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ECONOMY

Consumer confidence still strong despite recession

German consumer confidence is resisting a deep recession in Europe's biggest economy but could still be done in by rising unemployment, the latest survey by the GfK research institute showed on Monday.

Consumer confidence still strong despite recession
Will it be fish sticks or Halibut tonight? Photo: DPA

A widely-tracked index compiled by GfK was stable at 2.5 points for May, the Nuremberg-based think tank said, after it revised the April reading upwards to 2.5 percent from 2.4 percent previously.

“The consumer climate is proving to be surprisingly resilient in the face of all the gloomy predictions” for a sharp drop in German output this year, a statement said.

GfK’s survey of around 2,000 people is the leading barometer of household confidence in Germany, which is suffering its worst recession in six decades.

The survey measures income expectations as well as consumers’ outlook on the economy in general and their propensity to make major purchases.

Household confidence has held up owing to a very successful government car scrapping bonus, lower energy prices and higher pension payments, GfK found.

Hopes for an economic turnaround towards the end of the year, as demonstrated by an increase in the Ifo business climate index last week, have also helped keep consumers’ moods from sinking, the statement said.

It added however that downbeat growth reports “which warn that the German economy will shrink by six percent in 2009, are likely to severely test consumer sentiment.”

A sub-index which measures consumers’ propensity to make large purchases dropped slightly, but remained well above its level of a year ago, as Germany’s car scrapping scheme “is keeping consumer sentiment high,” GfK said.

UniCredit economist Alexander Koch was unimpressed with the latest results however, commenting that “the cautious breeze of an upward trend in consumer confidence observed since last October has stalled.”

The car-scrapping premium of €2,500 ($3,300) would help through the second quarter, but a steep rise in unemployment would churn up stiff headwinds, he warned.

“An inevitable setback in car sales and the in-general tarnished propensity to buy, driven by the labour market developments, should bring back weakness in private spending,” Koch said.

GfK acknowledged that “the greatest hazard jeopardizing further development of the consumer climate comes from the job market.”

But it added that “while consumers remain very pessimistic, the downward spiral of the indicator which began in the middle of 2007 and continued until the beginning of this year, does seem to be gradually coming to an end.”

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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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