MESEBERG (Reuters) – Germany’s government must be cautious about the potential inflationary impact of its economic stimulus measures, according to Chancellor Olaf Scholz. This statement came shortly after his cabinet approved 32 billion euros ($35 billion) in corporate tax cuts aimed at boosting the sluggish growth.
Preliminary data released on Wednesday revealed that German consumer price inflation, adjusted to allow for comparison with other European Union countries, rose by 6.4% on an annual basis in August. Although slightly lower than the 6.5% recorded in July, this figure surpassed the forecasted 6.3% from a Reuters poll.
Prior data indicated that inflation had risen in four out of six key German states this month, sparking concerns that the recent downward national trend would halt.
Speaking at a cabinet retreat in Meseberg, Scholz stated, “Measures to stimulate the economy must be targeted and carefully developed so as not to result in a new surge in inflation but help stimulate growth.”
The approved Growth Opportunities Act covers the period from 2024 to 2028. It incentivizes companies to make environmentally friendly investments, offers tax incentives for research, and allows companies to offset more losses against profits from other financial years.
The draft law will now undergo a consultation process with states and municipalities, and German Finance Minister Christian Lindner emphasized the importance of their feedback. He urged them to support the law by stating, “The states and municipalities, just like the federal government, must be interested in securing the economic strength of our country.”
The German economy, the largest in Europe, stagnated in the second quarter, showing no signs of recovery from a recession experienced during the winter and solidifying its standing as one of the world’s weakest major economies.
In response to criticisms regarding the government’s delayed response to mounting signs of an economic slowdown, Lindner asserted, “The overall political signal is that this government is aware of the situation in the country and the economy, and it is taking action; it is agile.”
Scholz expressed optimism about an upcoming economic upswing while highlighting the fight against inflation as a priority. He stated, “Inflation is detrimental to businesses and citizens, and the European Central Bank is therefore on the right path with its campaign to tighten monetary policy.”
He further added, “The central bank’s decisions to curb inflation are appropriate for monetary stability, the future sustainability of Europe, and the welfare of citizens and companies.”
In July, the European Central Bank raised interest rates for the ninth consecutive time, escalating the rate it pays on banks’ deposits from 3.50% to 3.75%, the highest level since 2000 when euro banknotes and coins were introduced.
($1 = 0.9185 euros)
(Reporting by Maria Martinez and Thomas Escritt, Editing by Rachel More, Friederike Heine, and Catherine Evans)
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