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ECONOMY

Business confidence reaches 6-month high

Confidence among German firms rose to a six-month high in May, a key sentiment index showed on Monday, suggesting that Europe's top economy might be pulling out of its worst slump in more than 60 years.

Business confidence reaches 6-month high
Photo: DPA

The closely watched Ifo indicator rose for the second consecutive month to 84.2 from 83.7 in April, adding to evidence that sentiment is again on the up in Germany, the world’s top exporter.

The result was slightly worse than expected, though. Analysts surveyed by Dow Jones Newswires had expected the index to rise to 85.0.

The survey “points to a gradual stabilisation of economic output at a low level,” the Ifo institute’s head Hans-Werner Sinn said in a statement.

Economists see the index as a key leading indicator to gauge the future health of the economy. It had been falling steadily – with occasional blips – since June 2008 as sentiment among firms plummeted due to the financial crisis.

Tempering the optimism, however, was a sub-index showing that companies’ assessment of the current situation in Germany dropped in May to 82.5, its lowest level ever.

But the brighter outlook from the 7,000 German firms surveyed is the latest in a string of more positive data, with industrial orders and exports showing their first increases in March after falling for several consecutive months.

Another closely-watched sentiment index, which measures the outlook of players in the financial markets, also rose to a near three-year high in May after a seventh rise in a row, data from the ZEW institute showed on Tuesday.

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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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