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BUSINESS

Investor confidence index rises

Germany's closely watched ZEW survey of investor confidence showed a surprise rise for December, on Tuesday, even though markets fretted over how long the country's recession might last.

The ZEW economic research institute said its investor sentiment index rose to minus 45.2 points this month from minus 53.5 points in November, coming in better than expected again after a slight surprise in the previous month. Analysts had forecast a drop to minus 55 points in November.

Mannheim-based ZEW said the improvement of 8.3 points “signals that the worries about a further aggravation of the recession in the middle of 2009 seem to be limited.”

The interest rate cuts of the central banks worldwide and the economic rescue packages should bolster the economic development,” its statement added.

The index hit a record low of minus 63.9 points in July but the European Central Bank has slashed its main interest rate to 2.50 percent since then and the German government has unveiled banking and general economic rescue plans.

ZEW president Wolfgang Franz said nonetheless that “the German economy is slipping deeper into the recession. There is great uncertainty about the pattern of the business cycle in the next year.”

A measure of current conditions as seen by financial sector specialists fell sharply this month to minus 64.5 points from minus 50.4 points in November.

For mid-2009, financial analysts estimated economic conditions would be comparable to those at present, Franz added. “The government is well-advised to launch a growth package, which, for example, includes infrastructure projects, instead of building [just[] an economic straw fire by distributing consumption vouchers,” he said.

The poll was taken against a backdrop of recession in Europe’s biggest economy, with auto manufacturers in particular hard hit by a sharp drop in demand worldwide and increasing divisions within the coalition government.

On Sunday, Economy Minister Michael Glos defied Chancellor Angela Merkel by issuing an urgent call for quick tax cuts to battle a deepening recession. Many have complained that Merkel has not moved faster to help Germans hit by the economic slowdown and her government partners are beginning to worry owing to general elections that are scheduled in September. “A tax cut for average earners ahead of the election would send the right message,” Glos told the mass-market Sunday newspaper Bild am Sonntag.

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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