GERMANY: BUSINESS EXPECTATIONS The geopolitical environment has sharply driven up energy and commodity prices. Inflation rose to 7.9% y/y in May, a record high since February 1952 for West Germany.
It is mainly fuelled by energy prices (+38.3% y/y in May), but inflation is also spreading to goods (+13.6% y/y) since many companies have already carried over part of the increase in production costs to their end prices. Although inflation has not yet spread to the services sectors (+2.9 y/y), the programmed increase in the minimum wage (from EUR 9.82 currently to EUR 12 in October) could change the situation since it will touch numerous sectors (temporary employment, cleaning and security services). Even so, it seems fairly unlikely that Germany will be hit by a price-wage spiral.
Despite a favourable environment for wage talks, with a very low unemployment rate (3% according to the ILO definition in May) and the job vacancy rate at an all-time high (4.1% in Q1 2022), inflation is too high to be fully offset by wage increases. Wage talks between labour unions and management since the beginning of the year seem to be heading towards an average wage increase of 4%, not including bonuses, but that will not be enough for average household purchasing power to hold in positive territory.
Faced with the inflationary shock, the government is providing only minimum support to households and companies (limited assistance with strict compliance criterion). The public deficit will barely reach 2.5% of GDP this year (compared to 3.7% in 2021). Christian Lindner, the Finance Minister, intends to comply with the constitutional stipulation limiting the Federal government’s structural deficit to 0.35% of GDP. Moreover, beginning in 2022, the government has begun to sharply reduce the public debt ratio (by about 3 points of GDP). The only manoeuvring room could come from the creation of a special off-balance sheet fund, the cost of which would not appear on the Federal government’s public deficit, as was the case for the recently-approved EUR 100 bn investment plan for defence.
