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ECONOMY

Inflation hits German investor confidence

"Extraordinary" price rises badly dented German investor confidence in April, the ZEW institute said Tuesday as it reported a surprise drop in its closely watched monthly sentiment indicator.

The institute’s indicator fell 8.7 points and now stands at minus 40.7 points, down from minus 32.0 points in the previous month. Economists polled by Thomson Financial had expected the index to rise to minus 29.0 points.

“Economic expectations were affected by the extraordinary high price pressure in Germany this month,” the ZEW said in a statement. “High rates of inflation reduce the available income of consumers and, hence, weaken private consumption. Low numbers of incoming orders of German companies point to slower growth in Germany as well.”

In March the indicator posted a surprise improvement, the second in a row, adding to a growing body of data suggesting Europe’s biggest economy was proving resilient to the slowdown in the United States, rising energy and food prices and a strong euro.

Annual inflation in March in the 15-nation euro zone, of which Germany is the largest economy, hit 3.5 percent in March, its highest level since the creation of the euro in 1999 and well beyond the European Central Bank inflation target of just under 2.0 percent.

Data last week for instance showed that German exports – the motor of its economy – had risen 9.0 percent year-on-year despite the euro making them more expensive to customers outside the 15-nation euro zone. And economy ministry figures had shown meanwhile that German industrial output also rose 0.4 percent in February when analysts had forecast a drop.

“The slight optimism of the financial market experts last month seems to be only a temporary phenomenon,” ZEW president Wolfgang Franz said. “Record highs of the euro and the oil price have reduced expectations again.”

The news prompted the euro to drop across the board, briefly touching a daily low of 1.5814 dollars and retreating from an all-time high of 0.8063 against the pound.

“It appears that the euro’s continued climb and ongoing troubles in financial markets have led investors to feel that the recent run of positive data, particularly on the industrial side, will not continue,” said Jennifer McKeown at Capital Economics in London.

The survey “highlights a risk that, while the German economy is holding up well for now, it might only be a matter of time before the strong euro and weakening global demand take their toll,” McKeown said in a research note.

But on a brighter note, the ZEW said that growth of 1.7 percent this year – as predicted by the government – was “realistic” and that its indicator for the current economic situation had improved 1.1 points to 33.2 points.

Andreas Rees, economist at Unicredit, warned against irrational pessimism as a result of the survey, saying a recession in Germany was “definitely not around the corner.”

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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