Wirtschaftswiser fears inflation scenario: "A 6 in front of the decimal point would not be a surprise"

Created: 03/11/2022, 20:01

By: Thomas Schmidtutz

Achim Truger: The war in the Ukraine is likely to dampen the growth prospects for the German economy noticeably, the economics expert expects.

© Stefan Boness/Imago

In view of the war in Ukraine, economics professor Achim Truger expects another severe setback for the German economy and increasing inflationary pressure.

Munich – The war in Ukraine* and the sanctions will also have a noticeable impact on the German economy, according to economics expert Achim Truger.

Because of the further Corona* waves and the supply chain problems, it was clear within the Council of Experts even before the outbreak of the Ukraine war, “that we have to noticeably reduce our forecast from November 2021* to below four percent.

Now we have to go further down.

If there is a complete stop to energy supplies, I even fear a severe recession," Truger told

*.  

Prof. Truger, inflation in Germany was 5.1 percent in February, the highest it has been in 30 years.

In the US, the inflation rate is 7.9 percent, the highest level in 40 years.

The biggest driver here are energy prices.

Because of the Ukraine war, the oil and gas situation has now deteriorated even further.

How dangerous is the steep increase in energy prices for the economy in Germany?

These are currently really dramatic developments in inflation.

The economy can be negatively affected by falling real incomes and thus lower consumption by private households.

In addition, the cost burden in companies is increasing, which hinders investment, production and sales.

But it's not just inflation.

In addition, there are other war-related or sanctions-related restrictions in the international supply chains, which put an additional burden on the companies.

According to the forecast published in November, the German Council of Economic Experts has so far assumed economic growth of 4.6 percent for 2022.

Will that be tenable?

Of course not.

Even before the war in Ukraine, it was clear because of the further corona waves and the supply chain problems that we would have to lower our forecast from November 2021 to below 4 percent.

Now we have to go further down.

In the event of a complete halt to energy supplies, I even fear a severe recession.

Where could the annual average inflation come from if the situation on the energy markets does not ease?

You would have to reckon with at least a 5 before the decimal point, unfortunately a 6 would no longer be a surprise.

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The consequences of this development are far-reaching.

Countless medium-sized companies from energy-intensive industries such as steel, chemicals or metal processing are very concerned.

It is said that if energy prices do not fall again soon, many companies will now even have to survive.

Is it really so bad?

I would take the concerns very seriously.

The impending cost burden is very high.

There has never been such a massive increase in energy prices coupled with fears about the security of supply.

In view of the situation, the first companies are already demanding state support.

Does it have to be that way?

If the situation doesn't ease up soon, which unfortunately is likely, then I'm afraid that after all the Corona aid, government support will actually be needed again.

However, a pandemic plus a war in Europe are really an unfortunate chain of exceptional situations that require appropriate responses.  

Wirtschaftswiser Achim Truger: Social transfers must be increased

How could the federal, state and local governments specifically help companies?

For the time being, liquidity aid, income support and extended short-time work regulations for affected companies could help, similar to Corona.

As far as tax measures such as depreciation allowances and loss carrybacks are concerned, these are being extended again because of Corona.

However, fixed-term compensation payments would also be conceivable to specifically cushion the burden of energy costs.

The EU Commission has already announced the state aid requirements for this.

The high energy prices not only affect companies, but also affect private households, in some cases severely, through heating and fuel prices.

Does the federal government have to get here?

The federal government has already launched a 10-point relief package that I think is sensible and balanced.

If the energy prices continue like this, however, that will no longer be enough and the federal government will have to step up.

In order to mitigate the worst consequences, Bavaria's Prime Minister Markus Söder has called for a reduction in the VAT rate to seven percent.

What do you make of it?

I'm rather skeptical about that.

First of all, it is unclear to what extent the VAT reduction will be passed on from companies to consumers in an environment of significant price increases.

And then that is a very unspecific relief that everyone gets: rich households that don't need it at all, as well as households that are hardly affected by the energy price increases.

This will be expensive, without one being able to be sure that those who are really affected will be relieved enough.

There are also calls to raise the commuter allowance or to grant the higher rate not from the 21st kilometer, but from the first kilometer. How useful would that be?

I can understand that there should be a special relief for commuters.

But the commuter lump sum is very unfair, because high-income households with high tax rates benefit particularly from it because of the deduction from taxable income.

If you want to adjust the commuter allowance, then you would have to combine this with a reform that makes the relief independent of income, for example in the form of a mobility allowance.

Container ship in Hamburg: The corona pandemic and stagnant supply chains have weighed on the economy.

The consequences of the Ukraine war and the sharp rise in energy prices are now clouding growth prospects for the German economy.

© Marcus Brandt/dpa

What other alternatives do you think would make sense?

In any case, the social transfers, such as the heating subsidy, have to be increased again.

Then it would be good if the implementation of climate money as a uniform per capita payment to all households was finally tackled.

In this way, increases in CO2 prices could be compensated very fairly in the future.

I believe that there must also be specific relief for households that are affected by the exploding gas prices.

This could be a gas price cap, for example, in which a certain basic consumption of natural gas per household is temporarily capped by a targeted subsidy in the price.

The ECB now intends to stick to its cautious course.

ECB boss Christine Lagarde announced on Thursday that bond purchases are to be scaled back.

However, the turnaround in interest rates that many observers are hoping for is still a long way off.

Many economists criticize that inflation will only continue to rise and that the trade unions could use this as an opportunity to demand significantly higher wages.

Do you share this concern about a wage-price spiral?

The ECB surprised many on Thursday with the now accelerated exit from bond purchases, ie it has switched to a more restrictive course despite the significantly increased economic risks due to the war in Ukraine.

So far I haven't seen any signs of a wage-price spiral either.

Incidentally, the fact that this does not happen also depends on the policy of the federal government: If it noticeably relieves the employees because of the increased energy prices, this also takes some wage pressure out of the collective bargaining. 

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