'Uncertainty' stalls German economy
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.
03:43 [BLANK_AUDIO]