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EUROPEAN UNION

German business confidence makes surprising climb higher

Germany's Ifo business confidence index improved slightly in January, beating market expectations on Tuesday in a rare ray of light for Europe's biggest economy.

German business confidence makes surprising climb higher
Photo: DPA

The Ifo indicator rose to 83 points in January from 82.7 points in December, its lowest ever reading, the Munich-based Ifo institute said. Economists polled by Dow Jones Newswires had forecast a fall to 81.3 points. While the firms surveyed had a gloomier view of their current situation than in December, they had a brighter outlook for the next six months.

Despite the apparent increased level of optimism in Germany’s business community, the head of the Ifo economic institute, Hans-Werner Sinn, warned against reading too much into the surprisingly strong survey.

“We can’t deduce from this that an economic turning point is in sight,” Sinn said.

Heinrich Bayer, an economist from Postbank, was similarly cautious. “One must be careful when interpreting this. One rise should not be over-estimated. For a turning point to have been reached, the result will need to be confirmed in the coming months,” Bayer said.

However, some analysts seized on the data to give a more bullish outlook for the German economy.

Alexander Koch from Unicredit said the “end of the free-fall in expectations is a strong ray of hope that the vicious circle is broken and the German economy will manage – not to rebound strongly – but to stabilise in the second half of the year.”

The index was published moments after Germany’s “grand coalition” government sealed a €50-billion ($66-billionr) economic stimulus package to stave off what is feared to be the country’s worst recession in 60 years.

The government predicted this month that Germany’s export-oriented economy – which entered a recession in 2008 – would contract by 2.25 percent this year, its biggest slump since World War II.

The International Monetary Fund is even gloomier, expecting a contraction of 2.5 percent this year.

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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