Business confidence rises despite euro fears

Signs that the debt crisis is striking at the core of the eurozone eased slightly on Thursday as business confidence in Germany, Europe's top economy, showed a surprise bounce.

Business confidence rises despite euro fears
Photo: DPA

Markets soared as the Ifo economic institute’s closely watched business sentiment index rose to 106.6 in November, compared to 106.4 in October, the first rise in four months and contrary to analysts’ expectations.

“The German economy is still performing relatively well despite the international turmoil,” said the president of the institute, Hans-Werner Sinn.

The rise completely wrong-footed analysts surveyed by Dow Jones Newswires, who had predicted a decline to 105.1.

Traders were quick to cheer a rare slice of good news, with the DAX index of leading German shares jumping nearly 50 points and the euro gaining nearly half a cent against the dollar.

The index “improved somewhat in November for the first time in four months. The slight increase is due to somewhat less sceptical business expectations,” said Sinn.

“The current business situation, according to the survey responses, remains positive,” added the economist.

A weak German bond sale on Wednesday had stoked concerns that the eurozone debt crisis was seeping from the weak countries on the periphery of the bloc to the core, thought until recently to be safe.

Germany suffered the unusual humiliation of very weak demand at an auction for its bonds, until now considered the gold standard for eurozone debt and a safe haven against the crisis.

But analyst Carsten Brzeski from ING bank said that despite the poor bond auction, Germany was still standing up well to the crisis.

After the sale, “some market participants had already welcomed Germany in the debt crisis club,” he said.

“The lack of investor’s appetite for German government bonds was by some market participants even considered as a vote of no confidence against Germany. Time to put things into perspective,” he added.

However, a more bearish analyst, Jonathan Loynes from Capital Economics, believed the index would “do little to ease the growing concerns over the outlook for Germany in the wake of yesterday’s unsuccessful Bund auction.

“Overall, with the economy clearly slowing and the government under ever increasing pressure to take on enormous fiscal risk in order to save the euro, market worries about Germany look set to intensify,” he said.

Nevertheless, official data released earlier on Thursday showed that gross domestic product rose 0.5 percent in the third quarter, following a 0.3-percent expansion in the second quarter.

The data confirmed that Germany outperformed its neighbours during the three months ending September 30. However economists see signs of a looming slowdown in the fourth quarter as the eurozone debt crisis takes a toll.

Germany suffered more than most from the last economic slump, with its economy shrinking around five percent in 2009 as demand for its exports dried up.

But as the developing world recovered quickly and began again buying goods “made in Germany”, the country staged an impressive comeback, with output growth of 3.7 percent last year.


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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.