Germans use up their savings to face inflation:
The outlook on the German economy is becoming bleaker, as private households are forced to use up their savings to combat soaring consumer prices.
Inflation has taken a toll on the savings accumulated by Germans during the COVID-19 pandemic, a report by the Munich-based Ifo Institute said on Tuesday.
Ifo economic research head Timo Wollmershäuser said that German citizens had saved around an additional 70 billion euros (69.5 billion USD) between April 2020 and March 2021 compared to normal circumstances.
But, the trend has now reversed, with bank balance sheets showing that consumers are using up their savings since the end of last year to an extent that they were “almost completely eliminated by the end of the first quarter of 2022,” Wollmershäuser added.
“In the second quarter, this development continued at an almost unchanged pace,” he said, highlighting that inflation is likely to have been a major catalyst.
Consumer prices are soaring in Germany without an end in sight, indicating that “private consumption will, unfortunately, fail to act as an economic engine in Germany over the rest of the year,” the economist said.
While consumption still expanded strongly in the first months of the year, despite high inflation, “since the middle of the year, many leading indicators have been showing a clear dampening effect,” he concluded.
High inflation, rising interest rates and economic uncertainty contributed to the German economy’s contraction in August by the most since the beginning of the COVID-19 pandemic in March 2020.
According to the economist Phil Smith (S&P), the data “paint a bleak picture of the German economy.”
Increasingly negative impact on real wages
In the first half of the year, union-negotiated wages did not rise nearly as fast as consumer prices. A trade union study by the Hans Böckler Foundation claims this may not change in the foreseeable future.
According to their analysis, union-negotiated wages rose by an average of 2.9% in Germany. With consumer prices rising much faster simultaneously, a real wage loss of 3.6% persisted.
The average wage increase of 2.9% in Germany is still largely linked to union agreements that were concluded in 2021 before the Russian invasion of Ukraine.
Most of them lie at 2.5%. More recent deals brought employees an average of 4.5%, but these still lagged behind inflation