German economy is buffeted by global headwinds

German industrial output and exports fell in March, data showed Thursday, as a stronger euro, weaker global demand and high raw material prices left their mark on Europe's largest economy.

German economy is buffeted by global headwinds
Goods at the port in Hamburg. Photo: DPA

Until recently, economic data and sentiment indicators suggested that Germany was weathering well the prevailing headwinds in the world economy, but Thursday’s data added to growing evidence that this may not be the case.

Figures from the economy ministry showed that output from German factories dipped 0.5 percent from February, the first monthly fall since November, while February’s rise was adjusted downwards to mere 0.2 percent.

The main culprit was a 12.3 percent slump in construction activity as a result of a mild winter which meant that the usual spring bounce in building activity was not forthcoming, the ministry said.

On a two-monthly basis – comparing February and March to December and January – production rose a more respectable 0.6 percent, and for the whole of the first quarter output was up 2.3 percent.

Commerzbank economist Matthias Rubisch said the quarterly output number was the best result for more than a year and that as a result he expects the German economy to have grown 0.8 percent in the first three months of 2008.

But the weak end to the quarter is a sign that there are tougher times ahead.

Manufacturing output taken on its own fell 0.2 percent in March, “below the average of the first quarter, and the decline in order intake in recent months suggest only a slight increase in the coming months at best,” Rubisch said.

“In the second quarter a stagnation of GDP (Gross Domestic Product) growth is likely,” he said.

Analysts at Moody’s agreed, saying the data was a sign that demand for German goods is falling, forecasting industrial output growth will slow from 6.9 percent last year to just 3.0 percent this year.

The economy ministry shared the downbeat assessment.

“Falling orders in recent months and the clear worsening of sentiment of late are signals that there will be a somewhat weaker production dynamic in the coming months.”

Exports are the motor of the German economy, but another set of numbers released on Thursday suggested that weaker demand abroad and a stronger euro – which makes eurozone goods less competitive in price – are taking their toll.

Data from the statistics agency showed that German exports fell 0.5 percent in March from February.

Again, for the first quarter as a whole the numbers were respectable, with exports for the first three months up 2.4 percent, which “can hardly be described as weak,” Commerzbank’s Rubisch said.

“Nevertheless, export growth can be expected to slow down over the months ahead as the economy in Western Europe shifts down a gear, and the euro gained in strength recently,” Rubisch said.


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.


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.