Germany faces a slowing economy with higher inflation

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by Shaun Richards

At the end of last month we looked at the increasing inflation pressure in Germany. The President of the German Bundesbank has suggested that it might rise to 5% by the end of this year. We can immediately reflect on that via this morning’s official release.

WIESBADEN − The inflation rate in Germany, measured as the year-on-year change in the consumer price index, stood at +3.8% in July 2021. The inflayion rate has thus surged; in June 2021 it had been +2.3%. A higher inflation rate than in July 2021 was last measured in December 1993 (+4.3%). The Federal Statistical Office (Destatis) also reports that consumer prices were up 0.9% on June 2021.

It is unusual to see an official release stating that inflation has surged. Perhaps the author has been affected by price rises. As to taking a perspective it is important to note the monthly rate of increase and more detail is below.

Compared with June 2021, the consumer price index rose by 0.9% in July 2021. Energy product prices were up 1.3%, especially the prices of heating oil (+3.0%) and motor fuels (+2.6%). In addition, in the holiday month of July, seasonal price rises were recorded for overnight stays (+1.8%) and especially package holidays (+22.1%); the range of such services offered was still restricted.

As you can see my topic of yesterday, domestic energy costs is already in play. We can go further because the statistics office does a podcast and in June they told us this.

In January, CO2 pricing was also introduced in the context of climate protection. This has primarily had the effect of increasing the price of fuels and heating energy.

A clear case of bad bureaucratic timing as not doubt they were trying to slide the green inspired price rises in under the Covid-19 radar but have ended up in the spotlight. Also there has been an impact from VAT rates.

The base effect from the VAT reduction from the previous year could theoretically increase the monthly inflation rates from July to December 2021 by up to one percentage point.

There is also quite an issue going on with package holidays which were an area reformed only a couple of years ago. It changed the Euro area inflation rate too. At 22.1% on a monthly basis it is impacting in spite of it only being 2.7% of the index. Let me show you how extraordinary this is and the detail is from the Euro area measure called HICP. In January it was imputed at 69.9 and has gone 80.7, 83.6, 95.8, 104.1 followed by actual numbers 109.3, 133.6.

Actually with the new costs for test and trace I wonder if those numbers are too low but enough for now and having introduced the Euro area measure here it is.

Harmonised index of consumer prices, July 2021
+3.1% on the same month a year earlier (provisional result confirmed)
+0.5% on the previous month (provisional result confirmed)

Is it better? Well in theory yes because it was updated to 2020 figures but there is a catch because the more we return to normal ( whatever that was…) then it will be using the wrong weights. This is rather awkward as we should not be supporting a CPI measure that is 5 years out of date in this sense but it may be more realistic.

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Oh and looking at the detail there is no used car effect in Germany and I am unsure why that might be? After all the microchip shortage must be in play there too.

Economic slow down

Things were shaken up a little yesterday by this.

The ZEW Indicator of Economic Sentiment for Germany decreased in the current August 2021 survey, falling 22.9 points to a new reading of 40.4 points compared to July. This is the third time since May that the indicator has dropped, this time even somewhat stronger than in the previous month.

The drivers for this include our subject of yesterday, China.

This points to increasing risks for the German economy, such as from a possible fourth COVID-19 wave starting in autumn or a slowdown in growth in China.

However if we switch to right here, right now, things continue to improve.

The assessment of the economic situation in Germany improved in August, and currently stands at 29.3 points, 7.4 points higher than in July.

A similar situation was seen for the Euro area.

The financial market experts’ sentiment concerning the economic development of the eurozone also decreased for the third consecutive time, bringing the indicator to a current level of 42.7 points in August, 18.5 points lower than in the previous month. The indicator for the current economic situation in the eurozone climbed 8.6 points to a level of 14.6 points compared to July.

If so this represents a change from what we have been seeing from the Markit PMI business surveys.

The rate of expansion in new orders also quickened to a record high at the start of the third quarter. Manufacturing continued to lead growth, but the rate of expansion in services new business hit a near-record high amid looser COVID-19 restrictions. Total new orders were supported by a marked increase in new business from abroad, particularly in the manufacturing sector.

So we see that the surveys show growth for now but some of that as we note manufacturing leading growth has a problem if we switch to the official data. From Friday.

WIESBADEN – In June 2021, production in industry was down by 1.3% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis).

There are different time period here as the official data is lagged but we were told things were booming back then and the same was true of May.

May 2021 (revised):
-0.8% on the previous month (price, seasonally and calendar adjusted)

Industry output was 100.7 in December but 96.5 in June. A major factor is no doubt this from the German car industry.

Production at the German automotive plants slumped once again in July. In all, 246,600 passenger cars were built (-25 percent). During the first seven months domestic production totaled nearly 2.0 million cars (+9 percent). The shortages of semiconductors continue to hold back production.

Also if we use the official measure things may not be so good right now.

KÖLN/WIESBADEN – The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways declined by a seasonally and calendar adjusted 1.4% in July 2021 on June 2021.


We see that the times they appear to be changing for the economy of Germany. The rises in economic growth look to be fading and are being replaced by inflation instead. If we now switch to the ECB this poses a real problem because it will be pulled in opposite directions at the same time. How can it reverse any of the easing should we see a slow down in its biggest economy? If it is targeting economic growth then it should be easing further which to say the least is not so easy from here!

However not every area is doing badly as this from Reuters highlights.

This means that BionTech and its breakthrough development of a coronavirus vaccine based on mRNA technology could account for roughly an eighth of overall GDP growth in 2021, based on estimates by Sebastian Dullien, head of think tank the Macroeconomic Policy Institute (IMK).

“I can’t think of another example in which a single company had such an impact on German GDP,” Dullien told Reuters.

A government official said it was absolutely plausible to assume that the BioNTech effect on overall economic growth would easily reach up to 0.5 percentage points this year.

Looking at this from another perspective we see why the Euro exchange rate has been drifting lower against both the US Dollar and UK Pound which has rallied to 1.18.

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