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Germany debates how to spend massive budget surplus

German economic growth plummeted in 2019, official data is expected to show Wednesday, stoking renewed debate about how to use fiscal surpluses to boost gross domestic product.

Germany debates how to spend massive budget surplus
Photo: DPA

Persistently anaemic growth and a multitude of structural challenges — from an ageing population to crumbling infrastructure and the car industry's transition to electric power — have prompted calls at home and abroad for Berlin to do more.

Critics say Chancellor Angela Merkel's successive governments have stuck too dogmatically to a no-new-debts policy known as “black zero”.

READ ALSO: 'Germany will do what's needed without new debts'

In recent years, billions of euros in government budget surpluses have not been deployed to maximum growth-boosting effect.

Figures released this week showed the federal government alone booked a surplus of 13.5 billion in 2019.

Separate data on Wednesday could highlight a surplus across all levels of government of up to 1.6 percent of GDP, Berenberg bank analysts predict, down from 1.9 percent in 2018.

A fresh tug of war is already beginning between Merkel's conservative CDU party and their SPD centre-left junior coalition partners over how to spend the bonanza.

Where the SPD favours more investment and higher social spending, many CDU politicians want tax cuts for individuals and businesses.

“Short-term stimulus is still not really needed” in Germany, ING's Brzeski said. “Instead, the surplus should be used to step up investment efforts in the well-known sectors: digitalization, infrastructure and education,” he added.

Possibly in response to such arguments, the government said Tuesday it had agreed to pump 62 billion euros into modernizing its rail network system, as part of a wider plan to incite commuters to opt for greener public transport options.

While the political battles are fought out, “Germany's attractiveness as a site for investment is gradually falling away, because economic policy is becoming less favourable”, Berenberg's Schmieding said.

READ ALSO: Germany to invest €62 billion to modernize rail network

'The fat years are over'

After 1.5 percent economic expansion in 2018, last year's figure should come out around 0.5 percent, the Bundesbank central bank and leading economic think-tanks have forecast.

“The fat years are over, at least when it comes to growth,” ING bank economist Carsten Brzeski told AFP, predicting “probably the weakest annual growth rate since 2013.”

“The golden decade Germany has seen for growth is gradually coming to an end,” agreed Holger Schmieding of Berenberg bank.

Trade conflicts, political upsets such as Brexit, slowing global growth and a near-unprecedented rate of change in the car industry have all weighed on Germany's manufacturing backbone in recent years.

Meanwhile, solid domestic consumption, buttressed by low unemployment, has helped keep the economy out of recession.

As 2020 begins, a “phase one” US-China trade deal is set to be signed Wednesday, while the next Brexit steps are clear after Boris Johnson's resounding British election victory last month.

Both could provide much-needed relief to export-oriented German manufacturers.

But ratings agency Moody's warned Tuesday of a “deteriorating global environment” that “will weigh on growth in (eurozone) member states' open economies in 2020”.

The Bundesbank sees growth this year marking time at around the 2019 level, while the think-tankers and some bank analysts including Brzeski expect a mini rebound, to around one percent.

Destatis said GDP “grew slightly” in the fourth quarter of 2019, without providing figures — “a moderately positive starting base for 2020,” tweeted analyst Oliver Rakau of Oxford Economics.

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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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