MNI INTERVIEW: ECB At Risk Of Overtightening - Suedekum

Increases in German wages will continue to outpace price rises for some time, leading German economist Jens Suedekum told MNI, though he added that eurozone inflation could fall more quickly than expected and that monetary policy risks being too tight.

German inflation ticked up 1.5 percentage points in December to 3.8% as a result of one-off base effects, but a recent decision by the country’s Constitutional Court to strike EUR60 billion from the federal budget is likely to contribute to a downward trend in price rises, he said in an interview.

"I think we will see a movement towards 2% pretty soon, and the change in fiscal policy - this slight austerity - will add to this disinflationary impact that we will have in Germany," said Suedekum, professor of International Economics at Duesseldorf University and a member of the Federal Ministry for Economic Affairs and Climate Action’s Scientific Advisory Board.

OVERTIGHTENING RISK

While, like ECB chief economist Philip Lane, Suedekum said that the revision to Germany's fiscal and growth outlook would not be sufficient to significantly ease eurozone inflation, he was worried monetary policy may already be too tight.

“In the absence of new shocks, my baseline would be that inflation is disappearing rapidly, and maybe even more rapidly than current projections. We underestimated the rise of inflation, and now might be underestimating its disappearance to a degree,” he said. (See MNI INTERVIEW: ECB Heading For Spring Cuts-Ex ECB Economist)

“I do think there's a risk of over tightening. The only story that is left for the ECB is previous wage growth driving inflation. I expect that we will see wage settlements above inflation for some time, but my personal view is that we are just seeing normal catch-up of real wages. This is not something that the central bank should fight. On top of that, there are no indications of a wage-price spiral of any sort. The ECB has done its job.”

Still, Germans are only now waking up to the impact of “the most consequential Constitutional Court ruling for decades”, he said, adding that fiscal policy will become "vastly more difficult”, given the country’s constitutional "debt brake" limiting the federal budget deficit.

"This is going to be a major drag on growth for 2024 and 2025, unless we see some form of political compromise leading to a reform. But at the moment I don’t see how that is going to happen," Suedekum said. (See MNI INTERVIEW: German Budget Faces "Severe" Cuts-Gov't Advisor)

GERMAN GROWTH SLASHED

Major forecasters have slashed this year’s growth forecasts for Germany to below 1%, with official figures suggesting GDP fell slightly in 2023. Suedekum predicted only a modest upturn in the business cycle as rising real wages boost consumer spending. (See MNI INTERVIEW: Court Ruling Shaves 0.5% From German GDP-Demary)

“Inflation is really coming down pretty rapidly and wage growth has picked up after a massive decrease in real earnings in 2022,” he said. “But the change in fiscal policy and the massive uncertainty will predominantly affect investment, which I would expect to decrease.”

Smaller investors, who had been betting on a combination of falling electricity prices and government support, face continued uncertainty.

“We need a serious discussion of a special budget just for investment and transformation purposes until 2030, or maybe even 2045. But for that we need broad consensus with the conservatives in parliament. Otherwise, I think, this uncertainty will just take over,” Suedekum said.