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ECONOMY

German business confidence tanks

German business confidence dropped for the fifth month running in October, a key index showed on Monday, as the biggest European economy was slammed by the international financial crisis.

German business confidence tanks
Protestors from Attac at the Frankfurt Stock Exchange on Monday. Photo: DPA

The monthly business climate index calculated by Munich-based economic research institute Ifo fell to 90.2 points in October from 92.9 points in the previous month.

Although the current business situation was assessed as essentially unchanged, survey participants “are considerably more sceptical regarding the outlook for the coming six months,” a statement quoted Ifo President Hans-Werner Sinn as saying.

“German firms are anticipating declining business activity,” he added.

A sub-index of the Ifo survey that measures the current situation in Germany was stable at 99.9 points, compared with 99.8 in September, but expectations for the next six months dropped to 81.4 points from 86.5 points, the institute said.

In the key manufacturing sector, Ifo found that German businesses expected exports to weaken, while their production capacitites were being used at a markedly lower rate and they were no longer planning to hire more workers.

The construction sector also reported a worsened business climate, while it cooled marginally in the retail sector and much more sharply in wholesaling, Ifo said.

Capital Economics economist Jennifer McKeown said the poor results along with the most recent figures on eurozone money supply would increase the chances of a sharp cut in interest rates by the European Central Bank. “The latest German Ifo and eurozone M3 figures add further weight to our view that the ECB is set to cut interest rates aggressively,” she said.

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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