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EUROPEAN UNION

Growth offers hope amid eurozone gloom

The German economy grew by a modest 0.2 percent in the first quarter, official figures showed Wednesday, giving hope as Europe battles a fiscal crisis.

Growth offers hope amid eurozone gloom
Photo: DPA

The data confirm that Germany, the eurozone’s largest economy, is slowly rising out of its deepest post-war recession.

“It’s a recovery, not a stagnation,” ING senior economist Carsten Brzeski commented.

The increase from the previous three month period exceeded forecasts for zero growth, and matched a revised 0.2 percent increase for the fourth quarter of 2009.

Germany’s national statistics office had initially estimated that the country suffered economic stagnation late last year. It revised the full-year 2009 contraction down to 4.9 percent from a previous 5.0 percent.

“The German economy is slow in gaining momentum,” the Destatis office said in a statement however, following three winter months marked by particularly harsh weather that hampered construction.

Domestic consumption remains subdued owing to unemployment and concern over government finances that have been weakened by stimulus programmes and the European Union bailout of Greece.

German investment in industrial equipment, inventory rebuilding and public spending nonetheless provided engines for growth, which showed a rise of 1.7 percent from the first quarter of 2009, Destatis said.

Details on the growth data are to be released next week.

Meanwhile, figures on industrial orders and production in March have pointed to a solid rebound by the key sector.

The economy fell into recession in 2009 but demand for German goods has picked up as prospects for the global economy brightened. The government currently forecasts growth of 1.4 percent this year.

“The strong March figures came right in time to make an almost lost quarter look somewhat better,” Brzeski noted.

Confidence indicators have also regained levels seen before the economic crisis, the labour market had begun to stabilize, and parts of the government’s massive stimulus package are still feeding into the economy.

German authorities have approved a stimulus package worth up to €21 billion in 2010, and construction activity is now making up for time lost over the winter.

The picture for the rest of the year is nonetheless uncertain, owing to the eurozone fiscal crisis that could force many governments including Germany’s to adopt strict measures to reduce their public deficits.

Economic activity is expected to weaken in the second half of 2010 but the euro’s fall in value against other major currencies should give German exports a boost in the meantime.

The country lost its title as the world’s leading exporter to China last year, but still ships enormous quantities of automobiles, chemicals and machine tools to all parts of the globe.

In 2011 however, exports could be hit as global economic stimulus plans wind down, UniCredit economist Andreas Rees noted.

The debt crisis will also force eurozone countries to consolidate their finances, “and step on their expenditure brakes,” he added.

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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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