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ECONOMY

Central bank upgrades German growth forecast

The German central bank or Bundesbank on Friday said it was upbeat about the outlook for expansion in Europe's biggest economy, upgrading its growth forecast for 2017.

Central bank upgrades German growth forecast
A worker installs the rear window on a Volkswagen car at the manufacturer's factory in Wolfsburg, Lower Saxony. Photo: DPA

“The Bundesbank's economists expect Germany's real gross domestic product (GDP) to grow by 1.7 percent this year, followed by a rise of 1.8 percent in 2016 and 1.7 percent in 2017,” the central bank said in a statement.

The forecasts for 2015 and 2016 are unchanged from the bank's earlier projections, while it had been pencilling in growth of 1.5 percent for 2017.

“The German economy is currently following a growth path that is primarily underpinned by domestic demand,” the statement said.

“The main drivers are the favourable labour market situation and substantial increases in households' real disposable income, though foreign trade is currently being hampered by frail demand from the emerging market economies,” said Bundesbank chief Jens Weidmann.

“But with export markets outside the euro area expected to rebound and economic growth within the euro area gaining a little more traction, the healthy underlying state of the German economy should stand out even more clearly over the next two years,” Weidmann said.

Despite the expansionary effect which migration was having on the labour supply, “the labour market will experience shortages to a growing extent, driving up wage increases,” it said.

Turning to the outlook for public finances, the central bank said Germany's general government budget was expected to post “a higher surplus in the current year and record a more or less balanced fiscal outcome in 2016 and 2017.”

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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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