German economy in ‘festive mood’ as business confidence jumps

German businesses rounded off 2016 with a stronger-than-forecast increase in confidence, a closely-followed survey showed Monday, despite fears for the future over Brexit and Donald Trump.

German economy in 'festive mood' as business confidence jumps
Hamburg harbour. Photo: DPA

The Munich-based Ifo institute's headline business confidence index hit 111.0 points in December, an increase of 0.6 points over November's reading.

Analysts surveyed by financial data provider Factset had predicted the index would see a smaller rise of 0.2 points.

“The German economy is in a festive mood,” commented Ifo head Clemens Fuest, hailing a “strong finish to the year”.

A sub-index covering current business conditions rose by one full point to 116.6 — the highest level since February 2012 — while one covering the future outlook also brightened slightly.

The Ifo survey has painted a resilient picture of German businesses' mood over the course of the year.

Its lowest point came in February amid fears of a slowdown in China – a key customer for many German exporters.

By contrast, the dip after Britain's June vote to quit the EU – widely expected to bring economic pain for both the UK and the remaining 27 EU countries – was relatively contained.

And December's slightly improved result shows no negative impact from the election of Donald Trump to the White House in November.

President-elect Trump's protectionist rhetoric on the campaign trail prompted fears that exporters' US business could suffer.

“The German economy has continued its recovery and defied many external risks and turmoil” in 2016, ING Diba bank economist Carsten Brzeski commented.

High levels of employment, wage increases, low inflation and interest rates, and billions in government spending on refugees have all helped boost domestic consumption this year.

But there is unlikely to be much additional impulse from any of those quarters in 2017, Brzeski went on.

“The growth ingredients should remain the same but it will be a bit less of everything,” he said.


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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.


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.