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ECONOMY

German consumer confidence hits five-year low

German consumer confidence has hit its lowest level since June 2003, a leading survey showed on Monday, as benefits of increased employment and wages were "demolished" by inflation.

The confidence index compiled by the GfK institute fell to 2.1 points from 3.6 points in its previous survey, with an indicator of economic and income expectations dropping especially sharply.

“The positive momentum generated by the job market and the beneficial wage and salary increases compared with last year are consequently being demolished by inflation,” GfK said.

In June, consumer prices in the biggest European economy rose by 3.3 percent in June on a 12-month basis, the biggest increase since December 1993. “Record price increases, triggered primarily by rocketing energy prices, are leaving consumers increasingly fearful of their purchasing power,” GfK said.

Income expectations fell to their lowest level since November 2005, owing to “growing fears of a recession and the fact that the crisis in the financial markets seems far from over,” it added.

With the euro’s rise in value hampering Germany’s export-led economy, the government had hoped that thrifty German consumers would begin to hit the stores owing to lower unemployment and substantial pay raises. But GfK said that “consumers will no doubt be putting the brakes on their purchasing in the belief that in the future, a large proportion of their household budget will be going towards energy costs.”

UniCredit Markets economist Alexander Koch said Germany had seen “several consumer recessions” since the high-tech bubble burst, and recalled the results of a recent German business climate survey by the Ifo research institute that showed sentiment plunging to a 34-month low point in July.

“Continuing high pressure on the purchasing power as well as the darkening economic outlook, underscored by last week’s plunge in the Ifo, clearly argue against private consumption becoming the required pillor in the second half of the year, with the next consumer recession already lurking around the corner!”

GfK’s survey of some 2,000 consumers found that “the number of Germans worried about price rises has more than doubled within the space of one year.” An indicator that measures consumers’ propensity to buy lost a relatively modest 2.5 points from the previous survey, but was down 35 points on a 12-month basis at minus 26.2 points.

UBS analyst Martin Lueck commented that “a substantial recovery in consumer spending has now become very unlikely.”

“Both sentiment indicators and hard industrial data have recently shown that a massive slowdown is underway,” prompting the Swiss bank to forecast that Germany’s economy would grow by around 2.0 percent this year and 1.0 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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