As inflation climbs and indicators point to an economic slowdown, there are growing concerns Germany and the 15-nation euro zone overall will stumble into ‘stagflation’ – a fatal combination of little growth and rising prices. Central banks would normally cut interest rates to boost a slowing economy but if inflation rises, driven by soaring oil prices, they have no option but to hike borrowing rates so as to keep living costs in check.
“Consumer price inflation continues to be a serious problem for the German economy in 2008,” commented Martin Lueck at the Swiss bank UBS. “It has already dampened the chances of a recovery in private consumption quite markedly, as inflation is eroding disposable income and offsetting the positive impact from higher wages.”
While energy costs rose sharply, Capital Economics economist Jennifer McKeown noted that “the patchy detail from the (German) states suggests that food inflation was broadly stable, or perhaps even softened a little in June.”
Unfortunately, she added, the “data suggest that eurozone inflation might have risen to another high of 3.9 percent in June,” sealing the case for an interest rate hike next week by the European Central Bank.
Euro-zone inflation spiked to a record 3.7 percent in May.
In Germany, “it is not a surprise at all that the key driver of the latest increase was once again the oil price,” said Alexander Koch at UniCredit Markets. The cost of heating oil jumped a massive 60 percent and “together with rising natural gas prices, this heralds a marked rise in heating expenditures during the coming winter,” Koch forecast.
He nonetheless felt that weaker German economic data “and especially depressed consumer spending should limit the pricing power of companies and thus help to keep non-energy inflation at an acceptable level” in coming months.
On Tuesday, the Gfk institute reported that German consumer confidence had fallen to a 30-month low as climbing energy prices undermined household purchasing power. A day earlier, national statistics office data showed that German pay raises in the industrial and service sectors had been outstripped by a first-quarter rise in the consumer price index.
Lueck at UBS noted Friday that “German households who have become painfully used to declining real wage income in recent years once again failed to benefit from nominal wage increases.”
The German inflation figures coincided Friday with data showing that the French and British economies were growing slowly in the first quarter of the year.
“As it prepares to assume the presidency of the European Union (on July 1), France is moving closer and closer to recession,” warned analyst Marc Touati of Global Equities.
“The (British) figures paint a pretty worrying picture,” said Jonathan Loynes, chief European economist at consultancy Capital Economics. “With growth already so weak in the first quarter before the full effects of the credit crunch and housing downturn had been felt, the economy looks set to slow significantly further over coming quarters.”
“We now expect growth to slow to just 0.5 percent in 2009, with a very real chance of a technical recession,” he added.