Consumers: historic inflation mix pushes Germany into recession

Ka company carelessly raises prices. The fear of scaring away customers and harming one’s own business is too great. The figures presented by the Ifo Institute in Munich are all the more striking: almost two thirds of the companies in this country are preparing price increases.

“More and more companies are planning to increase their prices over the next three months,” says Timo Wollmershäuser, economic director of Ifo. The index of price expectations it determined jumped to 62 points in April, which is the highest value since Ifo researchers have conducted regular surveys.

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A historical comparison shows how unusual such a broad front of companies wanting to raise prices is: on average, over the 30 years to 2022, only 12% of companies had concrete plans to raise prices in the near future. . The current value is therefore five times higher than normal. The Ifo price expectations index had already reached an all-time high in March, but at 55 points it was well below the current level.

When so many companies want to make their products and services more expensive, this has far-reaching consequences for the whole economy. For consumers, this means that they must be prepared for further price increases: hyperinflation in virtually all areas of life – and by no means just for individual goods. According to Ifo data, the likelihood that the current wave of inflation will subside in the near future is very low.

Source: WORLD infographic

The Federal Statistical Office estimated inflation in Germany at 7.4% for April. This is the largest increase in consumer prices in 40 years. If you follow the Ifo survey, hopes of the situation normalizing soon are probably over for now.

Forecast of continued cost increases

“Inflation in Germany is expected to exceed 7% in the coming months,” Ifo economic director Timo Wollmershäuser said in view of companies’ large-scale price hike plans. Ifo price expectations were particularly high in wholesale with 79 points, followed by retail with 75 points and industry with 73 points. At the bottom of the scale are construction with 64 points and service providers with 52 points.

Tough times aren’t just for German consumers. The German economy is also suffering from continued cost increases. Much of the inflation is imported, but on a scale not seen in Germany for decades. At best, during the oil crises of the 1970s and early 1980s, imports caused a similar price spike in the country.

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Prices for energy, groceries and other everyday items are getting more expensive

In the decades that followed, imports often had a rather deflationary effect: as part of globalization, they lowered the price level and made products and services cheaper for German consumers. As of March, import prices were 31% higher than a year earlier, according to a survey by the Federal Statistical Office.

According to the data, imported energy sources were 161% more expensive than a year ago. These energy sources include natural gas, oil and coal, but also gasoline and diesel. This price explosion is a consequence of the Russian invasion of Ukraine.

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However, minerals, agricultural products and other raw materials have also become more expensive, as have computer chips and other primary products, which often come from Asia and without which German industry cannot function. The People’s Republic of China has disrupted supply chains with lockdowns and closed ports as part of its zero-Covid policy.

Lower profit expectations and investments

Companies cite rising costs for energy, raw materials, other preliminary products and raw materials as the main reason for their sometimes steep price increases. The general increase in production costs carries a number of risks for the local economy.

One is lower profitability. “In our latest survey, companies said they could not fully pass these costs on to their customers and therefore reduced their profit margins,” Wollmershäuser points out.

Source: WORLD infographic

For their part, lower profit margins are dampening the propensity of companies to invest and could also lead to a cooling of the economy. There has been growing evidence of this lately, especially as other EU countries, which are among Germany’s most important customers, are facing similar problems.

Orders received by German industry fell by 4.7% in March, as shown by the figures just presented. Wiesbaden previously reported weaker exports. Economists interpret this as a harbinger that Germany could slide into a recession.

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“The German economy is set for a slowdown. Exports fell sharply in March and incoming orders also tend to be weak for the second consecutive month,” says Thomas Gitzel, chief economist at VP Bank in Liechtenstein. The war in Ukraine is a factor that spoils the investment mood of companies. But ongoing supply chain issues and rising costs also played a role.

Well-filled order books and a strong propensity to invest

More and more economists fear that the summer months will bring a dry spell for the German economy. “The burden is currently too heavy. A recession is becoming more and more likely,” says Gitzel. Imported inflation plays an important role here. Together with the uncertainties of the war, the economic dynamic slowed down brutally. So, in 2022, a toxic mix is ​​brewing that turns upside down.

Experts warn of a wage-price spiral

Record inflation is making small incomes out of average incomes. Many therefore try to save on driving, heating or the next vacation. Unions are now demanding that inflation be offset by wage increases. But the employers refuse.

Source: WORLD / Sebastian Plantholt

The paradox is that the signs for 2022 actually pointed to a recovery: “Many orders are still awaiting processing. At the same time, the public sector wants to invest in the renewal of the energy industry. Companies are also willing to spend money on digitalization and reducing CO₂ emissions,” says Gitzel.

But now there is either a lack of equipment or personnel: “Frustration is rising among entrepreneurs, investments are being postponed.” It is quite possible that the German economy with full order books and a fundamental will to invest will sink into recession.

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