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ANGELA MERKEL

Growth grinds to a halt

The German economy grew by a meagre 0.1 percent in the second quarter of the year, while expansion in the first quarter was slower than originally reported, according to official data published on Tuesday.

Growth grinds to a halt
Photo: DPA

Analysts polled by Dow Jones Newswires had forecast 0.4 percent growth for the second quarter in the eurozone’s top economy as the group grapples with a crippling debt crisis.

“The dynamism in the German economy has cooled significantly since the robust start to the year,” the federal statistics office (Destatis) said in a statement.

It revised the first-quarter growth figure down to 1.3 percent from the 1.5 percent originally reported.

Destatis said the 0.1 percent growth in the second quarter compared to the first quarter came based on only anaemic expansion in exports, the backbone of the German economy.

Imports rose in the second quarter more than exports, undermining the growth figures, as consumer spending and investment in construction also slipped.

The figures were stronger in a year-on-year comparison, with gross domestic product rising 2.8 percent in the second quarter.

In late May, Merkel had said it was likely that gross domestic product would rise more than three percent this year, in line with the forecasts of most economists and key institutions.

The Bundesbank central bank expects 3.1 percent expansion in Europe’s biggest economy this year while the International Monetary Fund has forecast 3.2 percent growth.

The government’s official forecast, reported in April, remains at 2.6 percent but economic data since then had made that prediction seem timid.

Chancellor Angela Merkel, who is meeting French President Nicolas Sarkozy later on Tuesday in Paris for talks on the eurozone crisis, said last month she expected German growth to reach a similar level this year to the rate in 2010, when it hit 3.6 percent.

On the eve of the talks both sides talked down the chances of a breakthrough, and the French and Spanish markets dipped when a German spokesman flatly ruled out talk of issuing a joint eurozone bond.

Last week, European stock markets saw their worst losses since 2008 on rumours that France might lose its Triple A credit rating and as the European Central Bank had to intervene to buy Italian and Spanish government bonds.

Sarkozy has been pushing for a more centralised system of controls across the eurozone, better able in Paris’ eyes to protect against future meltdowns.

But Merkel – and German voters – oppose any bid to create what they dub a “transfer union” in which Germany’s powerful export-led economy effectively underwrites its underperforming eurozone partners.

Such a system would make it easier for struggling members like Greece or Portugal to finance their massive public deficits but would also transfer some of the cost of servicing these debts to German taxpayers.

This would be a complete non-starter for Berlin without a quid pro quo of new rules to enforce tougher fiscal discipline throughout the bloc.

On the eve of the talks, a German spokesman said the idea of eurobonds to pool eurozone public debt would not even be on the agenda in Paris.

Merkel and Sarkozy are to meet in Paris in the afternoon, then hold a press conference before sharing a working dinner.

Afterwards, they will make recommendations to European Union President Herman Van Rompuy.

Sarkozy will meet his cabinet on Wednesday and on August 24 he is due to unveil austerity measures designed to bring France’s budget deficit down to less than three percent of gross domestic product, the EU limit, by 2013.

AFP/hc

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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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