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Consumers: historical inflation mix drives Germany into recession

Ka company raises its prices carelessly. The fear of scaring customers and hurting your business is too great. The data presented by the Ifo Institute in Munich are all the more surprising: almost two thirds of all companies in this country are preparing price increases.

“More and more companies are planning to raise prices over the next three months,” says Timo Wollmershäuser, head of the Ifo economy. The price expectations index he determined jumped to 62 points in April, which is the highest since Ifo researchers conducted regular polls.

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A historical comparison shows how unusual such a broad front of companies wanting to raise prices is: on average, in the 30 years before 2022, only 12% of companies had concrete plans to raise prices for the foreseeable future. The present value is therefore five times higher than normal. The Ifo price expectations index had already hit an all-time high in March, but at 55 points it was well below the current level.

When so many companies want to make their products and services more expensive, it has far-reaching consequences for the economy as a whole. For consumers, this means they need to be prepared for further price hikes: hyperinflation in virtually all areas of life – and not just for individual goods. According to Ifo data, the chance that the current inflation wave will subside in the near future is very small.

Source: WORLD Infographic

The Federal Statistical Office set inflation in Germany at 7.4 percent for April. This was the strongest rise in consumer prices in 40 years. If you follow the Ifo poll, hopes that the situation will normalize soon are probably exhausted for the time being.

Continued cost increases expected

“Inflation in Germany is expected to exceed seven percent in the coming months,” says Timo Wollmershäuser, head of the Ifo economy, ahead of the companies’ large-scale price hike plans. Ifo price expectations were particularly high in wholesale with 79 points, followed by retail with 75 points and industry with 73 points. At the bottom of the scale are buildings with 64 points and service providers with 52 points.

Difficult times are not just in store for German consumers. The German economy is also suffering from the continuous rise in costs. Much of the inflation is imported, but on a scale not seen in Germany for decades. At best, during the oil crises of the 1970s and early 1980s, imports caused a similar sharp rise in prices in the country.

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The prices of energy, food and other everyday items are becoming more and more expensive

Over the intervening decades, imports have often had a rather deflationary effect: in the course of globalization, they have lowered the price level and made products and services cheaper for German consumers. Already in March, according to a survey by the Federal Statistical Office, import prices were 31 percent higher than the previous year.

According to the data, imported energy sources were 161% more expensive than a year ago. These energy sources include natural gas, oil and coal, but also gasoline and diesel. This price explosion is a consequence of the Russian invasion of Ukraine.

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However, minerals, agricultural products and other raw materials have also become more expensive, as have computer chips and other primary products, which often come from Asia and without which German industry cannot function. The People’s Republic of China has resulted in disruption of supply chains with blockades and closed ports as part of its zero-Covid policy.

Lower expectation of profits and investments

The companies cite the rising costs of procuring energy, raw materials, other pre-products and raw materials as the main reason for their sometimes abrupt price increases. The generalized increase in the cost of production involves a series of risks for the local economy.

One is the lower profitability. “In our most recent survey, companies stated that they cannot fully pass these costs on to their customers and consequently have reduced their profit margins,” points out Wollmershäuser.

Source: WORLD Infographic

For their part, lower profit margins dampen companies’ propensity to invest and could even lead to a cooling of the economy. There has been growing evidence of this in recent times, especially since other EU countries, which are among Germany’s largest customers, are facing similar problems.

Orders received by German industry fell by 4.7 percent in March, as evidenced by the data just presented. Wiesbaden had previously reported weaker exports. Economists interpret this as a warning sign that Germany could slide into a recession.

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“The German economy is set for a downturn. Exports fell sharply in March and incoming orders also tend to be weak for the second consecutive month, “says Thomas Gitzel, chief economist at VP Bank in Liechtenstein. The war in Ukraine is a factor ruining the investment mood But ongoing supply chain problems and rising costs also played a role.

Full order book and high propensity to invest

More and more economists fear that the summer months will bring a drought for the German economy. “The burden is currently too great. A recession is becoming more and more likely, “says Gitzel. Imported inflation plays a significant role in this. Along with the uncertainties of the war, the economic dynamic slows brutally. So, in 2022, a toxic mix is ​​brewing that is brewing. lowering the level.

Experts warn of a wage-price spiral

Record inflation is making small incomes from middle incomes. Many therefore try to save money on driving, heating or on upcoming holidays. The unions are now demanding that inflation be offset by wage increases. But the employers refuse.

Source: WELT / Sebastian Plantholt

The paradox is that the signs for 2022 actually indicate a recovery: “Many orders are still waiting to be processed. At the same time, the public sector would like to invest in the renewal of the energy sector. Companies are also willing to spend money on digitization and CO₂ reduction, “says Gitzel.

But now there is a shortage of materials or personnel: “Frustration is growing among entrepreneurs, investments are postponed”.

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