Business confidence drops again amid crisis

German business confidence deteriorated for the fourth month in a row in October, data showed on Friday, as Europe's economic powerhouse begins to feel the pain of the region's debt crisis.

Business confidence drops again amid crisis

The monthly Ifo business climate index fell by one full point to 106.4 points in October, its lowest level in just over a year.

The decline may not have been quite as steep as expected – economists had been pencilling in a fractionally steeper drop to 106.3 or 106.2 points – but the data showed that the eurozone’s debt crisis is making companies perceptibly nervous about the future, analysts said.

Ifo chief chief Hans-Werner Sinn said the business climate in Germany “cooled further in October.”

While survey participants assessed their current business situation “predominantly as favourable, they do not regard it quite as positively as they did in September,” Sinn said.

Business expectations for the next six months “are noticeably more pessimistic

than previously,” he added.

Nevertheless, “given the international turmoil, the German economy is still performing well overall,” he insisted.

A sub-index that measures company assessments of their current situation fell to 116.7 points from 117.9 points in September and expectations for the six months to come dropped to 97.0 points from 97.9 points, hitting its lowest level since July 2009.

Holger Schmieding, economist at Berenberg Bank, suggested that the hope EU leaders will agree on a solution to the debt crisis at the upcoming summits in Brussels “may have dampened the October decline in business confidence somewhat.”

Such hopes have already fuelled a modest rebound in equity markets, he noted.

“But it is still the fourth significant fall in the Ifo index in a row” and the speed of the decline was “alarming… and points to a modest recession ahead,” Schmieding said.

The economist believed the eurozone’s economic fundamentals “remain solid” and Germany had already undertaken successful economic reforms in recent years.

Nevertheless, the outcome of the upcoming double summit was crucial and if EU leaders failed to come up with a solution that can calm markets for good “the eurozone is likely to slip ever deeper into recession,” he said.

Ben May, European economist at Capital Economics in London, said that while the modest decline in the Ifo index superficially suggested that the German economy was continuing to hold up reasonably well.

“In all, there is nothing to alter our view that Germany is in the midst of a sharp slowdown and that growth next year will ease to a well below consensus 0.5 percent or so,” he said.

ING Belgium economist Carsten Brzeski, too, said that the eurozone’s “economic Superman (had) looked invulnerable” for a long time.

But now “with Italy and France starting to falter, Germany is now finally feeling the pain of the sovereign debt crisis,” he said.

Andreas Rees, chief German economist at UniCredit, was less pessimistic.”There is no denying that the German economy will cool off in coming quarters. However, doomsday is certainly not around the corner,” he said.

Companies had an “airbag” of a huge pile of backlog orders which would be worked off in coming months.

“Furthermore, the propensity of companies to invest further in Germany remained at historically high levels recently, at least partly offsetting declining impulses from exports.”

We are sticking to our growth forecast of 1.5 percent for 2012 after 3.0 percent in 2011,” Rees stressed.


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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.