German chemical employers group warns of inflation risk

03 September 2009 15:11  [Source: ICIS news]

TORONTO (ICIS news)--The real threat to Germany’s economy may be inflation and not deflation, Germany’s chemicals employers group, BAVC, said on Thursday.

As the economy rebounds, the European Central Bank (ECB) would be challenged to withdraw the liquidity it injected into the market in past months without strangling the recovery, the Wiesbaden-based group said.

Its comments came as the ECB decided earlier on Thursday to maintain interest rates at a record low of 1%.

BAVC, for its part, sees only a small deflationary risk for Europe's largest economy, even though German consumer prices fell 0.5% in July, compared with July 2008, marking the first such decline in 22 years, it said.

Once energy and food prices were excluded, consumer prices were up 1.4% this year, it said.

So far, the decline in prices - primarily due to the drop in oil prices from last July’s peak of over $140/bbl - had strengthened German consumer purchasing power and confidence, BAVC said.

Each percentage point decline in inflation translated into additional consumer purchasing power of some €15bn ($21bn), it added.

Germany’s chemical production rose 2.5% in the second quarter from the first after nine months of declines, and sales rose 1.3% to €34.3bn, Germany’s chemical producer association, VCI, said this week.

But while the worst was over for the chemicals industry, VCI maintained its earlier forecast of a 10% decline in chemical production and a 12% decline in the sales for the full year.

Forecasters expect Germany's economy to grow 0.8% in the third quarter from the second quarter, while the full-year decline for 2009 could be less than 5%, below earlier forecasts of a drop of more than 6% this year.

($1 = €0.70)

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