Booming economy seen shrinking deficit in coming years

Thanks to the booming economy and shrinking unemployment, Germany’s deficit for 2012 will likely be much lower than initially feared, sinking to €31.5 billion, according to government sources.

Booming economy seen shrinking deficit in coming years
Photo: DPA

Finance Minister Wolfgang Schäuble had previously allowed for new borrowing of €40.1 billion, but new medium-term plans to be reviewed by Chancellor Angela Merkel’s cabinet on Wednesday reflect the lower number, the sources said on Monday.

The new budget for the next four years also plans to reduce net borrowing to €22.3 billion instead of €31.6 billion in 2013. One year later, the budget gap will be at €15.3 billion – as opposed to €24.1 billion in the previous plan. In 2015, the deficit is set to be at €13.3 billion.

Meanwhile Defence Ministry spending will reportedly see smaller budget cuts than expected. New Defence Minister Thomas de Maizière won’t be required to cut costs there by €8.3 billion until 2015. That would give him an extra year to push through wide-ranging reforms than what was previously allotted for his predecessor, Karl-Theodor zu Guttenberg, who resigned recently after a scandal over his plagiarized doctoral thesis.

The Health Ministry will likely get a boost of some €700 million in 2015 to fund statutory health insurance to subsidize payments from low-income recipients.


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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.