German inflation hit double-digit levels for the first time in more than 70 years, underscoring the precarious state of Europe’s biggest economy, which leading economists say could shrink to as low as 7.9 % next year in the worst case.
Chancellor Olaf Scholz reacted to soaring energy costs on Thursday by announcing plans for a €200 billion cap on gas prices, which he described as a “defensive shield” to be funded by extending an off-balance sheet fund set up to provide relief during the coronavirus pandemic.
Consumer prices in Germany rose 10.9% on the year to September, from 8.8% in August, according to a flash estimate released Thursday by the Federal Statistics Agency. It’s the first time German inflation has hit double-digit levels since 1951 and the increase is expected to take headline eurozone inflation to a new record high of 9.7% when those numbers come out on Friday.
“Inflation is rising to red in Germany,” said Carsten Brzeski, an economist at Dutch bank ING, adding that it was “difficult to see” how the European Central Bank could not raise interest rates from 0, 75 percentage points for the third straight time at next month’s meeting.
The rise in German prices – which rose 2.2% month-on-month – was driven by the expiry of temporary measures to protect households and businesses from the impact of high prices, such as reduced fuel taxes and a subsidized €9 monthly train ticket.
Energy prices rose 43.9% on the year to September, after rising 35.6% in August, while food prices jumped 18.7% from 16, 6% a month earlier. Services price growth accelerated from 2.2% to 3.6%.
Russia’s decision to cut off gas supplies to Europe after its invasion of Ukraine plunged Germany into its worst energy crisis since World War II. Soaring gas prices have forced many businesses to cut production or even shut down altogether, while private households brace for huge increases in heating bills.
Germany’s leading economic institutes said the country would see 1.4% growth this year, 0.4% contraction in 2023 and 1.9% growth in 2024. But they also warned that the economy could contract by 7.9% 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 increase significantly, which will increase the likelihood of a gas shortage,” said Torsten Schmidt of the Leibniz Institute for Economic Research. “It will have more impact on GDP than we 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, although the supply situation will remain “extremely tight”. They said “it will mean a permanent loss of prosperity for Germany”.
The ‘increased risk’ of gas rationing and shortages could be avoided if consumption were cut by 20% and imports increased, but the institutes warned of a ‘massive decline’ in GDP in early 2023 and 2024 if the country fails to sufficiently limit gas consumption.
The forecasts were 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 forecast marks a drastic downward revision to the institutes’ spring forecast when they predicted growth of 2.7% this year and 3.1% in 2023. “This revision mainly reflects the scale of the energy crisis” , they said, adding that the value of production in 2022 and 2023 would be 160 billion euros lower than the spring forecast.
Schmidt said private households were bearing the brunt of rising energy prices and facing a “huge loss in purchasing power”. Most companies, on the other hand, have managed to cope with the energy crisis, he added.
As temperatures drop in Germany, gas consumption by households and businesses rose sharply last week to 14.5% above the average for the past four years, the federal network agency said on Thursday. Klaus Müller, head of the agency, said the change was “very worrying” but added that the situation could change quickly.
The institutes said inflation would rise to 8.8% next year, slightly above this year’s level of 8.4%, although it will drop to 2.2% in 2024.