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Ifo business confidence jumps

German business confidence jumped unexpectedly in May, a closely watched survey showed on Wednesday, underscoring the dogged resilience of Europe's biggest economy.

The business climate index calculated each month by the Munich-based economic research institute Ifo, rose to 103.5 points.

Economists polled by Thomson Financial News had forecast the index would fall to 101.9 after dropping to 102.4 in April, the biggest monthly loss since September 2001.

An Ifo statement quoted president Hans-Werner Sinn as noting however that “the business climate index only partially recovered its losses from April.”

In March the index had stood at 104.8 points.

Surveyed companies nonetheless “now assess their current situation more positively,” Sinn added in another sign that Germany was resisting the effects of a US economic slump, high energy prices and the euro’s rise against other major currencies.

For its monthly survey, Ifo polls 7,000 companies about their assessment of current business and their expectations for the next six months. It is considered the most reliable barometer of the current state of the German economy and its outlook.

A breakdown of the results showed that the current situation index also rose to 110.1 points from 108.4 in April, while the expectations indicator edged up to 97.3 points from 96.7 points.

“On the whole, the dampening of economic activity in Germany in the months following the very good first quarter should be moderate,” Sinn said.

German gross domestic product (GDP) grew by 1.5 percent in the first quarter of 2008, official data showed last week, the fastest quarterly rate since early 1996.

“May’s rise in the German Ifo index provides some encouragement that German businesses are seeing economic activity hold up pretty well,” said Jennifer McKeown at Capital Economics.

“It leaves the index far above its long-run average and at similar levels to those reached in the second half of last year.”

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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