MNI INTERVIEW2:Consumption, Energy Costs To Damp German Growth

Germany will avoid recession over coming quarters, but weak consumption and high energy prices will continue to dampen growth even as inflation stabilises and real wages recover, one of the country’s leading economists told MNI in an interview.

Household spending should level off after two quarters of contraction, with workers also experiencing an improvement in income relative to upward cost pressures as a result of pay rises, Klaus Adam said. Tourism has proved particularly resilient, with overall incentives to spend still strong, he said.

But higher interest rates and inflation continue to eat into consumer confidence, said Adam, a professor of economics at the University of Mannheim, research professor at the Bundesbank and an adviser to the German Finance Ministry.

“If you’re a debtor, you’re really going to feel the pinch. For less indebted households the situation looks little different, because banks aren’t passing interest rate rises on to savers, except at the margins.

INFLATION EXPECTATIONS SETTLE

Still, despite uncertainty over the stickiness of core inflation and the extent to which it is driven by energy, most Germans’ medium-term inflation expectations are now “pretty much settled” at around the ECB’s 2% target, Adam said.

“Eventually, probably as early as next spring, energy is going to be out of the headline figure and the two should converge,” he said.

Profit margins - cited by the European Central Bank as a driver of price rises - have clearly increased, but could normalise as companies absorb the cost of higher wages. “If not, we need to look into competition policy and strengthening competition oversight,” he said. (See MNI INTERVIEW: Europe Faces Slow Growth- German Gov't Advisor)

Several quarters of weak growth should also offer some relief to Germany’s tight labour market, but with vacancies at historically high levels, the ECB will need to keep a close eye on developments.

Berlin’s approval this month of a tighter 2024 budget in line with strict debt and spending rules is welcome both in the short run, by easing pressure on inflation, and longer-term, he said, as it will free up space for private expenditures, most urgently in the green transition.

Having so far focused on the short-term goal of bringing several liquid natural gas-powered electricity plants online, Germany needs “massive” investment in grid and storage capacities if it is to improve the outlook for industry over the medium-term, Adam said.

“What really worries me is that I see relatively little movement on storage. It’s not clear to me that all these gas plant investments won’t become obsolete once we switch to generating and then storing electricity via cheap batteries.” (See MNI INTERVIEW: Cut Red Tape To Boost GDP -German Gov't Advisor)

CHINA SLOWDOWN

Additional headwinds will come from China’s slowdown as it struggles to move towards a more consumer-driven economy.

“China has substantial rebalancing problems,” Adam said. “But it's not clear to what extent German and European companies will be able to benefit from that, since there's really no level playing field in China.”

Germany’s auto industry - which was last year overtaken by China as the world’s second-largest exporter of cars by volume - now effectively subsidises sales in the Asian nation in a bid to retain market share, Adam said, adding that the success of such a strategy is in doubt.

“They're certainly having difficulties in achieving cost competitiveness, and also attractiveness in terms of the models. The Id3, which is selling here at around 40,000 euros, they have to get rid of it at about 15,000 euros in China. So there's a lot of cross subsidisation in order to have the volumes needed for the mass market, but it’s not clear they’ll manage to do that.”