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Jens Eisenschmidt, economist at Morgan Stanley, says the German economy relies on large numbers of migrants to make up for its shrinking workforce, yet inflows are fading, undermining its growth prospects.
“The underlying trend of steady migration is slowing down – and intra EU migration is actually going into reverse,” according to his analysis.
“Add to that, refugees are not necessarily (immediately) adding to the labour force in the same way that migrants arriving in Germany for non-humanitarian reasons do. So the risk is high that Germany falls well short of the needed 400,000 migrants every year.”
Meanwhile Germany’s woes add to the European Central Bank’s challenges.
It has to set interest rates for the entire currency area, aiming to get inflation to 2pc over the medium term.
A one-size-fits-all policy is exceptionally tricky when Spain’s prices are up by just 1.6pc, while Italy’s inflation of 6.7pc is almost at German levels.
Despite the overall downward trend in inflation, Emily Nichol, economist at Daiwa Capital Markets, expects the ECB, which is based in Frankfurt, to focus on the worries showing up in the German data.
“Most importantly for the ECB, due to the big rise in Germany and despite signs of some softening elsewhere in the region, core inflation in the eurozone will likely rise slightly,” she says.
“With the base effect set to keep German services inflation high for the next couple of months too, eurozone core inflation seems likely to remain close to 5.5pc until September, likely persuading the Governing Council to hike rates at each of the next couple of monetary policy meetings.”
Those higher interest rates risk pushing Germany’s economic crunch onto more of its neighbours, which will in turn reduce demand for its exports.
So far the ECB has raised its headline deposit rate to 3.5pc, up from a low of minus 0.5pc. More rate rises are expected in July and again in September as policymakers seek to pull down core inflation.
“The eurozone as a whole is in recession, by the finest of fine margins,” says Allen-Reynolds.
“But given we really have not seen the full effect of ECB tightening that it has already implemented, let alone that which it is going to implement, there is a very good chance the region as a whole continues to struggle.”
German nerves may have to cope with high inflation – and rising interest rates for some time yet.
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