MNI INTERVIEW:Structural Drags On German Growth-ifo's Wohlrabe

MNI (LONDON) - Germany’s economy is far from recovery, with consumer spending and investment weak as the government fails to tackle challenges including a structural shift to higher energy prices and demographic change, the ifo Institute for Economic Research's Head of Surveys Klaus Wohlrabe told MNI.

Consumer spending has undershot ifo’s expectations, Wohlrabe said in an interview, after second quarter GDP fell 0.1%, a fourth
consecutive quarterly decline. 

It’s clear the German economy is a long way away from developing some kind of positive growth dynamic,” he said in an interview. “We were expecting consumers to spend more, but despite real wage gains there seems to be some hesitation to do so.” (See MNI INTERVIEW:German Growth Weak Despite Wages- GCEE's Werding)

Companies must contend with higher levels of uncertainty over government policy in Germany than in other major economies, he said, after ifo’s Business Climate Index slid from 88.6 points in June to 87.0 points in July.

“The decline in the German business survey was mainly driven by investment goods producers, both on the firm side - so private investment in machines and buildings, for example - and also with respect to infrastructure investment from the public side.”

POLICY RESPONSE

German officials have been slow to understand that the economy will not simply bounce back to growth levels seen in the years following the 2008-9 financial crisis despite having overcome the successive supply shocks of the Covid pandemic and the Russian invasion of Ukraine, he said.

“We do need some kind of active economic policy if growth is not to continue on a downward path. So there is perhaps something of a crisis of confidence, also, compared with those years when the economy was going well,” Wohlrabe said.

While households and firms have mainly adjusted to higher gas and power prices, energy-intensive industries are experiencing a “constant slight decline” in production, he said.

“We are still going to have large-scale energy-intensive production in Germany in the near future - BASF and Bayer, for example - but domestic production will continue to decline, and new, large-scale investments will be made abroad.”

Shortages of skilled workers could also intensify, despite a recent pickup in the unemployment rate, as more people leave the labour market in 2025 and 2026 than join, he said, noting that some firms are already being forced to turn down new orders despite offering higher pay. 

INFLATION EXPECTATIONS

“We have seen an increase in unemployment, but this is really the result of more people entering the labour market. A lot of people leave school in July, but have a job by September,” he said, adding that with firms which boosted prices during the recent period of high inflation apparently willing to absorb higher unit labour costs there are no signs of a wage-price spiral. (See MNI INTERVIEW: ECB Set For 25bp Sept Cut Despite Volatility)

Confidence in the ECB remains high, particularly among businesses. But, while inflation expectations are likely to remain well anchored so long as monetary easing is predictable and conducted in small steps, German consumers are still not convinced that inflation will remain low, Wohlrabe said, potentially hindering their spending.

“Maybe some are even afraid that it's going to go up a little bit more,” Wohlrable said. “The fact that the ECB has kept interest rates high - despite a small recent decrease - may also be contributing to this perception.

It will take “several months” with inflation at or below 2% before there is a real reset, he said, adding that disinflation is likely to proceed only very slowly.

“Based on our firm survey results, we do see inflation persisting somewhat. I would not want to over-emphasise the importance of the 0.1% increase we saw recently, but it does have a psychological effect - especially if people see inflation increasing at the same time as GDP drops.”