Germany's economic forecast is looking increasingly bleak
It wasn’t so long ago that the German media were reporting almost gleefully about the shortages of petrol and goods in the UK. Even serious newspapers proclaimed that the lack of food would be a permanent problem, not in small part due to Brexit. Apparently, we also have no more fruit and veg on the shelves and we might well have a sober Christmas this year as alcohol supplies have run dry.
Of course, there is no denying that supply chain problems are continuing to be a permanent threat to economic recovery from the Covid-induced slump, but this is not a Britain-specific problem. In fact it may well be the German economy — Europe’s largest — that emerges from the fourth wave of Covid battered and sluggish.
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According to the Institute for Economic Research (Ifo), the German economy might even go into recession this winter. Based on new figures released this week, Timo Wollmershäuser, Head of Forecasts at Ifo, said in a statement that :
While the Ifo’s report is very careful to avoid talk of ‘recession’, it has adjusted its figures to suggest that the German economy will contract by 0.5% in this quarter, followed by stagnation early in 2022. Inflation will also rise further, from 3.1% this year to 3.3% next year. Meanwhile increases in consumer prices are not expected to fall back to normal before 2023.
These figures may not make headlines in the way that long petrol queues in Britain did, but they are troubling nonetheless. Before the federal elections in September, a large-scale survey showed that around half of Germans were concerned about the rising costs of living. They now have a new centre-Left government promising to make life “affordable” again — be that in rents, mobility or energy costs.
Indeed, the cost of living had been a key election issue as many parties realised just how dire the situation had become for many households. Last year, in 10 Germany cities, rents had risen by more than 10% in the course of just one year. The costs of energy also rose by nearly 20%, the steepest increase in over two decades. Petrol is also at the second highest level it has ever been. A similar trend is at play in almost every other sector too from groceries to public transport.
Taken together, these statistics paint a bleak picture for middling and lower-income families who are struggling to make ends meet despite high employment rates. True, 8.4 million Germans in very low-paid jobs will benefit from the increase of the minimum wage to €12 (from €9.60) but this will not help the millions of Germans who earn above this threshold but not enough to make ends meet at the end of the month.
In addition, there are many policies in the new government’s roadmap for the next four years which are set to make things worse, not better. Coal and nuclear energy are to be phased out by 2030, exacerbating the shortage of affordable energy. The government also wants to phase out combustion engines, aiming for 15 million electric cars by 2030 — forcing those with older cars to buy expensive electric vehicles. Meanwhile, strict new covid restrictions are keeping a stranglehold over the economy.
Germany’s new government will have a huge task on its hands as it starts the post-Merkel era with promises of progress while introducing measures set to increase existing strains on an already battered economy. If the cost of living continues to rise under the new chancellor Olaf Scholz, Germans may quickly become disillusioned with the progressive optimism his new government seeks to project.