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ECONOMY

German growth struggles amid Omicron surge

The German government on Wednesday lowered its economic growth forecast for 2022 as an Omicron-fuelled surge in coronavirus cases holds back Europe's industrial powerhouse.

Robots assemble an Audi Q4 e-tron at the Volkswagen plant in Zwickau, Saxony.
Robots assemble an Audi Q4 e-tron at the Volkswagen plant in Zwickau, Saxony. Photo: picture alliance/dpa/dpa-Zentralbild | Hendrik Schmidt

The country’s gross domestic product is now estimated to expand by 3.6 percent, down from 4.1 percent in a previous forecast.

The start of the year “will still be subdued due to the coronavirus pandemic, especially in the service sectors”, the economy ministry said in a report.

But the bounce-back in Europe’s biggest economy should “noticeably” pick up pace once infections level off and global supply chain frictions “gradually” ease over the course of 2022.

The ministry’s forecast is more pessimistic than that of the Bundesbank central bank, which is pencilling in 4.2 percent growth this year.

Germany, whose export-oriented economy is particularly vulnerable to the global supply chain bottlenecks and raw material shortages caused by the pandemic, has seen its recovery lag behind other major European economies like France and Italy.

Its flagship auto industry has been hardest hit, with giants Volkswagen, BMW and Daimler forced to trim production over a shortage of semiconductor chips.

READ ALSO: German industry still waiting on post-viral boom amid shortages

The German economy is in an “opaque phase”, Economy Minister Robert Habeck told lawmakers after the report’s publication.

Some sectors “have full order books, others have considerable problems” because of Covid restrictions, he said.

Vaccine mandate

German gross domestic product (GDP) grew just 2.7 percent in 2021, official data showed earlier this month, well below the expected European Union average of around five percent.

Despite tightening curbs to slow the virus’s spread in recent months, Germany is seeing record numbers of new infections blamed on the highly contagious Omicron variant.

German lawmakers will later on Wednesday begin debating the introduction of a vaccine mandate for adults.

The measure is backed by new Chancellor Olaf Scholz from the Social Democrats, but has divided public opinion and sparked street protests.

Economy Minister Habeck, from the Greens, said in the report that “an increased vaccination rate should make it possible to sustainably contain the pandemic” this year and “accelerate the economic recovery”.

Consumer spending will be a key growth driver, the ministry said, as businesses gradually resume normal service and meet pent-up demand.

Industrial firms can also expect to see higher exports as the global recovery from the pandemic shock continues.

German employment meanwhile is expected to remain robust and workers should see higher wages in response to increased demand and rising inflation, according to the report.

Risks

The ministry however cautioned that “uncertainty” remains about the pandemic’s evolution at home and abroad, and the speed at which supply and production issues will be ironed out.

Rising inflation, fuelled partly by soaring energy costs, also remains a risk factor, it said, as it could push central bankers to raise interest rates faster than expected — which could in turn dampen lending and investment.

The ministry said it expected German inflation to run at 3.3 percent this year, up from 3.1 percent in 2021.

READ ALSO:

The European Central Bank, which is slowly weaning the eurozone off its vast pandemic support, believes inflation will peak this year before falling back below its two-percent target in 2023.

Looking further ahead, Habeck — who in a first for Germany also holds the climate portfolio — said the “difficult situation” caused by the pandemic “does not change anything” about the urgent action needed to make Germany’s economy greener and more digital.

Scholz’s government last month agreed to spend 60 billion euros of unused debt on climate protection and modernising the country, as part of the goal to reach carbon neutrality by 2045.

“The investments we make now will pay off in the long run,” Habeck said.

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ECONOMY

Germany slashes growth forecasts amid Ukraine war

Germany on Wednesday slashed its economic growth forecast for 2022 as consumer prices continued to rise steeply amid the war in Ukraine.

Germany slashes growth forecasts amid Ukraine war

The gross domestic product of Europe’s biggest economy is now expected to expand by 2.2 percent rather than 3.6 percent projected in January, the economy ministry said.

Inflation was meanwhile expected to jump to 6.1 percent for the year, “a rate seen only at times of the oil crisis or shortly after German reunification” in 1990.

Germany is “paying a price” for its backing of Ukraine against Russia’s unprovoked aggression, said Economy Minister Robert Habeck.

“We must also be ready to pay this price,” said the minister, noting that Germany was “paying through higher energy prices, through higher inflation and a slower growth”.

“This literally means that Germany will be poorer compared to the forecasts from three or four months ago.”

Berlin had previously pinned its hopes on a firm recovery for 2022 as the impact of the coronavirus pandemic begins easing.

But Russia’s aggression in Ukraine has laid waste to those plans. Instead, it has further exacerbated supply chain woes and pushed up prices of daily necessities.

Energy prices in particular have leapt since war broke out, forcing the first German companies to take drastic action like idling their plants while consumers are faced with hefty power bills.

READ ALSO: Russian gas stop promises ‘sharp recession’ for Germany

Energy threat

Germany, which is highly dependant on energy from Russia, was also facing a real threat of its gas supplies being cut off.

Russia’s Gazprom turned off its gas taps to Poland and Bulgaria earlier Wednesday over their refusal to meet Russian President Vladimir Putin’s demand for payment in rubles.

An immediate end to Russian gas imports would send Germany into a “sharp recession” next year, the country’s leading economic institutes said in a forecast published in mid-April.

“This has to be taken seriously,” Habeck said on Wednesday, stressing that Germany would continue to make its payments in euros or dollars in line with its European partners.

Converting payments into rubles is the responsibility of Gazprom, he said, acknowledging that there was some uncertainty around how Russia “will
interpret and apply” its recent decree on gas payments.

Habeck also said Germany had managed to start weaning itself off Russian coal and oil faster than expected in response to the war.

The share of crude oil imported from Russia has fallen from 35 percent before the conflict to around 12 percent, meaning a European embargo on Russian oil would be “manageable”, he said.

“This does not mean that an embargo would not significantly increase prices and that there would not be localised supply disruptions… but it would no longer lead to a national economic disaster,” Habeck said.

Berlin has also managed to reduce its gas imports from Russia to 35 percent, compared with 55 percent before the conflict, he said.

However, he said it was “not realistic” for Germany to completely ban Russian gas before next year, given the new infrastructure needed to diversify gas imports.

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