German inflation data: is Germany heading for a stagflation?

Yesterday’s, much of Europe announced its Q4 figures for GDP growth – or contraction. And no country’s data was more alarming than Germany’s.

Today brought more worrying figures to light, as Germany reported its unemployment and inflation figures for January 2024. These promoted the question: is Germany heading for a stagflation?

What is stagflation?

A stagflation is largely considered by economists to be the worst of all economic environments to deal with – even worse than a simple recession.

That’s because a stagflation is comprised of three negative impacts – high inflation, rising unemployment and low to no economic growth. These three headwinds tend to worsen each other as time goes on in a vicious cycle, making a stagflation exceptionally hard to get out of in most cases.

Slow to no economic growth

Germany’s economy is certainly not booming. Yesterday, Germany reported that its economy shrank 0.3 percent quarter-on-quarter in the final months of the year, and by 0.2 percent for 2023 overall.

In fact, the country would have entered a technical recession, were it not for the fact that prior months figures were revised upwards. A technical recession is defined by two quarters of consecutive negative growth – something which is certainly a possibility still for 2024.

Today’s employment figures

This morning, Germany’s Federal Employment Agency revealed that the country’s official unemployment rate dropped marginally, from 5.9 percent to 5.8 percent, in January 2024.

However, its adjusted unemployment rate was 5.8 percent for January, the same as in both December and November 2023. And it was also revealed at the time that, actually, Germany’s unemployment rate was revised to 2.9 percent in December 2023, making it flat and unchanged YoY since December 2022.

So, employment “remains stable”, but has also, plateaued and shown no growth in three months, and even YoY since December 2022, even with inflation supposedly coming down in both November and December 2023.

Inflation: the good – and bad – news

Ahead of this afternoon’s inflation announcement, market experts are broadly anticipating inflation for January being at three percent year-on-year, down hearteningly from 3.7 percent in January 2022.

However, inflation is a different story when it comes to a month-on-month rate. Forecasters anticipate a 0.1 percent increase in inflation for January to 0.2 percent, a rise from December’s 0.1 percent inflation rate, which the country rejoiced over at the time.

The bottom line

So, to recap, we have slowing economic growth, inflation likely marginally increasing and flat unemployment figures – but no new jobs being created either.

A stagflation is certainly a possibility for Germany in the future, especially since the European Central Bank is facing mounting pressure to cut interest rates, in order to not dampen the growth other economies, such as Spain and Italy, are experiencing currently.