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German economic confidence up despite recession reports

Germany's closely watched ZEW economic indicator picked up Tuesday, as investors' mood improved slightly amid international efforts to come to grips with the financial crisis.

German economic confidence up despite recession reports
A file photo of stock traders in Frankfurt. Photo: DPA

But two days before the government was expected to confirm that the world’s top exporter is in recession, experts warned that the country’s prospects were still far from bright.

The ZEW economic research institute said its investor sentiment index had risen to minus 53.5 points this month from minus 63.0 points in October, up from a record low of minus 63.9 in July.

The result was better than expected. Economists polled by Dow Jones Newswires had forecast a result of minus 58.5 points.

“The earlier pessimistic expectations of the financial market experts are confirmed by the current economic development in Germany. The experts, however, seem hopeful that the collective actions of governments and central banks will mitigate the economic slowdown,” a statement quoted ZEW president Wolfgang Franz as saying.

Since financial markets were plunged into turmoil following the collapse of US investment bank Lehman Brothers, central banks around the world have sharply reduced interest rates in a bid to stimulate economic activity.

Major central banks including the US Federal Reserve, the European Central Bank (ECB) and the Bank of England (BOE) cut rates simultaneously by 0.5 percent in a co-ordinated move on October 8.

The ECB cut interest rates by a further 0.5 percent to 3.25 percent last Thursday, while on the same day, the Bank of England slashed its rate by a further record 1.5 percent, to three percent.

Meanwhile, governments around the world have approved multi-billion euro packages aimed at rescuing troubled banks and stimulating economic activity.

Leaders of the G20, which includes the seven leading economies and key developing ones, will meet Saturday in Washington to discuss the way forward to ensure that the worst financial crisis since the Great Depression is not repeated.

But although the ZEW indicator was better than had been expected, analysts warned that the prospects for Germany’s economy remained gloomy.

Unicredit economist Alexander Koch said the index is still at “clearly recessionary levels, with no sign of bottoming out.”

“There is no doubt about it: The German economy is sliding into a recession,” Koch warned.

Berlin recently cut its forecast for economic growth in Germany to a mere 0.2 percent in 2009, as the crisis takes its toll on economies around the world.

The government will publish figures on Thursday for economic growth in the third quarter of the year and if growth contracted for the second three-month-period running, as widely expected, the biggest European economy will be officially in recession.

Five leading economic institutes – known as the “wise men” – will also release updated projections for growth in Germany on Wednesday. According to press reports over the weekend, they are expected to say the economy will register no growth at all in 2009.

Capital Economics economist Jennifer McKeown noted that the ZEW index was still at a “very low level” and warned, “far more investors expect the German economy to weaken further over the next six months than think that conditions will improve.”

For her part, McKeown predicted that the Germany economy would fall by 0.5 percent next year.

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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