Difficult times for the German economy: How is inflation impacting economic development?

Difficult times for the German economy: How is inflation impacting economic development?

As the website Merkur.de reports, the German economy is currently in a slump. Germany is the only G7 industrial country whose economy will shrink this year. In the third quarter, gross domestic product fell by 0.1 percent compared to the previous quarter. This is also further dampened by rising inflation, which despite falling in October is still at 3.8 percent.

High inflation is putting a strain on consumers as higher prices mean they can afford less. According to a survey by the German Savings Banks and Giro Association, 61 percent of those surveyed have restricted their consumption in the last twelve months. However, private consumption is an important pillar of the economy. In addition, the high prices for food in particular are putting a strain on the purchasing power of private households.

Despite a decline, inflation has continued to be a burden in Germany. In October, consumer prices were 3.8 percent above the previous year's level. The increased food prices in particular are contributing to this.

The European Central Bank (ECB) has raised interest rates ten times since July 2022 to counteract inflation. However, higher interest rates make loans more expensive and can slow down demand. For companies, this means that debt-financed investments will become more expensive, which may cause them to reconsider their investments. Private house builders and investors are also holding back in the construction industry.

The export-oriented German economy is suffering from the weakness of the global economy. The weaker foreign trade affects Germany more than other nations. The global economy is only slowly recovering from the consequences of the pandemic, the war in Ukraine and inflation.

Nevertheless, there are also positive aspects. The labor market is robust and there is a shortage of workers. Unemployment will rise moderately this year, but is expected to fall slightly again in the coming years. The Bundesbank emphasizes that Germany is doing well overall compared to other countries.

Source: According to a report from Merkur.de, November 1st, 2023, 9:03 a.m