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EARNINGS

Waning demand for exports fuels recession fears

The amount of goods turned out by German factories fell "strongly" in September as the global slowdown hit demand for products made by the world's top exporter, the government said on Friday.

In another sign that Europe’s biggest economy is probably in recession, industrial output fell by 3.6 percent in September from August, the economy ministry said. Economists polled by Dow Jones Newswires had forecast a fall of 2.0 percent.

On a less volatile two-month basis, output rose 0.5 percent in August and September from June and July, but it fell by 1.3 percent in the third quarter compared to the April-June period, the ministry said in a statement.

“The tendency of the last few months … is that production is clearly pointing downwards,” it said. “As a result of continued weak demand … perspectives for production are gloomy.”

The German economy shrank in the second quarter and figures next Thursday had been expected for some time to confirm that output also fell in the July to September period, meaning Germany is officially in recession. 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. Last Monday, Germany’s widely-watched Ifo sentiment indicator showed business confidence dropping in October to its lowest point in more than five years.

But Friday’s data, coupled with an eight-percent slump in orders announced on Thursday – the biggest fall since German reunification in 1990 – raises fears that the downturn may be deeper and longer than expected. The “huge drop is a worrying sign of a severe downturn to come,” Jennifer McKeown from Capital Economics said in a research note.

“With the service sector surveys pointing to stagnant output, next week’s GDP figures will almost certainly reveal another marked contraction, leaving Germany in its second recession in five years,” McKeown 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, and on Friday reinsurance giant Munich Re dropped its 2008 profit target following a plunge in profits.

“A noticeable recovery before the second half of next year looks extremely unlikely. Lean times are ahead for the industrial sector,” Unicredit economist Alexander Koch said.

Both the European Central Bank and Chancellor Angela Merkel’s government have attempted to jumpstart growth, with the ECB joining other central banks in slashing interest rates and Berlin launching a stimulus programme.

But economists are sceptical that the ECB and governments have done enough to stop Germany and the entire Eurozone from entering a deep slowdown. The International Monetary Fund forecasted on Thursday that advanced economies would contract next year for the first time since World War II, with the Eurozone economy expected to decline by 1.3 percent.

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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