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German business climate hits 15-year low

A key survey of Germany's corporate mood on Friday showed manufacturers and retailers, faced with a slowing economy and the global financial crisis, are gloomier than they have been in 15 years.

German business climate hits 15-year low
Photo: DPA

The monthy business climate index put out by the Ifo economic research institute fell from 90.2 points in October to 85.8 points in November, the lowest number since February 1993. The index, which polls around 7,000 firms, is considered the most important business sentiment reading in Germany, Europe’s largest economy. November’s fall was the sixth straight drop in a row for the index.

The drop was more severe than the forecasts of many experts surveyed beforehand, who had predicted a drop to 89.0 points.

The companies polled complained of the difficulty of their current business situation and were sceptical about the outlook for 2009.

With falling numbers of orders, many firms could start laying off workers, Klaus Abberger of the Ifo Institute told the DPA news agency. “I’d say we’ll make it through the winter OK, but it’s going to get increasingly difficult in the spring,” he said.

According to analyst Rainer Sartoris of HSBC Trinkaus, the index shows plainly “that there’s little hope that we’ll see an end to the economic hard times in the coming year,” he told the DDP news agency.

Like him, most analysts expect a contraction of the German economy in 2009, the only disagreement is by how much.

The Cologne-based German Institute for Business Research forecasts that the economy will shrink by 0.5 percent. The survey shows that “export and investment expectations have been dampened,” the institute’s director Michael Hüther told DDP. At the beginning of October, the institute had forecast that the economy would grow in 2009 by 0.6 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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