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ECONOMY

‘We need to stand up to crisis’: Germany warns of recession

The German economy could enter a recession in the third quarter, the Bundesbank warned Monday, as the debate on government measures to support the economy swelled in Berlin.

'We need to stand up to crisis': Germany warns of recession
Euro notes. Photo: DPA

 “The economy could contract again slightly” this summer, Germany's central bank said in its monthly report, following a 0.1-percent decline in gross domestic product (GDP) in the second quarter.

“According to data currently available, industrial production is expected to shrink markedly in the current quarter as well.”

READ ALSO: German economy is 'down on its knees': Is a recession looming?

Having seen a decline in trade against the backdrop of the US-China trade war, two of its main customers, Europe's biggest economy will enter what it technically defines as a recession should its GDP shrink further.

Alarmist signals are reviving the political debate between those who support the German government's dogma of balanced budgets and those seeking more flexibility in order to revive the economy.

Germany can afford it on paper after five consecutive years of budget surpluses and interest rates for long-term loans that are extremely attractive to the federal government.

As US-China tensions intensify, economists have urged Germany to fork out cash to avoid a recession, but Chancellor Angela Merkel's government has previously said things were not yet bad enough to warrant loosening the purse strings.


A BMW plant in Leipzig. Germany's auto industry comprises a sizeable chunk of its export market. Photo: DPA

Balanced budget

Citing anonymous sources, Der Spiegel news magazine said Friday that the government “had no intention of continuing to set aside money in the event of a recession”.

That would mean abandoning the so-called “black zero” doctrine committing the German state to a balanced budget.

On Sunday, German Finance Minister Olaf Scholz hinted at a potential intervention, stating that Germany could “fully face up to” a new economic crisis.

“It is sometimes important, when things change completely, for example, for us to have enough strength to react,” he said during an open house day at government offices.

“If we have debt in Germany that is less than 60 percent of our GDP, that is the strength we need to stand up to a crisis,” he added.

Scholz pointed to the estimated 50 billion that the 2008-09 financial crisis had cost the German government.

After the financial crisis and until 2013, there were negative figures to represent the difference between Germany's income and expenditure. Graphic: DPA

“We have to be able to muster that and we can muster that — that's the good news.”

In particular, several Social Democrats, junior partners in Merkel's coalition government, want Germany to draw on its reserves to finance a plan to combat global warming or infrastructure works.

Flexibility instruments could enable Berlin to draw on its large budget surplus of 1.7 percent of its GDP as early as September.

Merkel's conservatives have so far resisted and abandoning the popular balanced budget stance seems unlikely with major regional elections looming in September and October.

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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.

READ ALSO:

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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