Germany’s Rising Cost of Living
As inflation spiked over the last 2 years and Germany is facing a recession, German residents have become much gloomier, according to various surveys. Households have seen a variety of costs in their everyday lives surge, which has hit their propensity to buy so hard that the drop in domestic demand has substantially weakened consumer spending. This is dragging down the German economy as real growth takes a hit. In this post, I take a look at some of the major components of living costs in the country and how they have evolved, especially during the last several years. If you like this post, please subscribe here on my website, and follow me on Medium or on other social media.
People in Germany are justifiably frustrated and pessimistic
The content of this post does not constitute financial or investment advice. It is intended for information and education purposes only.
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The Dimensions of German Consumer Depression
At the start of 2024, German residents have already seen within a few weeks, their streets blocked by protesting farmers, their trains grinding to a halt due to unhappy locomotive drivers organizing a crippling week-long strike, and their airports unable to function with passengers stranded as a result of a trade union push for better working conditions and higher wages. All this is happening in the context of a ruling coalition that is rapidly losing popular support, at least in part due to ineffectual or inadequate economic policies, a persistently contracting economy with a manufacturing sector in major trouble, a decline in global competitiveness, and a global economic slowdown in the midst of one of the most challenging years from a geopolitical perspective.
The events of the past several years have also not yet fully abated. The impact of the pandemic-era stimulus policies and the energy shock resulting from the European conflict taking place less than 2,000 km from Berlin have caused prices to jump in almost all areas of economic life. Germany suddenly found itself in one of the worst inflation episodes over the last several decades, with an ECB rapidly hiking interest rates, causing indebted corporations, small and medium enterprises, and almost the entire construction sector to suffer enormously in the process.
Despite some improvements in the economic situation and some expectations in recent months, German consumers are rightfully still pessimistic. Real wage growth might have started to turn positive but that is not yet sufficient to offset the dissatisfaction with respect to accumulated price increases, as many product categories and services are now at permanently higher price levels, which have not stabilized yet. In January 2024, income growth expectations actually turned more negative again, and how that develops in the coming months will depend on salary negotiation rounds and potential increases in compensation.
Similarly, the willingness to make purchases is still very depressed and is at one of the lowest levels recorded. It also dropped back down in January, in line with deteriorating income expectations and signaling persistent concerns about the lack of sufficient disinflation in food and core services, as well as energy prices. According to GfK surveys, this reduces household ability to plan ahead and limits the certainty that is needed in order to make large purchases. People lack the financial resources to acquire such items as furniture or electronic devices. In the open survey, about 60% of respondents pointed to inflation as the primary reason for their negative judgment, ahead of issues such as political and economic uncertainty and their own bad financial situation.
Dissecting the Increases in the Cost of Living
Let us take a deeper look, using data and statistical estimates from Numbeo and the German Statistical Office. Generally, housing costs such as rent and utilities take up the largest fraction of household budgets — usually between 30–40% per month on average. This is followed by food and beverages, on which German residents would normally spend up to 30% of their budgets. A word of caution — aggregate figures are not necessarily applicable to everyone, as individual living situations and budgets could differ drastically from them. Variance is also significant depending on the region in Germany where households live, with the biggest cities generally having the highest costs in most consumer product and service categories, as will be shown a bit later.
1. Accommodation has become a significant burden
Not only has it become more difficult to find housing in Germany (especially in the biggest cities), but the cost has risen quite dramatically. Rents have gone up significantly for all types of accommodations, in many cases over 30% since before the pandemic. Rent levels in the biggest cities such as Munich and Berlin could now be over half of the minimum salaries of singles, and in the capital specifically, the rate of increase since COVID has far outpaced what was observed before, making the city the second most expensive one in Germany in 2023. It used to be one of the least expensive big cities in the country to rent in the early 2010s.
Utilities have also become significantly more expensive due to the rise in electricity prices, heating and energy. The cost per kilowatt hour went up around 2 times between 2018 and the start of the second half of 2023. And with energy support measures by the government being phased out, this development is about to take its full toll on household budgets in the coming months. Prices have stabilized since then and gas costs have come down somewhat, which provides some relief, but it does not fully offset the rise that was already accumulated. It has also likely permanently impacted businesses, which continue passing this on to consumers via goods and service prices.
Since the start of the pandemic, with relief measures in place, the housing cost overburden (i.e., housing costs exceeding 40% of household budgets) in Germany declined compared to the period until 2019. However, those measures have been withdrawn and the rise in rents and utilities is causing a rise in this metric once again — more so than in any other major European economy, or the EU and EA averages.
2. Supermarkets annoyingly keep hiking prices
Food inflation is not stopping, which is one of the main reasons people distrust official consumer price indices published by government bodies. It decelerated, but the rate is still too high, and what is causing even more frustration with people, is that they see smaller packages being offered for the same or higher prices in some cases — the so-called shrinkflation. On a wholesale level, we can see that, unlike mineral oil products, grain, seeds, tobacco, metals, chemical products, etc., many food categories (fruit, vegetables, potatoes, sugar, confectionery, bakery goods, beverages) keep going up persistently.
An example of the average costs of some core food items in a typical consumer basket is given below — you can see the notable impact after a decade of stability before that.
3. Transportation… The ‘Deutschland Ticket’ hides the true cost
In mid-2022, we had the 9-euro ticket introduced in Germany as a relief measure for 3 months. It was so popular (as a government-subsidized gift) that residents hoped it would be continued, if not exactly in the same form and price, then at least as something similarly attractive. In 2023, we got the €49-a-month Deutschland Ticket, which allows consumers to use public transport in any German city, as well as regional trains. This provides major cost savings for passengers, but the truth is that before it was introduced, subscription charges had already grown substantially for a decade (nearly 50%). Single-trip tickets are on average over 12% more expensive compared to the pre-pandemic years, and over 34% more expensive vs. 2011. Taxi costs are no better, with starting rates and kilometer rates both about 25–30% higher in 2023 compared to 2019. And for drivers, fuel prices have gone up over 35% since 2019.
4. Nothing is sacred anymore: leisure, sports, internet
The price of a cinema ticket used to be €8 a decade ago, now it is €12, but that is hardly the result of the developments we discussed. A similar increase has been observed in other leisure activities, as well as sports. Gym memberships are on average over 14% more expensive since the onset of the pandemic. What went up more significantly (>20%) since COVID, however, is the monthly cost of an internet connection. It is worth noting that this is now almost twice as expensive as compared to 2011. Similarly, eating out now costs between 25–40% more, compared to before the pandemic.
CONCLUSION
In the first half of 2023, the German Statistical Office estimated that nearly 21% of the population in Germany was exposed to the risk of poverty, or 17.3 million people. 6.1% were affected by severe material and social deprivation, while 9.7% were living in a household with very low work intensity. This differs significantly across regions, as some cities are more affordable than others. But in aggregate, nominal salary increases have not been able to fully keep up with the pace of inflation in 2022–2023.
Among German cities, Munich and Hamburg stand out as particularly expensive, but what is striking is that Berlin has jumped up quite a bit in that ranking over the last few years, primarily due to rent increases.
Some surveys of life satisfaction show that it has declined notably, across regions, and overall Germany is now with the second lowest score in Europe, only above Bulgaria. One of the major determinants is the material living conditions (income, consumption and material conditions). People’s negative sentiment is justified and is reflective of the standstill in which Germany finds itself these days, which fuels the perception of deteriorated prospects in a significantly more expensive environment.
Author: Nikolay
Founder of MoneyCraft
