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INDUSTRY & TRADE

German economy stalls as recession looms

German growth stagnated in the second quarter of the year, official data showed on Friday, as analysts warned that a recession could be round the corner amid a looming energy crisis.

A person holds cash from an ATM machine in Germany. The country is facing tough economic times.
A person holds cash from an ATM machine in Germany. The country is facing tough economic times. Photo: picture alliance/dpa | Angelika Warmuth

Europe’s largest economy grew zero percent due to “difficult” global economic conditions, the federal statistics agency Destatis said.

The continuing impact of the “Covid-19 pandemic, interruptions in supply chains and the war in Ukraine, are clearly reflected in the short-term economic development,” Destatis said.

Growth in the first quarter was revised upwards to 0.8 percent from an initial estimate of 0.2 percent.

But the weak second-quarter figures showed that Germany’s “economic engine is stalling”, said Jens-Oliver Niklasch, senior economist at the LBBW bank.

Government and consumers propped up the economy through June, but soaring inflation would see household spending “run out of steam” soon, he said.

Driven by the high cost of energy, consumer prices in Germany rose by 7.5 percent in July, well above the two-percent target of the European Central Bank.

READ ALSO: Germany inflation slows but high energy prices remain

With the growing headwinds for the economy, “Germany is on the cusp of a recession”, said Niklasch.

Sharp falls in key economic indicators, such as consumer confidence, were already in “recession territory”, said Carsten Brzeski, economist at ING bank.

A downturn in the second half already looked looks “like a done-deal”, he said.

READ ALSO: Germany on brink of recession, says expert

The threat of a cut-off of Russian gas supplies amid tensions over Ukraine has also prompted concerns that Germany may need to ration energy through the winter, with a punishing impact on business.

“The war in Ukraine puts an end to the German economic business model” based on cheap energy imports and massive exports of goods in a globalised world, Brzeski said.

Separate figures released on Friday showed that the German unemployment jobless rate climbed by 0.1 percentage points to 5.4 percent in July, the second consecutive monthly increase.

The recent rise has been attributed to Ukrainian refugees joining the ranks of jobseekers in Germany, the BA federal labour agency said.

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MONEY

German consumers warned to expect higher food prices

Groceries in Germany have already shot up in price by more than 16.6 percent compared to a year ago. But industry bosses expect prices to rise further - although they say they are fighting against unreasonable increases from large corporations.

German consumers warned to expect higher food prices

Life in Germany is getting significantly more expensive. As The Local reported this week, German inflation climbed again in August to 7.9 percent, according to the federal statistics agency Destatis. It came after consumer prices fell slightly in June and July. 

Energy prices, which have taken off since the Russian invasion of Ukraine, have had a “substantial impact on the high inflation rate”, Destatis said. Costs for household electricity and fuel rose by 35.6 percent in August 2022 compared to the same month a year ago.

However, food prices are also heavily affected – they have increased by around 16.6 percent, according to initial figures. 

The graph below by Destatis shows changes in consumer prices. 

Source: Destatis

READ ALSO: German inflation rises again as energy costs soar

According to retail giant Rewe, consumers in Germany will have to brace themselves for even higher food prices.

“We are currently seeing new price increases from manufacturers every week,” said Rewe CEO Lionel Souque on Wednesday ahead of a business event in Düsseldorf, reported Germany’s Tagesschau.

These increases are down to rising energy and raw material costs, as well as logistics and staff costs. 

However, Souque said that not every price increase is implemented. 

“We don’t wave through every price increase, but check whether it is reasonable,” he said.

Souque said the retail giant flights back if bosses feel the markups are not justified. Among multinational consumer goods manufacturers in particular, there are some looking to profit from the current price wave, he said.

“We are fighting against that,” the Rewe boss said. “Many multinationals are making more dividend income than they did last year.”

“Many (firms) come and announce price increases of 10 percent, and say Rewe should pass that on to the customer,” Souque reported.

“That’s totally unrealistic.”

He said that the majority of suppliers are behaving reasonably. “But we have a problem with the very large manufacturers who have the power to enforce demands,” he added.

READ ALSO: ‘€10-€15 for groceries’ -How price hikes are hitting consumers in Germany

Competitor Edeka has also warned its suppliers against excessive price demands.

“Food must not become a luxury good,” Edeka CEO Markus Mosa previously said.

Rewe has already announced that it would not pass on all the increases to customers, and would therefore accept an impact on profits.

Change in consumers’ behaviour

Rising inflation also has consequences for consumers’ shopping behaviour.

Customers in Germany have been switching from branded products to supermarkets’ own brands, and they are paying more attention to promotional prices.

There is also trend towards discounters, said Rewe boss Souque. The Rewe subsidiary and discounter Penny, for example, is currently doing better in terms of sales than in the previous year, he said.

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