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ECONOMY

ECB cuts growth forecast amid inflation concerns

The European Central Bank on Thursday cut its growth forecasts for 2008 and 2009 for the 15-nation eurozone, but raised its inflation projections.

ECB cuts growth forecast amid inflation concerns

Announcing the changes after leaving its main interest rate unchanged, it said it now expected economic growth this year of 1.7 percent, down from its earlier forecast of 2.0 percent. For 2009 it cut its growth prediction to 1.8 percent from 2.1 percent. But it raised its 2008 forecast for inflation to 2.9 from 2.5 percent.

ECB president Jean-Claude Trichet said inflation in 2009 should ease back to 2.1 percent, up from the previous estimate of 1.8 percent – but still above the central bank’s target of close to but below 2.0 percent.

“The latest information has confirmed the existence of strong short-term upward pressure on inflation,” Trichet told a news conference in Frankfurt on Thursday. “It has also confirmed the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth.”

Germany accounts for roughly a third of the entire eurozone economy.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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