MESEBERG, Germany (Reuters) -Germany’s government must be careful that its economic stimulus measures do not spur inflation, Chancellor Olaf Scholz said on Wednesday, shortly after his cabinet approved 32 billion euros ($35 billion) of corporate tax cuts to boost flagging growth.
German consumer price inflation, harmonised to compare with other European Union countries, rose by an annual 6.4% in August, preliminary data showed on Wednesday, edging lower from 6.5% in July but more than the 6.3% forecast in a Reuters poll.
Earlier data had shown inflation rising in four of six key German states this month, raising fears that a recent downward trend in the national figure would stall.
“Measures to promote the economy (must be) so targeted and so precisely developed that they do not lead to a new surge in inflation, but that they only help to stimulate growth,” Scholz said at a cabinet retreat in Meseberg.
The Growth Opportunities Act approved by the cabinet on Wednesday covers the period 2024-2028. It gives incentives to companies to make climate-friendly investments, provides tax incentives for research and allows companies to offset more losses against profits from other financial years.
The draft law will now enter a process of consultation with states and municipalities, and German finance minister Christian Lindner said their feedback would be heard.
“However…, the states and municipalities, just like the federal government, must have an interest in securing the economic strength of our country,” Lindner said, calling on them to support the law.
The German economy – Europe’s largest – stagnated in the second quarter, showing no sign of recovery from a winter recession and cementing its position as one of the world’s weakest major economies.
Responding to criticisms that the government had been slow to react to mounting signs of economic slowdown, Lindner said: “The overall political signal is that this government knows the situation in the country, it knows the situation in the economy and it is acting, it is agile.”
The German government did not reach an agreement during the cabinet retreat regarding an electricity price cap for industry that would limit companies’ power bills.
Scholz said the government devoted a lot of money to cushioning the surge in energy prices last year, after Russia’s invasion of Ukraine, passing a bill to rein in electricity and gas bills for households and industry, among other measures.
This was part of Germany’s 200-billion-euro ($218.62 billion) Economic Stabilisation Fund.
Now energy prices are falling, making it easier for companies to pay the bills, Scholz added, in reference to the sharpest year-on-year drop in import prices since 1987.
Germany’s chemical lobby VCI criticised the lack of agreement to control electricity prices, adding that the cap is a must-have to stop de-industrialisation.
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(Reporting by Maria Martinez; additional reporting by Thomas Escritt and Tristan Veyet; editing by Rachel More, Friederike Heine, Catherine Evans and Mark Heinrich)
