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High oil prices undermine Ifo German business sentiment

Germany's key business confidence index dropped sharply in June, underscoring the damaging effect of persistently high oil prices on Europe's biggest economy.

The monthly business climate index, calculated by Munich-based economic research institute Ifo, fell to 101.3 points from 103.5 points in May. The significant fall indicated that companies surveyed “have assessed their current business situation clearly less favourably than in the previous month, and they are more sceptical regarding the six-month outlook,” a statement said.

Ifo’s current situation index slipped to 108.3 points in June from 110.1 points, while the six-month expectations indicator dropped to 94.7 points from 97.2 points one month earlier.

“The sharp hike in oil prices is evidently becoming an increasing burden on the German economy,” Ifo said.

Last week, a survey of German investors by the ZEW economic institute showed financial sector confidence falling to its lowest level since 1992 as a result of high oil prices and expectations of higher borrowing costs in the 15-nation euro zone.

Economists polled by Dow Jones Newswires had expected the Ifo index to fall to just 102.3 points, and the sharper drop signalled that a surprisingly strong first quarter German economic performance was now well in the past. A breakdown by sector showed that the climate in Germany’s benchmark manufacturing sector “has worsened significantly,” Ifo said.

Both current and six-month indicators fell in June, with firms reporting that they “expect weaker stimulus from export business in the coming months.” That said, “despite the strong euro, they do not fear a slump in exports,” Ifo added. Germany is the world’s leading exporter.

The construction sector reported a somewhat brighter climate meanwhile, in particular regarding the situation at present, while wholesaling and retailing indexes both fell.

Ifo questions around 7,000 German firms each month to check the pulse of German business activity, and its index is considered the best indicator of the country’s economic climate.

But even though the results provided evidence that the powerhouse economy is hitting the brakes, analysts still expect the European Central Bank to raise its main lending rate in early July to 4.25 percent from 4.0 percent at present.

Euro-zone inflation hit a record 3.7 percent in May, and ECB directors are determined to keep prices from soaring out of control in a zone that comprises around 320 million inhabitants.

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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