of control.”

“If we thought inflation would permanently settle above 2%, we would definitely react. However, at the moment, we see no indications of this.”

Mr Brzeski predicted inflation would more likely “peak in December and begin to drop in January.”

Part of this drop would be down to the impact of changes to German VAT rules which should start to disappear by the new year.

He added the expectation of any potential rate hike from the ECB remained at 2023.

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