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ECONOMY

Brexit and an aging population said to shade German economy

Germany's "wise men" council of economic experts on Wednesday sharply lowered its economic outlook as Europe's powerhouse battles headwinds from trade conflicts, Brexit uncertainty and an ageing population.

Brexit and an aging population said to shade German economy
A famous sculpture of the euro in Frankfurt am Main. Photo: DPA

The experts, who advise the government on economic policy, said they expected Germany's economy to grow by 1.6 percent this year and 1.5 in 2019.

That was well below their previous forecast of 2.3 percent and 1.8 percent respectively.

“The uncertain future of the global economic order and unavoidable demographic change represent major challenges to the German economy,” said chairman Christoph Schmidt in the council's latest annual report.

The so-called “wise men”, actually four men and one woman, urged Chancellor Angela Merkel's government to take action to prepare Germany for the threats ahead.

The warning comes as Germany braces for a period of political turbulence at home following Merkel's announcement that she will step down as head of her centre-right CDU in December and will not seek re-election as chancellor when her fourth term ends in 2021.

Brexit and baby-boomers

The German economy enjoyed stellar growth in 2017 underpinned by brisk domestic and international demand, record-low unemployment and low interest rates.

But Europe's top economy has hit a soft patch this year against a backdrop of slower global growth. The German economy ministry last month lowered its growth estimates and is now pencilling in expansion of 1.8 percent this year and the next.

Clouding the outlook is concern about US President Donald Trump's aggressive “America First” trade agenda which has seen him lock horns with China and the European Union, unsettling Germany's export-reliant companies.

Other outside risks stem from an increased chance of a no-deal Brexit when Britain quits the bloc in March, which could badly disrupt trade, and rising euroscepticism in countries like Italy, the “wise men” said.

“An escalation of the trade conflict, a disorderly Brexit, or a resurgence of the euro area crisis harbour risks for economic development,” they warned.

They urged Germany and the European Union to forcefully reject protectionism and stand up for free trade.

Domestically, the experts singled out Germany's ageing workforce as a “major challenge”.

German companies are already grappling with a shortage of skilled workers as the baby-boomer generation retires, and the problem is expected to worsen in the years ahead.

To get more people into the workforce, especially women, the experts urged Berlin to encourage flexible working hours and improve childcare options.

Immigrants could likewise help plug the gap, they added, while also advocating a gradual rise in retirement age.

The experts pressed Berlin to make greater strides in preparing Germany for the digital economy, urging investments to improve the country's creaking internet infrastructure.

Berlin should also do more to support tech start-ups and modernize its education system to prepare youngsters for the “digital transformation”, they 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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