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ECONOMY

‘We’re all doomed!’ say top economic think tanks

Germany's leading economic think tanks warned on Thursday there was a "great danger" that Europe's top economy could fall into recession, as they slashed their growth forecasts for next year in half.

'We're all doomed!' say top economic think tanks
Photo: DPA

The four institutes – Ifo in Munich, IfW in Kiel, IW in Halle and RWI in Essen – also lashed out at the European Central Bank, saying its latest anti-crisis measures risked fuelling inflation in the 17 countries that share the euro.

“The euro crisis is negatively impacting economic activity in Germany,” the institutes wrote in their joint twice-yearly forecasts, published here on Thursday.

“Should the situation in the eurozone continue to deteriorate, this will also impact the German economy. Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession,” they warned.

While Germany clocked up growth of 0.5 percent in the first quarter and 0.3 percent in the second quarter, “there are currently a large number of signs that overall economic expansion will weaken towards the end of the year,” they wrote.

As a result, gross domestic product (GDP) was projected to grow by 0.8 percent overall this year and by 1.0 percent next year.

That marked a downgrade from the institutes’ previous spring forecasts when they had been pencilling in growth of 0.9 percent for this year and 2.0 percent for next year.

Furthermore, the latest forecasts were based on the assumption that the situation in the euro area, currently grappling with its worst-ever crisis, would stabilise.

If it did not then Germany, which has held up much better to the long-running crisis than its eurozone partners, could fall into recession, they said.

Turning to the ECB’s controversial decision to buy up the sovereign bonds of debt-wracked countries under its so-called OMT programme, the experts said such measures risked fuelling inflation in the single currency area.

The institutes “see the risk of a mid-term rise in inflation,” they said.

“This process could be triggered by the ECB effectively providing monetary financing for states. Europe’s citizens and players in the markets may lose trust in the ECB’s ability to ensure long-term price stability as a result,” the report said.

The ECB’s Outright Monetary Transactions (OMT) programme, as well as its predecessor the Securities Market Programme (SMP), have frequently come under heavy fire in Germany as being a covert way for the central bank to pay off countries’ debt by simply printing money.

“In the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation even if states deviate from the adjustment programmes, which could drive up prices and lead to an increase in inflation expectations,” the institutes warned.

AFP/bk

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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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