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ECONOMY

2015 growth forecast hiked to 2.1 percent

Germany's leading economic institutes sharply raised their growth forecast Thursday, predicting Europe's top economy will expand 2.1 percent this year thanks to cheap oil, the low euro and strong consumer spending.

2015 growth forecast hiked to 2.1 percent
Robots assembling cars in a Volkswagen factory in Wolfsburg. Photo: DPA

The forecast by four research institutes was sharply higher than the 1.2 percent growth for 2015 they had predicted last autumn.

"The low oil price leaves the Germans more money for consumption, and the low euro is pushing exports," said Timo Wollmershäuser, chief economist at the Ifo Institute, which took the lead this year in writing the annual spring forecast.

The joint paper said that while "consumer spending is the pillar of the upswing", Germany also benefited from "positive impulses from the rest of the euro area, so that foreign trade is contributing to the expansion".

For 2016, the institutes predicted 1.8 percent growth in Germany's gross domestic product (GDP), as the positive effects of low energy prices gradually wear off.

The report comes ahead of the government's official forecast to be released next Wednesday by Vice Chancellor and Economy Minister Sigmar Gabriel, which is also expected to be higher.

The German government had in January predicted 1.5 percent GDP growth for the year, after 1.6 percent in 2014.

The more upbeat forecast comes after the European Central Bank this year launched a massive 1.1-trillion-euro bond buying programme to stimulate the eurozone economy, and as the euro common currency has fallen, making exports more competitive.

The German economic research institutes in their report also predicted that the unemployment rate, already among Europe's lowest, will drop to 6.3 percent in 2015, from 6.7 percent last year, and decline further next year to 5.9 percent.

The researchers expect currently low consumer price inflation to rise only slightly to 0.5 percent this year and to 1.3 percent next year.

The current account surplus of the European export power will continue to rise to a new record €256 billion, or 8.5 percent of annual economic output, they predicted.

In 2014 the surplus was nearly €220 billion, or 7.6 percent of GDP. Next year, the institutes predicted, it will rise to €266 billion or 8.5 percent of output.

The institutes also forecast healthy government finances, with a public surplus of €21 billion this year, up from €18 billion in 2014.
Next year, the public surplus is projected to increase to nearly €26 billion, they said.

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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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