Deutsche Bank warns of massive 2009 recession

Deutsche Bank's chief economist Norbert Walter on Friday warned Germany could be in for a dire 2009 with Europe's largest economy possibly shrinking a massive four percent.

Deutsche Bank warns of massive 2009 recession
Photo: DPA

In an interview with the daily Bild newspaper, Walter said there was a 30 percent chance that the German economy will slump into a major recession next year.

“German gross domestic product could contract by up to four percent,” Walter told the paper, adding that at best the economy would likely shrink by one percent.

Walter called on the government to take immediate action to help stave off what would be the worst economic performance in Germany’s post-war history. In order to help stimulate consumer demand to get people buying again, he said Germany should “immediately and for a year” slash its value-added tax (VAT) from 19 percent to 16 percent. “Otherwise it will no longer be possible to avert the crash,” he said.

Following widespread criticism that Berlin was not doing enough to bolster the economy, German Chancellor Angela Merkel on Thursday defended her government’s €32-billion stimulus package. Germany is “among the leading countries in Europe in responding to the economic crisis,” she said in a speech to parliament.

Merkel reiterated that her government would discuss the economic situation in January to determine whether other measures were necessary. However, she said there would be no “race for billions” in spending or tax cuts.

The German central bank said on Friday it expects the economy to contract by 0.8 percent next year. The Bundesbank had already said it expected the country to remain in recession in 2009, but had not provided a forecast figure.

The Bundesbank forecast is now in line with one by the Organisation for Economic Cooperation and Development (OECD). In 2010, the economy should pick up again, and grow by 1.2 percent, the central bank said.

German output shrank in the second and third quarters of 2008, putting the country in a technical recession.

The government officially still expects the economy to grow by 0.2 percent next year, but few now really expect that to occur, with Finance Minister Peer Steinbrück already saying it could shrink by up to 1.0 percent.

Germany’s economic ace in the hole, exports, have been slammed by the global financial crisis, and business investment has dried up also owing to tighter credit conditions.


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.


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.