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ECONOMY

Analysts: German downturn won’t last

German's economy has begun to feel the effects of the cold winds of recession blowing elsewhere in the region, said a government report released on Friday, but analysts say any downturn it suffers will prove only temporary.

Analysts: German downturn won't last
Photo: DPA

For a long time, Germany managed to remain immune to the economic difficulties plaguing many of its closest neighbours thanks to the deep and painful structural reforms it undertook years earlier.

But it, too, has started to feel the pain from the crisis, according to a whole range of different data published in the later months of last year.

“The difficult international environment was a noticeable burden on the German economy,” the Economy Ministry wrote in its latest monthly report on Friday, citing “substantial uncertainty arising from the euro area debt crisis” as well as other factors such as budget problems in the United States.

“Together with weakening demand for German exports, this is also hurting companies’ investment plans. As a result, the growth momentum has slowed over the course of the year. Available indicators point to a noticeable contraction in economic output in the final quarter of 2012,” the ministry said.

“Germany is an open and integrated economy so it is not surprising that a slowdown in the rest of the euro area has an impact here,” European Central Bank chief Mario Draghi said in November.

German growth has indeed been slowing throughout last year: from 0.5 percent in the first three months to 0.3 percent in the second quarter and 0.2 percent in the third.

Official fourth-quarter gross domestic product (GDP) data are scheduled for release on Tuesday. And economists are pencilling in a contraction from anywhere between 0.2-1.0 percent.

Economy Minister Philipp Rösler has already begun to prepare the markets for a contraction, warning of “weaker-than-expected” output and overall annual growth of 0.75 percent for the whole of 2012.

That is a long way from the buoyant growth of 4.2 percent and 3.0 percent that Germany notched up in 2010 and 2011 respectively. But it is also equally far from the 5.1-percent contraction seen in 2009.

Traditionally, German exports have been the main driver of growth, but they have also made the economy vulnerable to downturns in neighbouring eurozone countries.

In November, the value of German exports amounted to €94.1 billion, down from €98.4 billion in October.

ING Belgium economist Carsten Brzeski said it would “take a miracle” for Germany to avoid posting a GDP contraction in the fourth quarter of 2012.

Nevertheless, economists are confident that such a contraction would not be repeated in the first quarter of 2013, meaning Germany would successfully skirt a recession, which is technically defined as two consecutive quarters of declining GDP.

“The outlook will quickly brighten again,” said the DIW research institute. The Economy Ministry thought so, too.” Overall, the German economy is still very competitive and in good health,” it said, pointing out that unemployment which is still close to historical lows will help buoy domestic demand.

Furthermore, with German-made goods still in demand outside the euro area, exports are unlikely to collapse completely.

“Given favourable sales prospects, companies will start to invest again, not least because of the very attractive level of interest rates at present,” said DIW economist Simon Junker.

UniCredit analyst Andreas Rees was similarly confident that the outlook for 2013 was “considerably brighter.”

The government, for its part, is pencilling in growth of around 1.0 percent for the current year.

AFP/jlb

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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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