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ECONOMY

Central bank welcomes stronger growth

Economic growth in Germany has picked up faster than expected thanks to low unemployment, higher wages and the weak euro, raising forecasts for the coming years, the German central bank, or Bundesbank, said on Friday.

Central bank welcomes stronger growth
A Siemens worker inspects parts of a gas turbine at a Berlin factory. Photo: DPA

The German economy, Europe's biggest, was projected to expand by 1.7 percent in 2015, 1.8 percent in 2016 and 1.5 percent in 2017, the Bundesbank said.

That marked an “appreciable” upgrade from the central bank's previous economic projections in December, when it had pencilled in growth of 1.0 percent for this year and 1.6 percent for next year.

With those growth rates, “the German economy would expand at a faster pace than potential output at an annual rate of 1.2 percent and aggregate capacity utilisation would greatly exceed the multi-year average at the end of the forecast horizon,” the Bundesbank wrote.

“Compared with the December projection, GDP growth expectations for 2015 and 2016 have been raised appreciably by 0.7 and 0.2 percentage point, respectively. This is primarily a result of the changed underlying conditions, which already positively influenced the fourth quarter of 2014 and the first quarter of 2015,” it said.

The German economy effectively ground to a halt in the middle of last year, but picked up again at year's end to show growth of 0.7 percent in the final quarter and expansion of 0.3 percent in the first three months of this year.

Recovered from lull

“The German economy has recovered from the lull in mid-2014 more quickly than expected and has returned to a path of growth that is supported by both internal and external demand,” the Bundesbank said.

“The domestic economy is notably reaping the benefits of the favourable labour market situation and substantial income growth. This is having an effect on private consumption as well as on housing construction,” it wrote.

While foreign business was currently burdened by “dampening effects emanating from the global economy … this is balanced out by the depreciation of the euro and the improving economic recovery in the euro area,” it continued.

“Moreover, the global economy is likely to pick up steam again in the near future,” the Bundesbank added.

The promising overall scenario was reflected in positive sentiment, it continued.

“Enterprises still consider their situation to be exceptionally good,” it said.

According to the survey published by the German Chamber of Commerce and Industry (DIHK) in the early summer, nine out of 10 firms were “at least content” with their situation.

Other leading sentiment surveys, such as Ifo and the Centre for European Economic Research, painted a similar picture.

“Firms are also looking to the future with a fair amount of confidence. That said, their sense of optimism is not as pronounced as it was at the beginning of last year. According to the DIHK, sentiment is clouded by fears concerning Germany's economic policy framework, labour costs and the labour supply,” the Bundesbank cautioned.

SEE ALSO: Industry: 'Doped' growth boosting economy

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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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