German business confidence highest since reunification

German firms are the most optimistic they have been since reunification in 1990, a key indicator showed Wednesday, raising hopes Europe's powerhouse could drag the debt-wracked eurozone from the abyss.

German business confidence highest since reunification
Light at the end of the tunnel? Photo: DPA

The Ifo institute’s measure of business confidence soared to 109.3 points in November, smashing expectations of analysts surveyed by Dow Jones Newswires, who expected little change from last month’s reading of 107.7 points.

“I confirm it’s the highest level since reunification,” an Ifo spokesman told AFP. Analysts were euphoric, with one harking back to the “economic miracle” enjoyed by Germany after World War II.

“Maybe it is a miracle after all,” said Carsten Brzeski from ING bank. “Amidst new financial market turmoil and sovereign debt woes in the eurozone, the German economy seems to be an island of happiness.”

Andreas Rees, from Unicredit, also drew a parallel between the crisis in the eurozone and the seemingly unstoppable rise of its biggest economy. “Ever heard of the European debt crisis?” he asked.

“Looking at the latest Ifo index suggests that German companies are currently shrugging off all these concerns. Instead, they concentrate on the positive aspects of the current upswing, becoming more and more optimistic.

“It is difficult not to become euphoric,” he concluded. A separate index measuring how firms assess their current situation also rose strongly, to 112.3 points from 110.2 in October, its highest level since May 2007.

“The upswing in the German economy is gaining more and more strength,” said Hans-Werner Sinn, the president of the Ifo institute.

Europe’s economic powerhouse suffered more than most during the downturn as its export motor spluttered amid lower global demand for goods “made in Germany.”

In 2009, the economy contracted by a bitter 4.7 percent, the worst recession in more than sixty years.

But Chancellor Angela Merkel pumped tens of billions of euros into the economy, introduced short-term working schemes to keep a lid on unemployment and has overseen an impressive bounce back as exports recovered.

Statistics released on 12 November showed that economic growth in Germany slowed slightly in the third quarter to 0.7 percent but this was still far ahead of fellow eurozone giants France and Italy.

Berlin expects growth of 3.4 percent this year, with domestic demand now also joining the party, contributing to more balanced and sustainable output, say economists.

“Unemployment is now under 3 million and will be on average 2.9 million next year,” said a triumphant Merkel in a speech to parliament earlier Wednesday.

However, tempering the euphoria has been some worrying signs from industry, with both production and orders disappointing recently, leading some to believe Germany is heading for a sharper-than-expected slowdown in 2011.

The government itself has forecast growth of 1.8 percent for next year.

Nevertheless, in the words of Jennifer McKeown, senior European economist at Capital Economics, “the survey suggests that the German economy should keep the eurozone recovery going in the very near term at least.”

“The German economy seems to defy gravity,” judged Barclays Capital in a research note.


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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.


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.