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ECONOMY

Robust economy seen chugging forward

Domestic consumption and business investment have helped Germany post record growth and raised the chances that Europe's economic engine will keep chugging along this year, economists said on Tuesday.

Robust economy seen chugging forward
Photo: DPA

Stimulus measures have swollen public debt however, data from the national statistics office also showed, though it remains within striking distance of European Union targets.

Dynamic German activity contrasts with a loss of momentum in the United States, the world’s biggest economy, a slowdown in number two China and a fragile recovery in Japan.

The Destatis office confirmed a second quarter growth estimate of 2.2 percent from the previous three-month period, a record for reunified Germany, and noted that household consumption had contributed to the result.

On a 12-month basis, the economy expanded by 4.1 percent in the second quarter, Destatis said. Its data showed that domestic consumption gained 0.6 percent from the first quarter of 2010, but was 0.7 percent lower on an annual basis.

It was the first time in a year that consumer spending showed an increase, however, and could ease pressure on Germany, which has been criticised by some EU leaders for relying too much on exports to drive its economy.

“The rebound has affected the entire German economy,” which is now getting input from all sectors, Economy Minister Rainer Brüderle said in a statement.

Private and public consumption joined business investment and global trade in hauling Germany out of a record recession, though the country has not yet reached pre-crisis levels.

The latest data “means that much more (almost 60 percent) of the sharpest economic contraction in post-war history (minus 7.1 percent during the second quarter of 2008 to the first quarter of 2009) has been recouped by mid-2010 than previously expected,” said IHS Global Insight senior economist Timo Klein.

Goldman Sachs economist Dirk Schumacher noted that “the fundamentals (job and wage growth) point to a more lively contribution from consumption going forward.”

The German Chamber of Commerce and Industry (DIHK) has forecast full-year growth of 3.4 percent, higher than a revised 3.0 percent forecast issued by the German central bank and a rate that would see the economy tie the growth record it set in 2006.

In October, the government in Berlin will revise significantly higher its current 2010 growth forecast of 1.4 percent, officials have said, and unions are gearing up for tough wage talks now that growth is back on track.

Klaus Zimmermann, head of the DIW economic think-tank, told the German business daily Handelsblatt: “We must give a priority to temporary wage hikes owing to economic uncertainties abroad” rather than permanent increases that would raise labour costs and undermine Germany’s new-found competitiveness.

Despite the strong growth, Germany’s public deficit doubled in the first half of the year from the same period in 2009 to €42.8 billion ($54 billion), or 3.5 percent of gross domestic product (GDP), Destatis said.

That compares with the European Union’s Stability and Growth Pact limit of 3.0 percent, a level German officials are aiming for by 2012.

Government public spending rose by 0.4 percent in the second quarter, but Berlin will tighten its belt next year to meet a constitutionally mandated cut in its public deficit and debt.

Continued growth, with Barclays Capital economist Julian Callow calling a full-year figure around 3.0 percent “easily attainable,” should boost tax revenues and help officials reach their target.

“The pick-up in private consumption is an important sign that the German recovery is on the verge of becoming self-sustained,” ING senior economist Carsten Brzeski said.

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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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