Business confidence takes another dip

Business confidence in Germany suffered a second monthly fall in a row, the closely watched Ifo indicator showed on Thursday, but the setback was roughly in line with

Business confidence takes another dip
Photo: DPA

analysts’ expectations.

The Ifo index of business sentiment fell to 110.4 in April from 111.1 in March.

Analysts surveyed by Dow Jones Newswires had on average forecast a drop to 110.5 points.

“Despite considerable risks at the international level, the situation of the firms in Germany remains excellent,” said the institute’s president, Hans-Werner Sinn.

The euro rose on the news as investors had feared a sharper drop. Although companies were more pessimistic about their future prospects amid higher oil prices and crises in Japan and the eurozone, an index measuring their sentiment about their current situation also rose.

Carsten Brzeski, an economist from ING bank in Belgium, said the markets should shrug off the April decline.

“Do not forget: even after today’s drop, the Ifo remains close to record highs and bodes well for a continuation of strong German growth,” he said.

“For the time being, fortunately, the German economy will continue to be (almost) everybody’s darling,” he added.

Before March’s small dip, the headline Ifo index had posted nine straight monthly gains as confidence flew sky high in Germany amid strong economic growth and relatively low unemployment.

After suffering the worst recession for more than six decades in 2009, Germany has stormed back to economic health, registering its strongest growth last year since the country reunified in 1990.

Berlin last week upgraded its forecasts for growth this year, with the economy poised to expand by 2.6 percent. In 2012 the government expects slower, but still healthy, growth of 1.8 percent.

As the German economy has roared ahead, unemployment has fallen, boosting domestic demand in a country that has historically relied heavily on exports for its success.

There have nevertheless been some clouds on the horizon, with Germany’s other major sentiment index, the ZEW indicator of confidence among financial market players, also falling recently.

Earlier in April this index fell by more than analysts had expected as Japan, unrest in the Middle East and spiking oil prices took their toll on sentiment.

Rising inflation and interest rates also threaten to take a toll on the German economic recovery, observers say.

This month the European Central Bank raised interest rates for the first time since mid-2008 in a bid to contain inflation although ECB president Jean-Claude Trichet said it was not the start of a series of hikes.

“Quite a lot suggests the Ifo index will continue to fall in the coming months,” said a more downbeat analyst, Ralph Solveen from Commerzbank.

The Ifo index is based on a survey of around 7,000 firms in Europe’s top economy.


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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.