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ECONOMY

German Ifo business sentiment plunges to 34-month low

German business sentiment plunged to a 34-month low point in July, a key index showed on Thursday, underscoring that high oil prices and a strong euro are throttling Europe's biggest economy.

The monthly business climate index calculated by Munich-based economic research institute Ifo fell to 97.5 points from 101.3 points in June. The last time it was below that level was in September 2005.

Analysts polled by Dow Jones Newswires had forecast a more modest drop in July to 100.2 points.

The index had already fallen sharply in June, and Ifo president Hans-Werner Sinn said the firms questioned “are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook.

“These results suggest that the economic upswing is coming to an end,” he said.

Ifo’s current situation sub-index dropped to 105.7 points from 108.3 in June, while the expectations indicator fell to 90.0 points from 94.6 points. Broken down further, the manufacturing business climate index “has fallen noticeably,” the Ifo statement said.

“Export business will no longer expand so rapidly, in the estimation of the manufacturers” and they were les likely to take on additional workers, Ifo found.

Germany is the world’s leading exporter and the latest findings are bad news because a hoped for pick-up in domestic consumption has failed to materialize owing to high inflation brought on by surging energy and food prices.

In other key sectors covered by the Ifo index – construction, retailing and wholesaling – “the business climate index is clearly trending downwards,” the statement added. “The trading firms have assessed both their current business situation as well as the six-month outlook clearly more pessimistically than in June.”

Ifo surveys roughly 7,000 German companies each month, and its index is considered the most reliable indicator of business sentiment. Although the index remained above its long-term average, “the magnitude of the recent falls is clearly a worry,” said Capital Economics economist Ben May.

Taken together with a recent fall in the euro zone purchasing manager’s index (PMI), he said available data “suggest that there is a chance that GDP (gross domestic product) contracted in the second quarter and … there might even be another fall in the third quarter.”

That would signal a recession in the 15-nation euro-zone economy.

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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