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ECONOMY

Economic growth spurred by consumers

UPDATE: Growth of the German economy was driven exclusively by booming domestic demand in the first quarter, while foreign trade put a brakes on activity, data showed on Friday.

Economic growth spurred by consumers
Photo: DPA

German gross domestic product (GDP) expanded by 0.8 percent in the period from January to March, the federal statistics office Destatis said in a statement, confirming a flash estimate released a week ago. It was the biggest GDP increase in three years.

"Positive impulses came exclusively from domestic demand," the statisticians said. "In particular, investment picked up at the start of the year, with a 3.3-percent rise in investment in equipment and construction investment up 3.6 percent," the statement said.
 
In addition, consumer spending increased by 0.7 percent and public spending by 0.4 percent.
 
By contrast, net foreign trade – the balance between exports and imports – knocked a total 0.9 percentage point off the overall growth rate, Destatis said.
   
While imports jumped by 2.2 percent, exports edged higher by just 0.2 percent, with goods exports falling by 0.5 percent.
   
Following its strong start to the year, German growth is nevertheless expected to come in softer in the second quarter, experts predict, as the first-quarter performance received an additional boost from the extremely mild weather.
   
It is also too early to gauge what effect the Ukraine crisis will have on growth, experts say.
 
But German business confidence fell in May, data on Friday showed, as companies became less optimistic about their future business development.
   

The Ifo economic institute's closely watched business climate index fell to 110.4 points this month from 111.2 points in April.
   
That is a slightly steeper fall than expected: analysts had been pencilling in a fractional dip to 111 points.
   
"A lull was seen in the German economy in May," Ifo chief Hans-Werner Sinn said.   
 

In all, the German economy is expected to expand by 1.7 to 1.9 percent across the whole of 2014, according to most forecasts.
 

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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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