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ECONOMY

Business confidence hits new record high

German business confidence began the new year at record highs, the Ifo institute said on Friday, good news for the 17-nation eurozone as it grapples with a dogged debt crisis.

Business confidence hits new record high
Photo: DPA

Ifo’s closely tracked reading of business sentiment climbed to 110.3 points in January from 109.8 points in December, an Ifo spokeswoman said, its eighth consecutive increase.

It was also the second straight record high since the country’s reunification in late 1990, even though the December level was revised slightly lower from an initial reading of 109.9 points.

Ifo also polls companies about expectations for the coming six months, with this index climbing to a record 107.8 points from 106.8 in December, beating analyst forecasts for 106.5 points.

“The German economy has started the year with great vigour,” Ifo president Hans-Werner Sinn said in a statement.

The institute polls 7,000 German manufacturing, construction, wholesale and retail companies each month to establish the barometer of business sentiment. The figures backed up the ZEW index of German financial market confidence earlier this week, which jumped to its highest level since July 2010 at 15.4 points.

“The firms are just as satisfied with their current business as they were in December and they have given more favourable assessments of their business prospects for the coming half year,” Sinn said.

He noted that in the manufacturing sector, the “the business climate has clearly improved,” and firms said they planned to hire more staff.

Analysts polled by Dow Jones Newswires had expected a more modest increase in the overall index to 110 points.

The German government has forecast economic growth of 2.3 percent this year, following a post-reunification record of 3.6 percent in 2010, which should give traction to some eurozone neighbours as well.

There were nonetheless a couple of shadows in the data. A sub-index that measures companies’ assessments of their current situation dipped very slightly for the first time since February 2010, suggesting sentiment might be reaching a plateau.

Substantial drops in sub-indices for the wholesale and retail sectors also cast doubt over the extent to which Germany’s economic recovery would spread to consumer spending.

Those categories had shown improvements in December. A steady fall in unemployment, plus higher wages, have lead to forecasts of a long-awaited pick-up in consumption to support exports and investment as growth drivers.

Those two factors are being underpinned by global growth and low interest rates adopted at the height of the global financial crisis to help get economies back on track. Low interest rates also help debt-laden eurozone countries such as Greece, Ireland and Portugal.

Commerzbank chief economist Jörg Krämer noted that the European Central Bank’s record low benchmark interest rate of 1.0 percent would probably remain in effect for much of this year, despite recent indications that the ECB was taking a harder line on rising inflation.

Other analysts viewed the latest Ifo release from different angles, with Jonathan Loynes at Capital Economics saying that although Germany was doing well, “that might not help its neighbours very much.”

UniCredit economist Andreas Rees pointed, however, to “a reviving of the good old Franco-German economic axis.”

“German and French companies are powering ahead in Europe, thereby reinforcing the upswing of each other,” Rees said.

ING senior economist Carsten Brzeski said a German “investment upturn should finally materialise,” and added that with job growth, “the conditions to initiate a virtuous circle have hardly been better in the last fifteen years.”

AFP/ka

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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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