German producer price rises show weaker-than-expected demand
German producer prices inched up 0.5% on an annual basis in January, stabilising from December's 0.8%, which was also a one and a half year high, according to official figures from the Federal Statistical Office.
Although January's number was less than analyst expectations of 1.3%, it was still the third consecutive month of producer inflation. This was primarily because non-durable consumer goods prices increased by 3% in January 2025, compared to the same month last year, whereas durable consumer goods prices inched up 1.1% on an annual basis.
Capital goods' costs also advanced, coming in at 1.9% in January. This was mainly due to higher machinery, trailers, motor vehicles and semi-trailers costs.
On the other hand, energy prices dropped 1% in January 2025, compared to the same month in 2023. This was mainly because of natural gas, electricity and district heating prices falling, although mineral oil product prices rose.
Excluding electricity prices, German producer prices inched up 1.2% in January, on the same time last year.
Producer prices dropped 0.1% on a monthly basis in January, the same as in December, although below market estimates of 0.6%.
German economy continues to struggle
According to the Federal Statistical Office, Germany's economy shrank by 0.2% in 2024, highlighting the second year in a row of negative growth. This was mainly because of higher energy costs, weak export demand, soaring international competition and ongoing uncertainty in the global political and economic outlook.
This situation was exacerbated by the country's coalition government collapsing in late 2024, following German Chancellor Olaf Scholz's firing of his finance minister Christian Lindner. Scholz lost a confidence vote after this.
The rising threat of US tariffs following US president Donald Trump taking office has also led to increased concerns about the outlook of the EU as well as the German economy in the coming months. In 2023, Germany's main exports to the US included cars, vaccines and packaged medicaments, according to The Observatory of Economic Complexity, whereas the main imports from the US were cars, crude petroleum and gas turbines.
In 2025, German gross domestic product (GDP) growth is expected to be 0.7%, before growing further to 1.3% in 2026. Inflation is expected to average about 2.1% this year, before falling to 1.9% in 2026.
Commission hopeful of reappearance of growth
The European Commission said in its latest economic forecast for Germany: "Construction is set to resume growth in early 2025, underpinned by recovering demand for housing and infrastructure, as already signalled by rebounding orders as well as mortgage loans. In response to the increase in tax incentives for investment in 2025 announced in July 2024, investment in equipment is expected to rebound.
"Overall, domestic demand is forecast to become again the main driver of economic growth in 2025 and 2026. As energy costs are expected to remain significantly above pre-pandemic levels, they are set to continue weighing on the cost-competitiveness of energy-intensive industries. The contribution to growth from net exports is thus projected to be slightly negative in 2025 and broadly neutral in 2026, despite improvement in demand from Germany's main trading partners."
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