German business confidence sours

German business confidence fell for the first time in five months in March, data showed Friday, as disappointing economic data, political gridlock in Italy and the Cyprus crisis dampened the business climate in Europe's top economy.

German business confidence sours
Photo: DPA

The Ifo economic institute’s closely watched business climate index slipped to 106.7 points in March from 107.4 points in February.

It is the first time since October that the index has fallen, countering analysts’ expectations for a further modest increase this month.

“After rising sharply last month, the Ifo business climate index edged downwards in March,” said Ifo president Hans-Werner Sinn.

“Companies were slightly less positive about their future business outlook than in February, but assessed their current business situation almost as positively as last month.”

But he insisted: “The German economy remains on track in a challenging environment thanks to strong domestic demand.”

Ifo calculates its headline index on the basis of companies’ assessments of their current business and the outlook for the next six months.

The sub-index measuring current business slipped fractionally to 109.9 points in March from 110.2 points in February. And the outlook sub-index fell by one full point to 103.6 points.

A breakdown by sector showed a mixed picture.

While confidence in the key manufacturing sector fell — weighed down by falling export expectations — and sentiment in the wholesale sector also “deteriorated considerably,” it rose slightly in the retail sector.

In construction, confidence lifted to its highest level since German reunification.

Analysts said fears of a resurgence of the long-running crisis — which had appeared to be abating — were taking their toll on sentiment.

The drop “is another sign that the economic recovery in the eurozone seen over the past six months or so might already be running out of steam,” said Capital Economics economist Ben May.

The Ifo reading was “still consistent with reasonably healthy gross domestic product. Nonetheless, given the uncertainty surrounding Cyprus and Italy, business sentiment may continue to fade and we still think that a sustained German economic recovery in 2013 is a hope too far,” May said.

Annalisa Piazza at Newedge Strategy agreed.

“The German Ifo has been hit by the ongoing political and economic turbulence in the eurozone in March,” she said. “This is the first downward correction since October and it shows that even the resilient German economy is not spared from the current turmoil.”

Natixis economist Constantin Wirschke said that “despite the disappointment, the numbers are still pointing towards growth in the first quarter and for the full year 2013.”

Rob Wood at Berenberg Bank was similarly optimistic.

“Discounting this month, it is at its highest since April 2012, when the German economy was growing at a decent clip. So this remains a positive indicator,” he said.

ING Belgium economist Carsten Brzeski also saw the reading as no more than a correction to the recent sharp rally.

It was “a small downward correction of last month’s enthusiasm rather than a new downward trend,” he said.

“Despite today’s drop, the absolute level of all components still points to growth in the first quarter,” Brzeski argued.


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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.