March 2002 - Nr. 3
Germany’s Brightening Economic Picture:
Ifo Index Up, Inflation Down
TWIG - Two key indicators of German economic health released this week offer encouragement. The closely watched Ifo index, which measures German business sentiment, rose at a much sharper rate than expected in February, buoying optimism that Europe’s largest economy is on the verge of an upturn. On Tuesday (February 26), Ifo, a Munich-based economic research institute, announced that its index for western Germany had climbed from 86.2 to 88.7 points, the highest level since the September 11, 2001 terrorist attacks. Ifo’s chief economist Gernot Nerb expressed confidence that the German economy is "close to a turning point." He added that there were growing indications the positive trend would continue, though he cautioned that the latest data had not yet provided any indication of the pace that recovery would assume.
While the business climate showed a particularly marked improvement within the manufacturing sector and among wholesalers, sentiment in the construction sector remains perennially weak. The mood among retailers actually worsened. Overall, the 7,000 companies surveyed by Ifo for the report indicated their sentiment about current business flagged in February, slipping to 76.8 from 78.0 in January. However, the future looks considerably brighter: The expectations component of the index for western Germany, which measures companies’ views of business six months out, leapt from 94.8 in January to 101.0 in February, reaching its highest reading since December 2000. In eastern Germany, too, there were indications of a rosier outlook, as the index climbed to 100.4 from 98.3 month on month.
The consumer price index, a measure of inflation, has slipped back below the significant 2% mark, to 1.7%, according to figures released Tuesday by the Federal Statistical Office. The decrease is due to lower prices for gasoline, heating oil and natural gas in February, the Statistical Office said. Based on the result of studies conducted in six federal states, inflation for all households in Germany is expected to have risen just 1.7% year on year in February. In January, inflation was up 2.1% year on year.
Before any of these figures were published, Finance Minister Hans Eichel signalled the government’s growing optimism that in the course of the year economic growth could be significantly stronger than the 0.75% anticipated in the 2002 federal economic report. He noted that underlying fiscal data were better than four years ago and that the ruling coalition’s consolidation of the national budget has advanced considerably, citing some 15 billion euros (US$13 billion) in savings that had arisen from tax reforms.
Eichel reiterated his commitment to fiscal austerity and stressed that while the federal government had maintained its consolidation policy and systemically reduced its debts, the federal states had tripled their deficits in the last year. He again called for a national stability pact to achieve a "virtually balanced budget" in 2004 and announced that the federal government would undertake additional reforms in the areas of health and social policy for further savings. Ernst Welteke, president of the Deutsche Bundesbank (German federal reserve bank) praised Eichel’s proposals, calling them "very ambitious, but not illusory."
