MNI INTERVIEW: German Jobs To Go As ECB Delays - Ex-Wise Man

German unemployment will rise as firms cut workforces due to low growth and the lagged impact of rate hikes, a former senior government adviser told MNI in an interview, adding that the European Central Bank’s delayed response to falling inflation will make a consumer-driven growth recovery less likely.

“What is now becoming more and more apparent is that a lot of companies are reducing their manpower,” said Peter Bofinger, professor of economics at the University of Wuerzburg and a former German Council of Economic Experts member.

“Not the large car manufacturers, but their suppliers like Bosch or ZF Friedrichshafen. Even high-end producers of durable consumer goods like Miele are forced to cut their labour force.”

Germany’s construction industry - a major source of growth in recent years thanks to low interest rates - is “almost collapsing,” Bofinger said, with negative labour market effects expected to materialise once the current order backlog has been processed. (See MNI BRIEF: German Insolvencies Steady, But Rise Expected - IWH)

Inflation is now strongly decelerating, with most forecasters seeing it sustainably close to 2% in the eurozone, the U.S, Japan and the UK in 2025, he said.

However, just as it was slow to respond when inflation was on the way up, the ECB will not react in a timely fashion to its decline, Bofinger said. (See MNI INTERVIEW: ECB Could Cut In April Or June- Simkus)

ECB TOO SLOW

“When President Lagarde repeats like a mantra the self-evident fact that the ECB follows a data-dependent approach, she is ultimately expressing the fact that decisions are primarily based on actual inflation data and not on forecasts. Given the lags of monetary policy measures, this inevitably means reacting too late,” he said. (See MNI INTERVIEW: Beware Temporary Inflation Dip- ECB's Kazaks)

Bofinger pointed to OECD projections for German GDP to grow only marginally this year, having shrunk by 0.3% in 2023, as evidence both of the challenges facing the country’s current business model, and of the need for a more expansionary fiscal policy that would allow it to compete with the U.S. and China.

“Our recipe for success was exports, manufacturing and cars. But this has changed: exports suffer from protectionism, deglobalisation, reshoring and derisking. Manufacturing suffers from high energy costs and decarbonisation,” he said, pointing also to the impact of last year’s court decision to block the government’s use of EUR60 billion in funds.

“What Germany would need now is an expansionary fiscal policy, an ambitious industrial policy to get out of this situation. But we are doing the opposite. Due to the decision of the Constitutional Court, fiscal policy has become more restrictive.”

There is no serious discussion about where the next five years’ worth of growth will come from, Bofinger said, with a majority of German economists still insisting that reducing government regulation and taxes will suffice.

“That’s Mickey Mouse thinking,” he said. “As the Chinese and the U.S. show, if you want to get future-oriented industries you have to subsidise them, like it or not.”

Meanwhile the outlook for consumer spending was uncertain.

“Most forecasters assume a mechanical reaction to real wage increases, but it remains to be seen how consumers will actually behave, because there is so much economic and political uncertainty around,” Bofinger said.