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ECONOMY

Business makes confident start to 2015

German businesses are confident about the outlook for Europe's biggest economy, a new poll showed on Monday, as a weaker euro and falling oil prices are set to boost the country's exporters.

Business makes confident start to 2015
A worker checks compensators in a Baden-Württemberg factory. Photo: DPA

Nevertheless, it was too early to predict the impact on German confidence of the elections in Greece, where the victory of a radical left anti-austerity party could reignite concerns of a euro break-up, analysts cautioned.

The Ifo institute's closely watched business climate index rose to 106.7 in January month from 105.5 points in December, the think tank said in a statement.

It was the third monthly rise in a row and was slightly higher than analysts' expectations.

"Companies were far more satisfied with their current business situation and the majority were also optimistic about the business outlook," said Ifo president Hans-Werner Sinn.

"The German economy has gotten off to a good start to the year."

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

The sub-index measuring current business rose to 111.7 points, the highest level since July 2014, and the outlook sub-index increased by 0.7 point to 102.0 points, the institute said.

Greek uncertainty

Nevertheless, the survey was conducted before the Greek elections, and the victory of the anti-austerity party Syriza there could soon begin to sour the recovery prospects once again, analysts warned.

"Substantial market turbulence or long, drawn-out discussions about the risk of a so-called 'Grexit' (Greek exit from the euro) could dampen sentiment again in the coming months," said BayernLB economist Stefan Kipar.

"It remains to be seen what effect the outcome of the Greek elections will have."

Berenberg Bank economist Christian Schulz also saw the Greek issue as an uncertainty factor.

"The renewed political risks in Greece probably prevented a stronger improvement" in Ifo's expectations sub-index, he said.

"That supports our short-term caution for Germany's economy until the Greek risk is resolved one way or another."

Natixis economist Johannes Gareis was more confident.

"There are several fundamental factors that support Germany's economic recovery, after it has lost speed in the course of 2014," he said.

Lower euro, oil price

"For 2015, Germany – and the eurozone – surely can lock in a positive growth stimulus from the massive drop in oil prices, a lower euro exchange rate and substantial monetary loosening by the European Central Bank," he said.

"This indicates a promising start to the new year. We currently expect the German economy to grow by 0.2 percent quarter-on-quarter in the first quarter," he said.

Capital Economics economist Jennifer McKeown said the renewed rise in the Ifo index "suggests that fears about the effect of the Greek crisis on the German economy have so far been offset by the perceived benefits of a weaker euro and ECB quantitative easing."

Last week, the ECB unveiled plans for a €1.1 trillion bond purchase programme to stimulate the eurozone's sluggish economy.

UniCredit economist Andreas Rees was also confident.

"The signs of a recovery in the making have become even stronger and more unambiguous," he said, pointing to the lower oil price, the depreciating euro and a brisk US economy.

"For the first quarter of 2015, we expect a growth acceleration to plus 0.4 percent quarter-on-quarter. And we're sticking to our growth forecast of 1.4 percent for this year as a whole.”

SEE ALSO: ECB bond-buying 'brings risks'

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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.

READ ALSO:

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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