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IMF chief urges Germany to increase spending

IMF director general Dominique Strauss-Kahn urged Germany to boost public spending, in line with other European countries, to stave off global recession, in a television interview on Thursday.

IMF chief urges Germany to increase spending
Photo: DPA

“It would be helpful if the German government, whose reluctance I fully understand, were able to take another step” and adopt more measures to help the economy, the head of the Washington-based International Monetary Fund told Germany’s ZDF television.

Such measures “make all the more sense when they are taken by all sides at the same time,” Strauss-Kahn said, referring to German Chancellor Angela Merkel’s wait-and-see attitude at a time when other European governments have laid out plans to kick-start their own economies.

Berlin has already laid out a package worth €31 billion to fight the crisis, but Merkel has been accused of timidity, or worse, in delaying further possible measures for fear of increasing deficit spending.

Merkel told business leaders on Tuesday they could expect a firm response from her government early next year. “We will take action again in January — another few billion could come together,” she told them amid press reports suggesting Berlin would invest up to €30 billion ($42 billion) more to drag the economy out of its slump.

But Merkel has also said that any new aid package would only be unveiled after US President-elect Barack Obama has taken office on January 20 and put forward similar measures.

Strauss-Kahn said it was likely European economies would experience negative growth of one to two percentage points next year, while warning that “the economic consequences will be truly hard for the little guy”.

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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