Inflation aside, Germans got rich again in the first quarter of this year. The Bundesbank said financial assets rose due to higher stock exchange prices and higher interest rates.
Persistently high inflation in Germany reduces the purchasing power of consumers. In addition to rising prices, rising prices on the stock exchange and higher interest rates have also made Germans overall wealthier. The Deutsche Bundesbank in Frankfurt announced that the financial assets of German private households in the first three months of this year increased by 146 billion euros from the previous quarter to around 7,393 billion euros.
The figures take into account cash, securities, bank deposits and claims against insurance companies, but not real estate. The data do not show exactly how wealth is distributed.
Equity value increased by 38 billion euros
The recovery that started in the last quarter of 2022 continues with growth in financial assets. Previously, it had shrunk by three quarters in a row. However, this figure is still a long way from the all-time record of 7,624 billion euros set at the end of 2021.
The increase in prices on the stock exchange had a positive impact on the first quarter of 2023, the Bundesbank said. The growth in the value of listed shares was particularly strong, reaching EUR 38 billion, especially compared to the first three quarters of 2022. But investment funds, as well as pension and insurance claims, were also lucrative for their holders, with valuation gains of 25 billion euros and 19 billion euros respectively.
In addition, there has been an influx of fresh money into bonds: purchases of so-called bonds have been impressive, reaching a record high of 30 billion euros. However, stocks, bonds and fund shares are the smallest segment of financial assets, totaling almost 2 trillion euros.
Unprecedented drop in demand deposits
By far the largest items are cash and bank deposits such as overnight deposits and time deposits. This totaled nearly 3.1 trillion euros at the end of the first quarter. However, in light of the shift in interest rates, many moved money: private households reduced their cash and deposit holdings for the first time since 2006, by 16 billion euros, according to the Bundesbank.
While cash holdings remained virtually unchanged, demand deposits (that is, demand deposits and overnight funds that usually do not bear interest) were 56 billion euros lower than ever. In return, private households increased their term deposits (ie term deposits that usually offer more interest) by €45bn.
Inflation eats into interest income
Driven by extremely high inflation, the European Central Bank (ECB) raised euro zone interest rates in July 2022 for the first time in eleven years. Because higher interest rates make loans more expensive, slowing demand and can offset high inflation. The key rate at which banks can access new funds from the ECB is currently at 4.0%. Banks now earn 3.5% interest on funds parked with the central bank.
The unprecedented shift in interest rates has made savings attractive again for banks and thrifts. Many institutions are advertising new fixed deposit and overnight interest rates. However, high inflation is currently eating into interest income. In other words: Savers suffered real losses despite rising interest rates.