European Central Bank President Jean-Claude Trichet said this month the bank may raise interest rates in July to curb the fastest euro-region inflation in 16 years. The risk is that higher borrowing costs will exacerbate the economic slowdown. Germany's benchmark DAX stock index has dropped 15 percent so far this year.
Record oil and food prices are reducing purchasing power just as a stronger euro begins to weigh on exports. Oil prices have doubled in the past year, reaching a record $139.89 a barrel yesterday. That helped drive inflation in Europe to 3.7 percent last month, and German inflation to an annual 3.1%. The ECB aims to keep the rate just below 2 percent.
``The economic upswing will clearly lose steam,'' Germany's DIHK chamber of commerce and industry said yesterday, citing a survey of more than 20,000 companies. Economic growth will more than halve to 1 percent in 2009 from 2.3 percent this year and 2.5 percent in 2007, as inflation restrains consumer spending and the euro's gains crimp demand for exports, DIHK said.
The German economy is facing a ``distinct slowdown'' next year as the stronger euro hurts exports and surging inflation damps consumer spending, government adviser Beatrice Weder di Mauro said earlier this week.
Germany's gross domestic product may expand "about 2 percent'' this year even as rising oil and food prices have driven consumer inflation to ``alarmingly high'' levels, Di Mauro, a member of Chancellor Angela Merkel's panel of economic advisers, said in an interview in Berlin.
``In any case, I would expect a distinct slowdown next year'' compared with 2008, Di Mauro said. The five-member panel has not yet given a forecast for economic growth in 2009.