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ECONOMY

German investor confidence at 17-year low

German investor confidence hit a record low point in July, a key survey showed on Tuesday, but analysts skirted any recession forecast as high oil prices and the euro weigh on the economy.

German investor confidence at 17-year low
Dirk Mueller, one of Germany's most visible traders. Photo: DPA

The ZEW research institute said its closely watched index of economic sentiment fell 11.5 points to minus 63.9 points, the lowest level since the survey began in December 1991, in a survey that was likely also affected by the latest US financial market crisis.

The previous low was minus 62.2 points, hit during a recession in December 1992, a ZEW spokesman told AFP.

“High oil prices, the strong euro, the crisis in the United States, an interest rate hike by the European Central Bank and weak domestic consumer demand are likely to put pressure on German companies in the coming six months,” a ZEW statement said.

The European single currency leapt to a record high point above $1.60 in London Tuesday on mounting investor fears about the stormy US outlook, dealers said.

ZEW president Wolfgang Franz said that “the current problems of US mortgage banks demonstrate that the financial crisis is not over yet. This has reinforced the worries of financial market experts about the economic development in Germany in the next year.”

But European economist Ben May at Capital Economics said: “Given that the headline index has previously been a fairly poor predictor of German GDP (gross domestic product) growth, we still expect a relatively moderate economic slowdown.”

The survey nonetheless underscored German industrial order and production data that had many analysts saying the economy would contract in the second quarter of the year.

At Uni Credit Markets, economist Andreas Rees said: “Yes, the recession risk has risen. But no, we do not scribble our name below the R-word for three reasons.”

He noted the survey had signalled recessions in the past that did not materialise, and said a strong backlog of industrial orders would keep German firms going in the coming months. Thirdly, the Ifo survey of business sentiment, Germany’s leading economic indicator, “paints a far less pessimistic picture,” Rees said.

The next Ifo reading is due on July 24.

Markets have been rocked in the past week by sharp falls in the shares of two US mortgage-finance giants, Fannie Mae and Freddie Mac, while investment giant Lehman Brothers and other US banks have also been roiled by falling confidence in the banking sector.

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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