German inflation soared to double-digit levels for the first time in more than 70 years, underlining the precarious state of Europe’s largest economy, which leading economists warned could shrink by up to 7.9 per cent next year in a worst-case scenario.
Chancellor Olaf Scholz responded to soaring energy costs on Thursday by announcing plans for a €200bn cap on gas prices, which he described as a “defensive shield” to be financed by extending an off-balance sheet fund set up to provide aid during the coronavirus pandemic.
Consumer prices in Germany rose 10.9 per cent in the year to September, accelerating from 8.8 per cent in August, according to a flash estimate published by the federal statistical agency on Thursday. It is the first time German inflation has reached double-digit levels since 1951 and the increase is expected to lift overall eurozone inflation to a new record of 9.7 per cent when those figures are released on Friday.
“Inflation is running red hot in Germany,” said Carsten Brzeski, an economist at Dutch bank ING, adding that it was “hard to see” how the European Central Bank could not raise interest rates by 0.75 percentage points for a third consecutive time at next month’s meeting.
The increase in German prices — which rose 2.2 per cent month on month — was driven by the expiry of temporary measures to shield households and businesses from the impact of high prices, such as a fuel duty cut and a subsidised €9 monthly train ticket.
Energy prices rose 43.9 per cent in the year to September, accelerating from 35.6 per cent growth in August, while food prices surged 18.7 per cent against 16.6 per cent a month earlier. Services price growth accelerated to 3.6 per cent from 2.2 per cent.
Russia’s decision to cut gas supplies to Europe after its invasion of Ukraine has plunged Germany into its worst energy crisis since the second world war. Soaring gas prices have forced many companies to reduce production or even shut down entirely, while private households are preparing for a huge increase in heating bills.
Germany’s top economic institutes said the country would expand by 1.4 per cent this year, contract by 0.4 per cent in 2023 and grow by 1.9 per cent in 2024. But they also warned the economy could shrink by 7.9 per cent next year in the event of an unusually cold winter and the introduction of gas rationing in industry.
“If we get a much colder winter gas consumption will grow significantly, which will increase the likelihood of a gas shortage,” said Torsten Schmidt of the Leibniz Institute for Economic Research. “That will have more of an impact on GDP than we’ve assumed in our forecast.”
The institutes said that, based on the median of their model simulations, Germany will not run out of gas this year and next, though the supply situation would remain “extremely tight”. They said that “this will mean a permanent loss of prosperity for Germany”.
The “heightened risk” of gas rationing and shortages could be avoided if consumption was reduced by 20 per cent and imports were increased, but the institutes warned of a “massive drop” in GDP at the start of 2023 and 2024 if the country fails to sufficiently curb gas use.
The forecast was produced by the Ifo Institute in Munich, the Kiel Institute for the World Economy, the Halle Institute for Economic Research as well as the Leibniz institute.
The prognosis marks a radical downward revision of the institutes’ spring forecast when they predicted growth of 2.7 per cent this year and 3.1 per cent in 2023. “This revision mainly reflects the extent of the energy crisis,” they said, adding that the value of output in 2022 and 2023 would be €160bn lower than expected in the spring.
Schmidt said private households were bearing the brunt of higher energy prices and facing a “huge loss in purchasing power”. Most companies were, in contrast, managing to cope with the energy crunch, he added.
As temperatures fall in Germany, gas consumption by households and businesses rose sharply in the past week to 14.5 per cent above the average over the past four years, the federal network agency said on Thursday. Klaus Müller, head of the agency, said the change was “very sobering” while adding that the situation could rapidly change.
The institutes said inflation would rise to 8.8 per cent next year, slightly higher than this year’s level of 8.4 per cent, though it would decline to 2.2 per cent in 2024.