MNI INTERVIEW: Wages Set To Refuel German Inflation-ZEW Chief

German inflation is likely to pick up slightly in coming months, particularly in services, with tight labour markets putting upward pressure on pay, ZEW president Achim Wambach told MNI, adding that it was too early to say how close the European Central Bank is to achieving its inflation target.

German inflation expectations remain generally anchored, the president of the Leibniz Centre for Economic Research said in an interview, but he added that negotiated wages in particular could see upwards pressure.

“It's not certain that that will be the channel through which inflation remains sticky,” he said, “but the risk is there, and the ECB has to be vigilant.”

Wambach agreed with ECB Executive Board Member Isabel Schnabel that the “last mile” might be the hardest in bringing inflation back to 2%.

“I'm not sure whether this is the last mile - it's too early to say,” he said.

COURT RULING

Last week’s Constitutional Court decision to strike down German government plans to repurpose EUR60 billion of Covid-19 borrowing for green energy and climate transition should have some moderating effect on the country’s inflation, he said.

“You could argue that if the government is spending less money that will have a positive effect on inflation via the labor market. I don't expect to see it immediately.”

Wambach spoke to MNI from Washington, DC, where he addressed State Department officials on EU economic policy. He said the trip had reminded him how much more dynamic U.S. companies and the American jobs market are compared with their counterparts in Germany, where there are “too many frictions in the economy, and we have too little churn,” leading to less productivity and pay growth.

This lack of creative destruction however means recent data indicating a pick-up in the number of German insolvencies from a very low level should not be regarded as a source of concern, he said.

“We need a more dynamic economy, we need more companies exiting and new ones entering. The corona crisis really froze the economy to a considerable degree, and while it’s true that every insolvency has its negative sides, for the economy as a whole it can be positive,” Wambach said.

While the Constitutional Court has thrown government promises for billions of euros of subsidies for energy-intensive industry into doubt, it will impose welcome fiscal discipline on Chancellor Olaf Scholz’s coalition, he said. (See MNI INTERVIEW2: Debt Limit A Brake On German Economy-Bofinger)

“This was still a temporary measure for the next two to three years. We need investment over the next 10 to 15 years. What makes more sense is to lower taxes on investments,” Wambach said.

“We have a real debt problem. Interest rates are high, and companies will run into that problem when their debt runs out and they have to prolong it. The consequences for the economy have been only partly felt, and we will feel them even more strongly. The government should be careful about how much debt they raise.”

IMPROVING SENTIMENT

The Scientific Advisory Board of the Federal Ministry for Economic Affairs and Climate Action - of which Wambach is a member -- has already called on the government to use markets rather than subsidies to achieve its green transformation aims, he noted, adding that no leading company surveyed by ZEW has complained of getting too little money for transformation.

While German economic sentiment appears to be improving, with growth picking up slightly over the next six to nine months, Wambach said warned against reading too much into the results of ZEW’s latest survey given its low base comparison.

Risks also remain regarding whether there will be enough gas for industry in the event of an unusually cold winter, he said, but he added that energy is not the main brake on growth for most companies.

“Energy is important, but for many it is not the main issue. The main issues are the new supply chain law, climate reporting and high taxation. They want to invest but they cannot because there are so many obstacles to doing so. So the focus on subsidies is to some degree misleading,” he said.