Stagflation is tightening its grip on Germany

Today has opened to a drumbeat that has become increasingly familiar in Germany.

WIESBADEN –In October 2021 the selling prices in wholesale trade rose by 15.2% compared with October 2020. This was the highest annual rate of change since March 1974 after the first oil crisis (+15.8% compared with March 1973). In September 2021 and in August 2021 the annual rates of change had been +13.2% and +12.3%, respectively.

There has been another blast from the Inflation Klaxon. If we look into the detail it is being driven by this.

The high rates of change for wholesale prices in annual comparison derive from increased prices for raw materials and intermediate products. The largest impact on the year-on-year price rate in wholesale trade had the increased prices for mineral oil products (+54.7%).

Because of the swings created by the Covid pandemic we need to take care with annual changes but as we check we see that the monthly numbers are playing a bass line in tune with the drumbeat.

From September 2021 to October 2021 the index rose by 1.6%.

For context we can note that any moves pre pandemic in this measure were mild as it was at 104.5 in January 2020 before falling to 101.7 on the initial impact of it. A minor rally has been followed by quite a surge this year taking it to 118.1.

This comes in a week where the provisional consumer inflation numbers were confirmed.

Harmonised index of consumer prices, October 2021
+4.6% on the same month a year earlier (provisional result confirmed)
+0.5% on the previous month (provisional result confirmed)

We did get more detail which is based on a slightly different measure ( Germany has its own CPI) and had suggested more is coming.

The prices of heating oil doubled compared with a year earlier (+101.1%), and those of motor fuels increased substantially (+35.0%). The prices of natural gas (+7.4%) and electricity (+2.5%) rose, too.

By that I mean from the domestic energy prices quoted. Food too especially eggs was more expensive.

Food prices were up 4.4% in October 2021 compared with the same month of the previous year.

As ever the rise in price for “non-core” items leads to things like this from Oliver Raku of Oxford Economics.

Yes, German inflation is very high in y/y terms. But monthly gains in the price of core goods & services in Germany have been unremarkable in the past 2-3 months having slowed to pre-pandemic levels –> Core inflation will slow significantly next year

If you don’t eat or heat you homes it is all just fine. Still you can always put rents in ( even for those who do not rent to help keep the numbers down).

 Net rents exclusive of heating expenses, which are important as they account for a large part of household final consumption expenditure, rose by 1.4%.

Meanwhile a price actually paid by home buyers is on a bit of a tear.

WIESBADEN – In the second quarter of 2021, the prices of residential property (house price index) in Germany rose an average 10.9% year on year. This was the largest price increase recorded for residential property transactions since the beginning of the time series in the year 2000. The Federal Statistical Office (Destatis) also reports that the prices of dwellings and of single-family and two-family houses were up by an average 3.7% compared with the previous quarter.

Economic Growth

In the third quarter economic growth meant that Germany was close to reaching pre pandemic levels.

The GDP in the third quarter of 2021 was still 1.1% lower (price-, seasonally and calendar-adjusted) than in the fourth quarter of 2019, the quarter before the coronavirus crisis began.

If we try to do a comparison with the UK we do not have monthly numbers but if we did it too would have been close to pre pandemic levels in September. The official EU forecasts are very optimistic especially for next year.

Overall, real GDP is projected to rebound by 2.7%
in 2021. In 2022, the level of activity is forecast to
be 4.6% higher than the year before, as all final
demand components regain pre-crisis levels. In
2023, GDP is expected to grow by 1.7%, assuming
a normalisation of supply and demand dynamics.

Those numbers were pretty much repeated by the advisers to the German government according to Reuters.

The advisers, whose forecasts guide the German government in setting fiscal policy, cut their 2021 growth outlook to 2.7%, down from the 3.1% they expected in March, but raised their outlook for next year by six percentage points to 4.6%.

Although as the overall view is up I am not sure how they get the darkening view from?

The darkening mood blamed by the advisers on supply-chain bottle necks and inflationary pressure afflicting the global economy is likely to create additional problems for the would-be coalition parties in carrying out promises of transformational investments into greening the economy and a return to strict debt limits from 2023 without raising taxes.

Actually the forecast had something which was very Germanic.

Public Finances

Have we missed something?

BERLIN, Nov 10 (Reuters) – Germany’s federal government finances are in a critical state and the next government must consolidate them, the federal audit office said on Wednesday

It was not in the Fitch Ratings report at the end of last month as this looks for these times fiscally rather conservative.

Based on all these considerations we expect a fiscal deficit at 5.4% of GDP in 2021, well below the original government target of 9% set in the spring Stability programme. As the economic recovery strengthens the budget deficit is forecast to shrink to 3.5% in 2022 and 2.8% in 2023.

Considering that pre pandemic it was reducing the relative size of its national debt this does not look especially critical either.

