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The Price of Goods and Services in Germany Just Got a Little Cheaper

The consumer price index for Germany, which measures the average price change for all goods and services purchased by households for consumption purposes, shows inflation easing in November.

Latest preliminary figures, released by the Federal Statistical Office of Germany, showed on Wednesday that monthly consumer prices declined more than expected this month. 

“The inflation rate in Germany is expected to be +3.2% in November 2023. This is the lowest level since June 2021 (+2.4%). The inflation rate is measured as the change in the consumer price index (CPI) compared with the same month a year earlier,” Destatis said.

The statistical office also noted, based on the results available so far, that consumer prices are expected to decline by 0.4% on October 2023. The inflation rate excluding food and energy, often referred to as core inflation, is expected to be +3.8%.

“The year-on-year drop in energy prices of 4.5% had a particularly dampening effect on the rate of inflation in November 2023. A base effect due to the very high energy price level in the previous year applied here. In addition, food prices (+5.5%) did not rise as much in November 2023 as in the previous months,” Destatis added.

What ‘s been dragging on Germany’s economy?

As Germany grapples with economic challenges, Osama Rizvi, economist and analyst, highlighted several factors which have been contributing to a complex scenario that could shape the nation’s financial trajectory well into 2024. 

Despite a slight easing of the downturn, he said the looming issues are casting shadows on the economic powerhouse of Europe.

Residential construction facing setback

“The residential construction sector in Germany faced a significant setback in October, with a staggering 22.2% of companies cancelling projects, marking the highest increase since 1991. 

“Global macroeconomic pressures, including rising debt levels and G7 countries tightening lending standards, coupled with higher interest rates, are creating an inhospitable environment for growth,” he added.

Rizvi further noted that if this trend persists, consumers may experience further income pressure in the coming year.

Declining new construction orders

Adding to the concerns is the declining trend is new orders for constructions. From September’s 46.6%, the fall in orders increased to 48.7% in October, a stark contrast to the 18.7% recorded in October 2022, representing a substantial 166% year-over-year drop.

Given that the construction sector contributes 6% to Germany’s GDP and accounts for a fifth of total output, this downturn is impacting not just the industry but also one in 10 jobs.

“Post-Covid injection of billions into the sector resulted in overpriced valuations, with house prices soaring by 66% between 2015 and 2022. The recent halt in the construction of Hamburg’s Elbtower, with a total cost of $1.38 billion, adds to the economic woes,” Rizvi said.

Soaring costs and material scarcity

A 40% increase in raw material prices since pre-Covid times, coupled with the European Central Bank’s 10 interest rate hikes, has eroded consumer purchasing power and confidence, contributing to soaring inflation. 

BaFin’s warning about potential further falls in real estate valuations, exemplified by Adler Group SA’s debt burden and the halted Elbtower project, indicates structural weaknesses in the German economy.

Notably, Rizvi also shared, not a single new railway project received approval in 2023, underscoring the broader challenges facing infrastructure development.

Budget crisis looms large

The Organisation for Economic Co-operation and Development (OECD) has also warned of a budget crisis in Germany, questioning planned spending in the billions of euros, with potential repercussions for the entire European economy. 

The OECD’s Robert Grundke emphasised that reduced investment and spending in Germany could have a cascading impact on the EU economy.

Source : Euronews

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