By Frances Coppola, Coppola Comment
Inflation is falling fast in Germany. Recent figures show a fall in annualised CPI growth to 0.7%. And this is in the supposedly powerful core of the Eurozone. Out in the periphery, things are much worse.
But whereas disinflation or even outright deflation in periphery countries has little effect on Eurozone aggregate inflation, German disinflation is an entirely different matter. Thomson Reuters has helpfully produced a chart showing the relationship between German and Eurozone inflation:
Nicely correlated. In fact it is so well correlated that it is probably fair to say that ECB monetary policy is really determined by inflation expectations in Germany.
In the last year there has been some divergence because of the awful performance of Spain and Italy and the stagnation of France, which has led the ECB to attempt to introduce a credit easing programme against the wishes not only of the Bundesbank, but of German politicians. But although disinflation in Germany doesn’t seem worry its politicians or its central bankers despite the consequences for the rest of the Eurozone, the threat of recession should:
Germany’s exports to Russia have collapsed due to sanctions. This may of course only be a temporary problem: the German export machine is not going to be derailed by a few Russian difficulties. A much bigger problem is the slowdown in China, to which Germany is a major exporter of intermediate goods. Whatever the cause, Germany’s exports have suffered a substantial drop:
More worryingly, industrial production figures for August showed a fall of 4%:
Ouch. No wonder investor confidence is falling:
But this is very bad news for a country where investment is already shockingly low and government is ideologically averse to spending money. The IMF’s call for Germany to invest should be seen in the light of these awful figures. The wheels are coming off Germany’s export-led, demand-deficient economy – and that is very bad news not only for Germany, but for Europe and indeed for the world.
The ECB has been accused of putting the interests of “profligate periphery countries” ahead of prudent German savers. But in fact it is trying to reflate the German economy through monetary stimulus. It is utter madness for German politicians and Bundesbankers to oppose this. They should back off and let the ECB do its job.
But it will take more than credit easing to sort out this mess. Germany desperately needs a change of stance from its fiscal authorities, too. Unless it invests in its own future, dark days lie ahead.