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ECONOMY

German economy seen rebounding next year

Germany is poised to bounce back to positive growth next year, the country's main economic institutes said Thursday, a major turnaround for Europe's top economy after its worst recession in 60 years.

German economy seen rebounding next year
Photo: DPA

Output in 2010 should reach 1.2 percent, the group of institutes said in a closely-watched joint report, strongly revising up a previous projection of minus 0.5 percent made in April.

“In the autumn of 2009, the lowest point of the worst global recession since World War II appears to be behind us. Much points to an economic recovery,” the institutes said in a joint statement.

Greater stability on global financial markets, a brighter outlook for world trade and a rebound in Asia will likely help Germany, one of the world’s leading exporters, recover relatively quickly from its slump, the report said.

The report came the day before the government is due to present its own economic forecasts, in which it too is expected to revise up its view following a strong bounce in Germany’s economic fortunes.

Nevertheless, this year is still set to be the worst in Germany’s post-war economic history, with a contraction in output of 5.0 percent, the institutes said.

Unemployment this year will reach 8.0 percent, rising to 9.4 percent next year, they added, with just over four million Germans unemployed on average in 2010. However, the jobless lines are considerably shorter than economists had feared in the midst of the slump in output. In April, the institutes predicted just under five million unemployed in 2010.

Chancellor Angela Merkel, who hopes to form a government with her new pro-business coalition partners by October 23, said Wednesday the road ahead will be bumpy for Germany’s economy but a recovery is on track.

The new coalition is currently squabbling over tax cuts and changes to the tax system, as well as over health care reform. So far, only a deal on measures to help the long-term unemployed has emerged from lengthy negotiations. With the public coffers empty in the wake of the financial crisis, Merkel is wary of sweeping tax cuts.

The institutes’ report predicted a budget deficit of 3.2 percent of output in 2009 and 5.2 percent in 2010. The maximum permitted under European Union rules is three percent.

The economists also injected a note of caution into their broadly optimistic analysis, saying that although the economy would grow strongly in the third quarter of this year, there were plenty of obstacles facing Germany in the coming months.

“The present recovery will likely not be sustainable. There are many more significant headwinds standing in the way of a swift upturn,” the report said.

The institutes – Ifo in Munich, IfW in Kiel, RWI in Essen and IWH in Halle, together with the Austria think-tanks, WIFO and IHS and the Swiss KOF – publish their outlook twice a year.

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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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