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ECONOMY

Top institutes upbeat on German economy

Six leading German economic institutes issued an upbeat outlook for Europe's largest economy on Thursday, forecasting 1.8 percent growth for 2008, easing inflation and all but ruling out a recession.

In their closely read spring report, the institutes said so far this year Germany appeared to be holding up well despite a slowing US economy, the credit crisis, rising energy and food prices, and a strong euro.

“Despite a range of adverse influences, economic conditions remained favourable in Germany at the beginning of 2008,” the report said. “All in all, although a noticeable slowdown in economic growth is to be expected as a result of these powerful shocks, a recession … is unlikely.”

The head of the German central bank Axel Weber – a member of the governing

council of the European Central Bank, which sets interest rates in the euro area – echoed the institutes’ optimism, saying Germany had “weathered the global headwinds remarkably well.”

“The ongoing financial markets turmoil has so far had no discernible impact on the German economy,” Weber said in a speech in Frankfurt on Thursday, adding that the central bank sees first-quarter growth in Germany at about 0.75 percent. “The conditions required for a continuation of the economic upturn in Germany are still very much in place even though downside risks persist,” Weber said, adding he sees no “compelling reason” to paint a bleak growth scenario for the German economy this year.

The six institutes said that in contrast to other industrialised countries, sentiment indicators in Germany remained positive and data on demand and production on the whole have indicated continuing expansion. Data last week showed that German exports – the motor of the economy – had risen 9.0 percent year-on-year in February despite the euro making them more expensive to customers outside the 15-nation euro zone.

Economy Ministry figures had shown meanwhile that German industrial output rose 0.4 percent in February when analysts had forecast a drop. The last reading for the Ifo business climate index also showed a surprise rise, while the market-moving ZEW indicator improved in March and in February.

An improvement in the labour market is also a reason for cheer, the institutes said, with the jobless rate for March 1.5 percentage points lower than a year-earlier at 7.8 percent.

But the data might not stay so good as the year progresses, the report warned, as weaker conditions outside Germany hit demand for exports, which in turn will dampen enthusiasm among firms to invest. Rising prices also remain a particular concern, with consumer inflation in Germany hitting 3.1 percent in March on the back of rising energy and food costs, it said.

For 2008 as a whole, the institutes expect inflation of 2.6 percent, higher then the European Central Bank’s target of just below 2.0 percent. Looking further ahead, the institutes expected growth to slow to 1.4 percent in 2009 and for inflation to ease to 1.8 percent.

The institutes cautioned that there remained “great uncertainty” about the world economy and that Germany may not be able to escape a recession if credit conditions worsen considerably. “The consequences of the crisis in the financial sector are difficult to forecast because the extent of the necessary writedowns are not yet known and because it is uncertain how much further property prices will fall,” they said.

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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