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ECONOMY

German economy seen grinding to halt in 2009

A blue-ribbon panel of experts said on Wednesday German economic growth would grind to a halt in 2009 and blasted Berlin's plans to shore up Europe's biggest economy as a mere fig leaf.

German economy seen grinding to halt in 2009
The economists presenting their report. Photo: DPA

The group of five economic advisors handed Chancellor Angela Merkel their annual report in which they predicted no economic growth next year and said the government’s announced measures would be of little help.

Gross domestic product (GDP) will grow 0.0 percent next year, after an expected gain of 1.7 percent this year, said the economists known as the Five Wise Men until a woman, Beatrice Weder di Mauro, joined in 2004.

Berlin recently cut its forecast for economic growth to a mere 0.2 percent in 2009 as the financial crisis continues to send shock waves around the world. The panel said that “the conditions are in place to talk about recession,” given the brutal nature of the slowdown.

The government will publish figures for third-quarter growth Thursday and if it contracted for the second three-month-period running, as widely expected, the world’s top exporter will already be officially in recession.

The economists dismissed a recent multi-billion-euro bundle of tax breaks and state investment as a “hotch-potch of isolated projects designed to give the impression that the government is doing something.” It said the package was far too small to have a real impact, and unfairly targeted at specific industries such as automaking thanks to heavy lobbying.

Merkel acknowledged her left-right government was grappling with a crisis that was difficult to manage or fully understand and said Berlin was doing its best to help the country weather the storm.

“We are in a situation now in which it is extremely difficult for all of us to know exactly what the future will bring,” she said as she accepted the report.

The experts noted that Germany’s “real economy” had as yet remained relatively unscathed but it forecast that unemployment would rise 1.1 percentage points next year.

Last week Merkel’s cabinet approved a raft of measures aimed at stimulating the economy with an extra €50 billion ($63 billion) in investment in 2009 and 2010, in what she called a “bridge” for the economy until activity picks up.

The stimulus measures were approved less than three weeks after Merkel’s government rushed through parliament a €480-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 measures will do the trick.

The daily Financial Times Deutschland said in an editorial Wednesday based on leaked copies of the report that it hoped Merkel and her cabinet would heed the panel’s advice.

“The experts’ report could be the last chance to move the coalition towards a re-think,” it said. “If the government doesn’t even listen to a committee of experts it appointed itself then that would really give cause for despair.”

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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