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ECONOMY

Bundesbank raises 2008 growth forecast, but cuts it for 2009

Germany's central bank said Friday that growth in Europe's largest economy might be more subdued over the coming months, but it expects a pick-up later as global conditions improve and inflation abates.

“The German economy got off to a very strong start to 2008. Growth is likely to be more subdued in the second and third quarters, however,” the Bundesbank said in its June monthly report.

But growth “will pick up at the end of this year or early 2009 against the backdrop of a then more favourable global economic setting and a slowing rate of inflation,” it said.

The German economy posted “strong, broad-based” growth in the first quarter, expanding at a quarterly rate of 1.5 percent or by a real 2.6 percent when adjusted for the number of working days, clearly exceeding the Bundesbank’s forecasts.

Despite some special factors skewing the figures, “there is some evidence that the German economy’s intrinsic momentum or resilience has, to date, been underestimated,” it said.

But the Frankfurt-based bank agreed with economists that this strong performance at the start of the year would not continue, saying it expected “more moderate” growth in the coming months.

It now expects calendar-adjusted growth for the year as a whole of 2.0 percent. Due to the strong first quarter growth this represents a 0.4 percentage point increase from its last forecast in December.

Evidence this week added to signs that the first quarter growth rate was something of a one-off, with data on Friday showing that industrial production fell 0.8 percent in April.

“The fall comes after an equally sharp 0.8 percent drop in March … and suggests that industrial output is very unlikely to match Q1’s *(first quarter) strong 2.3 percent rise in Q2,” said Jennifer McKeown at Capital Economics.

And figures on Thursday from the economy ministry showed industrial orders fell for the fifth straight month in April, and at a faster pace than in March.

The chemical and automotive sectors showed the biggest fall in orders, but machine tools, a mainstay of the German economy, continued to post healthy results.

Strong price rises for food and energy are also making German consumers increasingly worried about how far their incomes would stretch, according to the recent survey by market research group GfK.

Official projections put inflation at 3.0 percent in May, with prices for heating oil rising as much as 13.3 percent just between April and May, and soaring by as much as 64.6 percent compared to May 2007.

But although the Buba said it was unlikely that inflation would fall below 3.0 percent in 2008, it said it could fall towards 2.0 percent in 2009, closer to the European Central Bank’s target rate of close to but below this level.

This, coupled with more favourable conditions outside Germany supporting demand for German exports, would help the economy pick up towards the end of 2008 or in early 2009, the Bundesbank said.

The Bundesbank cut its 2009 growth forecast by 0.6 percentage points to 1.4 percent.

The German government expects 1.7 percent growth in 2008 and 1.2 percent in 2009.

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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