MNI INTERVIEW:German Growth Weak Despite Wages- GCEE's Werding

MNI ((MNI) LONDON) - MNI (LONDON) - September wage negotiations between unions and employers may keep German inflation above 2% for longer, but labour market strength may be wearing off and consumption and growth are turning out weaker than expected, a member of Germany’s Council of Economic Experts told MNI. 

While demands by industrial union IG Metall for salary increases of 7% for some two million workers have led to concerns Germany could struggle to further bring down inflation, which is expected to be 2.3% in July, Martin Werding foresaw a deal at 3-4% without the additional one-off payments seen in previous settlements and added that labour market strength may be past its peak. (See MNI: Germany's IG Metall Says Wants Single-Installment 7% Rise)

July’s higher-than-expected rise in the number of unemployed was largely due to refugees entering the data for the first time combined with the reluctance of firms to make new hires, he said in an interview.

“It’s a slight increase. The labour market has been surprisingly strong for the last four years, throughout the entire crisis, also after the energy crisis. This may wear off.”

Though wage increases may further feed through to consumer prices, keeping inflation above 2% “for a while,” real gains in earnings have not been sufficient to boost consumer confidence, which continues to exert a drag on spending, Werding said.

The GCEE is unlikely to upgrade its outlook for the economy in its next report in November, after predicting average annual GDP growth of 0.2% for 2024 in its Spring Report, Werding said.

“What we expected earlier this year was that the very small growth figure would be mainly due to the fourth quarter of last year, while in the current year, quarter-by-quarter, we would see some limited amount of growth,” he said. “Several things that we expected to happen have not happened. We expected private consumption to slowly catch up, and we don't really see this.”

GOVERNMENT TENSIONS

Business investment has also been held back by doubts over government plans, with disagreements between the three ruling parties undermining a previous agreement over next year’s federal budget and calling the survival of the “Traffic Light” coalition into question. 

“If private enterprises cannot rely on what the government is planning to do - if they do not know what public investment will be there - they will be very reluctant to increase investment themselves,” Werding said.

But he saw a chance of a boost to fiscal leeway after federal elections scheduled for September 2025, with opinion polls pointing to a possible new grand coalition bringing the centre-right Christian Democrats into government with current chancellor Olaf Scholz’s centre-left Social Democrats.

A grand coalition might consider the series of “mild adaptations” proposed by the GCEE earlier this year to Germany’s constitutional debt brake, to provide additional fiscal space equivalent to a “small two-digit figure in the billions of euro” each year as soon as the debt ratio falls below 60%, Werding said. Altering the debt brake would require a two-thirds majority in parliament.

“Maybe if the CDU is in power, it might be easier,” Werding said, “This will be attractive for any new CDU-SPD government. Still, this does not make a massive difference as long as growth is weak.”