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ECONOMY

German inflation surges to fastest pace in 15 years

German inflation picked up speed in June, jumping to an annual 3.3 percent, the fastest pace since 1993, from 3.0 percent in May, official figures showed Friday.

Published: 27 June 2008 17:33 CEST

As inflation climbs and indicators point to an economic slowdown, there are growing concerns Germany and the 15-nation euro zone overall will stumble into ‘stagflation’ – a fatal combination of little growth and rising prices. Central banks would normally cut interest rates to boost a slowing economy but if inflation rises, driven by soaring oil prices, they have no option but to hike borrowing rates so as to keep living costs in check.

“Consumer price inflation continues to be a serious problem for the German economy in 2008,” commented Martin Lueck at the Swiss bank UBS. “It has already dampened the chances of a recovery in private consumption quite markedly, as inflation is eroding disposable income and offsetting the positive impact from higher wages.”

While energy costs rose sharply, Capital Economics economist Jennifer McKeown noted that “the patchy detail from the (German) states suggests that food inflation was broadly stable, or perhaps even softened a little in June.”

Unfortunately, she added, the “data suggest that eurozone inflation might have risen to another high of 3.9 percent in June,” sealing the case for an interest rate hike next week by the European Central Bank.

Euro-zone inflation spiked to a record 3.7 percent in May.

In Germany, “it is not a surprise at all that the key driver of the latest increase was once again the oil price,” said Alexander Koch at UniCredit Markets. The cost of heating oil jumped a massive 60 percent and “together with rising natural gas prices, this heralds a marked rise in heating expenditures during the coming winter,” Koch forecast.

He nonetheless felt that weaker German economic data “and especially depressed consumer spending should limit the pricing power of companies and thus help to keep non-energy inflation at an acceptable level” in coming months.

On Tuesday, the Gfk institute reported that German consumer confidence had fallen to a 30-month low as climbing energy prices undermined household purchasing power. A day earlier, national statistics office data showed that German pay raises in the industrial and service sectors had been outstripped by a first-quarter rise in the consumer price index.

Lueck at UBS noted Friday that “German households who have become painfully used to declining real wage income in recent years once again failed to benefit from nominal wage increases.”

The German inflation figures coincided Friday with data showing that the French and British economies were growing slowly in the first quarter of the year.

“As it prepares to assume the presidency of the European Union (on July 1), France is moving closer and closer to recession,” warned analyst Marc Touati of Global Equities.

“The (British) figures paint a pretty worrying picture,” said Jonathan Loynes, chief European economist at consultancy Capital Economics. “With growth already so weak in the first quarter before the full effects of the credit crunch and housing downturn had been felt, the economy looks set to slow significantly further over coming quarters.”

“We now expect growth to slow to just 0.5 percent in 2009, with a very real chance of a technical recession,” he added.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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