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ECONOMY

Business confidence rises for fifth consecutive month

German firms are at their most confident since the spectacular collapse of US banking giant Lehman Brothers in September 2008 and the subsequent global recession, a survey showed Wednesday.

Business confidence rises for fifth consecutive month
Photo: DPA

The Ifo’s closely watched business sentiment indicator rose for the fifth straight month to 90.5 in August with the biggest jump since the index was created in 1991, and experts said even better figures were to come.

“The latest rise in business sentiment takes place at a similar breathtaking pace as the … collapse after the Lehman default,” noted Alexander Koch at Unicredit.

He said that Germany, heavily dependent on exports, should get a boost as the global economy recovers from its worst downturn since the Great Depression in the 1930s.

“Notwithstanding the latest impressive acceleration, the rally in business sentiment is likely to continue in the short term,” he said.

“The hard-hit export champion will now in turn benefit disproportionately from the pick-up in industrial demand around the globe,” added Koch.

The rise in expectations caught analysts polled by Dow Jones Newswires by surprise. They had predicted a rise to 88.8 after a restated 87.4 in July. Last month, the July figure was given as 87.3.

“The German economy is slowly recovering from its downturn,” said Hans-Werner Sinn, Ifo president.

The surprisingly strong gain is the latest in a string of positive indicators from Germany, which officially exited its worst recession in six decades with growth of 0.3 percent in the three months to June.

Another survey of financial market investors, the ZEW, pointed last week to better times ahead for Germany, while so-called “hard” data, such as industrial orders, have also been better than expected in recent months.

A further poll, published Wednesday in Stern magazine, showed that 39 percent of people thought the worst of the economic crisis was over, compared to only 12 percent who held that opinion one year ago.

With just over four weeks to go until German elections, the increasingly positive mood in the economy is likely to boost the campaign of Chancellor Angela Merkel, whose Christian Democrats are riding high in the polls.

She has said that the worst is probably over for Germany but that the road to recovery will be bumpy.

Other economists warned against prematurely popping champagne corks.

“While the near term looks bright, there are still at least two impediments to a real recovery – the worsening labour market and a possible credit crunch,” said Carsten Brzeski, senior economist at ING.

Although job losses have been stemmed by a government scheme offering incentives to firms to put employees on part-time work, unemployment has started to rise and experts have warned that worse is to come.

Finance Minister Peer Steinbrück said there were “clear indications” that credit was tight for big- and medium-sized firms, adding that he was considering low-interest state loans to cash-strapped companies.

“If the efforts of banks are not sufficient to supply the economy with enough fresh cash, the state will have to make use of other measures,” Steinbrück told Handelsblatt business daily in an interview.

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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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