We no longer expect additional debt increase from one-off adjustments beyond the programmes that are already reflected in public debt. As part of the initial response to the pandemic the German government announced capital-injection programmes aimed at the private sector with existing and new guarantee schemes totalling EUR820 billion, 21% of GDP.

Another reason for this is that Germany is paying very little for new borrowing and in fact is often being paid to do so. Or thank you ECB!

The German sovereign debt market has continued to enjoy very benign financing conditions. As part of the ECB’s quantitative easing programmes, purchases of German sovereign bonds were close to an estimated EUR600 billion by September 2021, around 17% of GDP. The average issuing yield has been negative since 2016.


I am more sanguine about economic prospects that the official forecasts. One way of looking at that is simply to consider the effect of inflation on real wages and hence likely consumption trends. Next comes the fact that even the PMI business surveys are showing a fading of growth.

Business activity across Germany’s private sector showed
only a modest rise in October as the pace of growth slowed
notably and for a third straight month. The seasonally
adjusted Germany Composite PMI Output Index registered
52.0, down from September’s 55.5.

If we allow for its optimism bias ( supply chain issues are reported as a positive) then Germany may well be contracting.

Next comes the rise in Covid-19 cases and the increasing likelihood of more restrictions.

Covid is seeing a big resurgence in Europe. Germany just recorded 51k cases in a day. Deaths are still low but that rises only after a lag. ( @sanjeevsanyal )

Let me first wish anyone who has Covid a speedy recovery. But if we see what is happening in the Netherlands another nudge lower to the economy looks to be on its way.

The Netherlands will become the first western European country to impose a partial lockdown since the summer, Dutch media have reported, introducing strict new measures from Saturday in the face of record numbers of new Covid-19 infections. ( The Guardian)

Thus I remain of the view that it is going to be a tough end to the year for the German economy or if you prefer stagflation.

On a separate issue I know that the ECB only buys out to 31 years but if I was Germany I would be issuing some 50 and indeed 100 year bonds.



11 thoughts on “Stagflation is tightening its grip on Germany

  1. Hello Shaun,

    fascinating to see how deomcracy dies , isnt it? Dutch death rates are in the twenties now but infections 223K , Germany the same , but you have to lock down the country to control infection rate which most have had theire jabs for ( you know , the ones to flatten the curve ). 98% survival rates now.

    Forgetting the politics , we llke no, we cannot , as the next restrictions are political so their economies will be trashed yet again . If as other sources have mentioned , covid is going to be around for 8 years (!!) then what will be the economic impact of that ?

    Along with climate controls and taxes?

    Interesting times indeed !

    • Hi Forbin

      I wonder if the new German government will have a different attitude to all of this? With the rising case numbers it feels like events are gathering their own momentum. It always was the issue with the lockdown culture, which is how do you stop?

      • “It always was the issue with the lockdown culture, which is how do you stop?”

        Simple; you respond, “It hasn’t worked three times, there’s no reason to believe a fourth would work. Lockdown does real damage to people’s physical & mental health, & you have no mandate to incarcerate the UK population, so I refuse to comply.”

  2. Great blog as usual, Shaun.
    You note that the German HICP inflation rate was 4.6% for October. This is the national inflation rate that feeds into the ECB’s Monetary Union Index of Consumer Prices (MUICP), the target inflation indicator for the euro area. On the face of it, this looks comparable to the inflation rate for the US Fed’s target measure, PCEPI, 3.64% for September; the October rate is not yet available. The German HICP inflation rate for September was 4.1%.
    However, this is comparing apples to oranges. If one looks at the US BLS experimental HICP for the total US population it shows an annual inflation rate of 7.26% in October, up from 6.22% in September. This is considerably higher than the PCEPI or CPI-U inflation rates for the US partly because of the exclusion of owner-occupied housing from the HICP, which gives a greater weight to energy prices. Comparing like to like shows that the US Fed, thanks to its disastrous average-inflation targeting framework, now has inflation substantially higher than any European country in the G7.

  3. It wont be long before the UK suffers stagflation petrol hits another high today.

    In the meantime I am somewhat confused at what Redrow are saying about building costs which they say are rising circa 5% when most the people in the building trade tell me most of the building materials including cement and wood hit the roof so to speak most in double digits, particularly wood.

    A joiner friend of mine has not seen anything come down as yet through their builders supply. Glass and UPVC and plumbing prices have all risen.

  4. The only cloud on the horizon is a new more deadly Covid strain and/ or a severe flu pandemic. Aside from that things are fixing themselves as markets do their work. The only grand plan needed is for decarbonisation as I believe there could be significant first mover advantage. It’s going to happen whether we like it or not so why not game the system? Sorry, I mean think of the children and our children’s children (Switches violin off).

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