Germany's economy is the only major economy whose output stagnated in the second quarter. Uncertainty about energy prices and inflation will continue to keep it down, says Veronika Grimm, a government economic advisor.
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00:00 Yeah, I think we are in a difficult period in Germany.
00:05 The central banks have been raising key interest rates at a record pace basically since last
00:09 year in order to fight inflation.
00:11 And I think the dampening of economic growth is something that comes with it, but which
00:16 is of course necessary in order to get inflation down.
00:20 So I think this will be the challenge to get a smooth landing of monetary policy, not too
00:27 much of a recession, but we are in a very stagnation kind of period.
00:32 Okay, so inflation is down, albeit only slightly to 6.2%.
00:38 Does that mean we can finally expect an end to these interest rate hikes, which have really
00:41 been hitting people with their mortgages and with their car loan payments?
00:46 Yeah, I think the ECB is under still much greater pressure than the Federal Reserve
00:54 Bank in the United States.
00:57 The core inflation in the eurozone is still high.
01:01 It might now go down, but it seems as if the issue is not yet done.
01:08 So the ECB has not committed itself to a further interest rate step in September, but it will
01:17 make its decision dependent on data basically.
01:21 And I think it could be expected that there is a next step in September.
01:26 But why is the ECB under so much more pressure than the Fed?
01:29 Why are the policies working in the US and not here in Europe?
01:32 Yeah, first the ECB reacted much later than the Federal Reserve.
01:39 The inflation is still high.
01:41 So in Europe there was a lot of pressure from the supply side.
01:47 Basically we had a huge energy crisis.
01:49 Energy prices went up and now they are going step by step into core inflation and core
01:56 inflation has been rising and is still high.
01:59 So this is a challenge for the ECB.
02:02 Headline inflation is very heterogeneous across Europe and Spain, for example, where the energy
02:08 prices have risen already very much in 2022.
02:13 Core inflation is now down because the energy price effect is not that essential anymore.
02:19 In other countries like Slovakia, inflation is still at 11.3 percent, but the average
02:27 core inflation is still high.
02:29 And I think this is the main issue why the ECB is not done yet.
02:34 But as you mentioned there, the countries are really experiencing diverging fates here.
02:39 Why is Germany struggling so much?
02:41 What are the weaknesses in this economy?
02:44 Yeah, I think there are two aspects beyond monetary policy.
02:51 One issue is that Germany has been hit very strongly by the energy crisis because Germany
02:57 has been very dependent on Russian gas.
03:00 So the delivery stop on Russian gas hit especially Germany very much.
03:05 And second, there's a lot of energy intensive industry in Germany, which is now, of course,
03:10 struggling with the high energy prices.
03:13 And there is quite a lot of uncertainty now.
03:16 What will be the perspectives in the context of the energy intensive industry?
03:22 I think one issue are the fossil fuel energy prices.
03:27 And the other issue is the transformation, which is much more of a challenge in these
03:32 times.
03:33 So the transformation towards climate neutrality is, of course, something that is very important
03:37 for the industry and which is very, which puts very much things at stake at the moment.
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