Subdued Germany likely to cut rates

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The Independent Online
The Bundesbank is expected to cut its key money market interest rate, perhaps as early as Thursday, after new figures showing inflation and growth in Germany remain subdued.

Prices charged at the factory gate fell by 0.2 per cent last month, while their year-on-year rate of decline picked up to 0.8 per cent. Cost of living figures due later this week are expected to show inflation running at just over 1 per cent.

The Economics Ministry said yesterday that Europe's biggest economy expanded by more in the second quarter of this year than it shrank in the first quarter. But a bounce in construction, laid low by bad weather in the first three months of the year, explained most of the apparent recovery.

The statement warned that the economy would not grow fast enough to reduce unemployment from its near-record level. "The pace of recovery in the foreseeable short term is still too low to stimulate demand for labour." However, it insisted that the economic climate was improving, with an increase in planned investment.

Many economists are much more sceptical about the chances of a solid improvement in the second half of this year. Holger Fahrinkrug, at investment bank UBS in Frankfurt, said: "There is absolutely no evidence of the sustainability of the recovery."

Unexpectedly weak business confidence in June, reported last week by the IFO research institute, dented analysts' optimism about the economy's prospects. IFO's retail survey, released yesterday, predicted that retailers would slash investment due to stagnating sales. Arno Stadtler, the report's author, said: "There has never been such a long downturn in retailing."

The weak survey results have called into question whether stronger export orders are feeding through to the domestic economy. "There have been signs of a more meaningful recovery in export orders, but the rise in the mark has probably hit that on the head," said Julian Jessop, an economist at Nikko Securities. The mark has climbed by just over 1 per cent in trade- weighted terms since the end of May.

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