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ECONOMY

Strong economy makes for €18-billion surplus

Germany's public finances were back in the black in 2014, as growth in Europe's biggest economy shifted up a gear at the end of the year, official data showed Tuesday.

Strong economy makes for €18-billion surplus
A worker in the Hamburg harbour. Photo: DPA

The combined budgets of the German government, regional states, municipal authorities and welfare system showed an overall surplus of €18 billion last year, the federal statistics office Destatis calculated in a statement.

It was the first time since unification in 1990 that Germany's public finances have been in the black. The surplus represented 0.6 percent of the country's overall gross domestic product (GDP) of €2.904 trillion, Destatis said.

In 2013, Germany had achieved a balanced budget in its public finances.

At the same time, Destatis calculated that German growth picked up in the fourth quarter of last year, with GDP expanding by 0.7 percent.

The statistics office said that Germany's financial surplus last year resulted from the difference between revenues of €1.294 trillion and expenditure of €1.276 trillion.

The government budget alone showed a surplus of €11.4 billion, compared with a deficit of €4.5 billion a year earlier.

The regional states' finances also swung to a surplus of €1.9 billion in 2014 from a deficit of €2.8 billion in 2013.

The municipal authorities turned in a surplus of €1.3 billion and the welfare budget showed a surplus of €3.4 billion, Destatis said.

Under eurozone rules, member states are not allowed to run up public deficits in excess of 3.0 percent of GDP and are obliged to bring their budgets into balance or surplus in the medium term.

Robust domestic demand

Confirming a preliminary estimate published earlier this month, the statistics office said that GDP growth of 0.7 percent in the fourth quarter was driven primarily by robust domestic demand.

Following a strong start to the year, when GDP grew by 0.8 percent in the first three months, the German economy subsequently lost momentum due to the uncertainty surrounding the Ukraine crisis and other geopolitical risks.

GDP actually shrank by 0.1 percent in the second quarter and showed only meagre growth of 0.1 percent in the third quarter.

But domestic demand helped growth pick up again at the end of the year, with consumer spending rising by 0.8 percent and public spending by 0.2 percent, Destatis said. Investment also increased and exports rose by 1.3 percent.

Analysts welcomed the latest set of positive data for Europe's biggest economy.

"Looking ahead, we expect more positive news from the German economy, in line with the brightening trend in soft data – such as the sentiment indicators – and hard data," said Natixis economist Johannes Gareis.

The expert said he was particularly cheered by the rebound in business investment in the fourth quarter.

"As the fundamentals are good and the uncertainty seems to fade, we think that the recovery in business investment is likely to strengthen in the course of 2015," Gareis said.

In addition, household consumption should remain an important pillar of Germany's growth, the expert said.

"Household confidence is very buoyant and households' real income is bolstered by solid wage increases due to a robust labour market and low inflation, which all bodes well for private consumption growth," he said.

Benchmark wage deal

Earlier on Tuesday, Germany's powerful metalworkers' union, IG Metall, reached agreement with management for a 3.4-percent wage increase for the sector which is expected to act as a benchmark for much of the rest of German industry.
BayernLB economist Stefan Kipar said the latest data "show that the German economy has gained a lot of momentum at the end of last year and the outlook for the current year is equally positive."

"In an environment of low interest rates and above-inflation wage increases, consumption will continue to provide a lot of impulses for the German economy in 2015," Kipar said.

It remained to be seen to what extent the Greek debt crisis and other geopolitical risks would weigh on German exports, he said.

"But we expect the fallout to be limited," Kipar added.

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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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