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ECONOMY

Germany economy in ‘disastrous’ shape

Germany is being pummelled by the global slowdown and "disastrous" data show its economy is already in recession, economists said on Thursday.

Things look grim for the world’s top exporter, following the release of data showing orders for goods made in Europe’s biggest economy plunged eight percent in September from August. The Economy Ministry said it was the steepest fall since East and West Germany reunited to become one country in 1990.

The downturn, revealed a day after Chancellor Angela Merkel unveiled a multi-billion-euro stimulus programme to try and avoid the worst effects of a global slowdown, was much worse than expected.

The data were released as the European Central Bank, the Bank of England and the Swiss National Bank all slashed their main interest rates in a dramatic escalation of global efforts to stave off recession.

Orders from outside Germany, which accounts for a third of eurozone activity, slumped 11.4 percent while domestic orders fell 4.3 percent, with all sectors registering falls.

On a less volatile two-month comparison the decline was less dramatic, with orders in August and September off 1.4 percent compared to June and July.

“All in all, the fall in orders experienced since December 2007 is accelerating. As a result, prospects for industrial production remain gloomy for the coming months,” the Economy Ministry said.

“Now that large parts of the industrialised world have already slipped into recession and others are likely to follow, new orders for German products are falling accordingly,” UBS economist Martin Lueck said, calling the data “disastrous.”

Exports, which account for up half of Germany’s economic output, will fall 2.5 percent in 2009, which would be the worst performance since the recession of 1992-93, Lueck predicted.

The numbers are “another clear indication that the German economy is in a recession,” Commerzbank economist Simon Junker said.

The German economy shrank in the second quarter and GDP figures next Thursday are expected to confirm that output also fell in the July to September period, meaning the country is officially in recession.

But what Thursday’s numbers prove is that conditions are going to get a lot worse, and that Germany has been hit hard since the mid-September bankruptcy of US banking giant Lehman Brothers pushed the global financial system close to collapse, economists said.

German industry “is currently contracting at an unprecedented pace,” UBS’s Lueck said.

This is borne out by a string of recent highly downbeat assessments of conditions in the real economy from German companies, not just car giants like BMW and Daimler but also in other sectors. Sportswear firm Adidas on Thursday said that uncertainty was so high it could not give a forecast for 2009.

Berlin has slashed its 2009 growth forecast to just 0.2 percent, the slowest rate of growth since Germany last suffered a recession in 2003. Third-quarter growth figures are due to be published next Thursday.

Last Monday, Germany’s widely-watched Ifo sentiment indicator showed business confidence dropping in October to its lowest point in more than five years.

On Wednesday Merkel’s cabinet approved a raft of measures aimed at stimulating an extra €50 billion ($65 billion) in investment in 2009 and 2010 in what she called a “bridge” for the economy until activity picks up.

The €23 billion in stimulus measures were approved less than three weeks after Merkel’s government rushed through parliament a €480-billion ($620-billion) rescue package to save the country’s banks from collapse.

Merkel has stressed the stimulus measures are “targeted,” after Berlin was highly critical of proposals by French President Nicolas Sarkozy – whose country holds the current EU presidency – for Europe-wide state intervention on a massive scale.

But economists are sceptical that the stimulus measures are enough.

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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