Inflation forces almost half of Germans to rein in spending

Bloomberg

Nearly half of all Germans can no longer afford their lifestyle as inflation surges from one record to the next, according to a poll conducted for public broadcaster ARD.
About 47% indicated they’re strongly or very strongly cutting back on spending. In low-income households, that share rises to more than three-quarters. The survey was conducted among 1,337 Germans between May 30 and June 1.
Inflation in Europe’s top economy hit 8.7% in May, driven by energy and food costs that are likely to rise further as the war in Ukraine persists. Chancellor Olaf Scholz’s government has introduced relief measures including a temporary cut to fuel taxes, subsidies and cheap public-transport tickets, but they’ve not shored up confidence so far.
Retail sales dropped the most in a year in April, and consumers see reining in inflation as a more urgent task than fighting climate change and social inequality. Only the Ukraine conflict is considered a bigger challenge, the survey showed.
Germany’s economy might again become the “sick man of Europe,” slipping back into a role from two decades ago as policies that kept factories humming turn sour.
After years of pushing exports to China and building up energy links to Russia, Europe’s largest economy faces a poisonous cocktail of risks. Its heavy reliance on manufacturing makes it more vulnerable than European peers to war-related disruptions in Russian energy supplies and bottlenecks in trade. The upshot is risk of contraction and even higher prices squeezing unsettled consumers.
“Germany is in a disastrous economic situation,” said Aline Schuiling, senior economist at ABN Amro. “Concerns about its outlook are well justified.”
Schuiling predicts Germany’s output will shrink in the second quarter. While economists at Bank of America Merrill Lynch and Banco Santander are among those sharing her opinion, the Bloomberg consensus is still for growth of 0.4%.
The European Commission expects only Estonia to post slower economic growth than Germany this year — due to similar impacts but a closer proximity to Russia — while inflation in both countries is expected to be stronger than the 19-nation euro-area average.
The strain is becoming evident at the heart of the Germany economy. Some 77% of manufacturers are complaining that material and equipment shortages are hurting business — more than anywhere else in Europe. The country’s machine makers slashed their forecast for production growth to just 1% from 4%.
On top of the industrial headaches, the summer travel season is likely to siphon off cash as German consumers spend money in sunny Mediterranean countries after two years of pandemic. Retailers may have already started feeling the pinch with sales dropping the most in a year in April.
Germany’s powerful BDI business lobby said the combination of Russia’s war on Ukraine and the impact of China’s zero-Covid policy will make 2022 “extremely challenging,” President Siegfried Russwurm said.
Germany’s struggles stem from ignoring geopolitical risks to strengthen its manufacturing base, which — along with sweeping labour reforms — helped pull the country out of a slump in the early 2000s. Both former Chancellor Angela Merkel and her predecessor Gerhard Schroeder intensified the country’s reliance on cheap energy from Russia, while encouraging companies to do business in China.