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“We are trapped in stagnation”


The economic downturn has Germany firmly under control, says ifo President Fuest im tagesschau24-Interview. From the economist's point of view, what are the reasons for this – and what could happen next with interest rates and inflation.

By Antje Erhard, ARD financial editorial team

tagesschau24: When will housing, gas and shopping become cheaper? Many consumers ask themselves this. Inflation runs counter to this. Is it still so high that the central banks cannot lower interest rates now?

Clemens Fuest: The central bank was relatively late when inflation rose. For a long time people thought: “It'll come down again,” and that's why it was too late to raise interest rates. That's why the central bank is now hesitant, worried about making a mistake again. Inflation is falling, but it is falling slowly, gradually.

Wage developments in particular are something that central banks are concerned about. So there could be further inflationary pressure from the wage side. Originally it came primarily from energy and food.

Now wages could drive up costs – and thus prices. And then the central banks want to give the signal: “You don't need to resort to large wage increases because you are afraid of inflation. Because we will fight inflation resolutely.”

Food prices continue to rise

tagesschau24: ECB President Christine Lagarde recently said that the ECB would now wait for the wage agreements at the beginning of the year. Can the high wage agreements in various sectors actually be responsible for the interest rate turnaround being pushed back further?

Fuest: That is a factor, of course it is not the only factor. And it must also be said that so far wage developments have not been the main driver of inflation. Nevertheless, the central bank is concerned about this.

But there are also other factors, for example food prices, which of course also play a big role. They are still rising quite rapidly at the moment.

tagesschau24: We consumers notice food inflation. The industry, for example, with electricity. We are currently receiving a lot of bad news: losses at Thyssenkrupp, job cuts at Continental, Bosch, Bayer and others. The government is also lowering its economic forecast for this year. Where are we now in Germany?

Fuest: Unfortunately, we are trapped in stagnation, and of course that has to do with short-term factors such as interest rates and energy prices.

But we also have longer-term problems, structural problems. The auto industry is in a process of change. We are experiencing demographic change. We are heading towards a situation with a shrinking workforce. And that worries many investors.

“Prevent everything from becoming even more expensive”

tagesschau24: We consumers first look at our own wallets. Inflation means that a supermarket purchase that cost 100 euros four years ago now costs 130 euros. Would life become cheaper again if inflation were under control?

Fuest: The first thing is to prevent everything from becoming even more expensive. Wages have also risen, although not as much as food prices. But other things, such as rents, haven't risen so much. It's less about everything becoming cheaper again, but rather about slowing down this further price increase. What you want is roughly stable prices.

When it comes to energy, however, things are really getting cheaper again at the moment. But the prices had previously risen so much that it was somehow clear that things couldn't stay like this. So prices sometimes fall. But the central bank is not aiming for the price level to fall overall. And that can only be expected in exceptional cases. It's about stabilization.

The time of zero or negative interest rates is over

tagesschau24: Is it so important when the interest rate cuts will come, but isn't it more important to what extent they are possible?

Fuest: Correct. The first step was to stop raising interest rates. We've got that behind us now. And now it's about interest rate cuts. And the central bank will proceed gradually, i.e. in steps of half a percent, perhaps a quarter of a percent.

The key interest rate in the euro zone is currently 4.5 percent. At the end of this year we will perhaps be at 3.5 percent – perhaps even at 3.75 percent if the central bank is a little more cautious. The direction is clear.

But the levels we had before the crisis – with zero interest rates or even negative interest rates: That won't come back any time soon.

Industry is lame, services are booming

tagesschau24: These interest rate conditions are the same for all members of the euro area. Nevertheless, the debt problem children such as Greece, Italy and Spain are doing better economically than Germany. Why are these states currently coping better?

Fuest: This is perhaps especially true in the short term. Sectors such as tourism are currently doing better again. People couldn't go on vacation for a long time during the pandemic.

And these countries don't have such a large industrial sector either. The industrial sector is a bit slow at the moment, partly because the global economy is not going well, but also because energy prices are high. So what otherwise helps us – a large industrial sector that benefits when the global economy is booming and energy prices are low – is now causing us problems.

Otherwise these countries might also like to have more industry. But for now, they may be quite happy that they are focusing more on services. That explains the difference.

Antje Erhard, ARD finance editor, asked the questions. The interview was shortened and edited for the written version.

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