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ECONOMY

Steinbrück sees financial crisis dragging into 2009

German Finance Minister Peer Steinbrück believes that repercussions of the global financial crisis from subprime lending will be felt well into next year, according to comments published on Thursday.

The credit market squeeze and volatile market activity that followed the collapse of the US market for high risk, or subprime, mortgages “are going to have repercussions all year and well into 2009,” the daily tabloid Bild quoted Steinbrück as saying.

But the Social Democrat added that Germany could nonetheless proceed with a pension increase scheduled for July 1.

“This increase is fair and important, because it tells pensioners that they have not been left by the wayside,” Steinbrück said.

Steinbrück has told the European Commission that Berlin expects to turn in a public deficit equivalent to 0.5 percent of gross domestic product this year. In 2007, Germany managed to post a slight surplus of €70 million ($110 million). The Finance Ministry said a return into deficit was the result of reforms to business taxes and unemployment allocations.

The German public account includes the finances of federal, regional and municipal governments along with the national social security system. The federal government’s budget remains clearly in the red, and is not expected to be balanced before 2011, according to official forecasts.

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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