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Tue, Jul 21, 2009 - Page 10 News List

German producer prices take biggest plunge since 1968


German producer prices, the cost of goods at the factory gate, plunged by 4.6 percent last month from the same month a year earlier, the sharpest decline since December 1968, the national statistics office said yesterday.

In May, producer prices in the biggest European economy had fallen by 3.6 percent, the Destatis office said.

On a monthly basis, they decreased by 0.1 percent last month, after having remained unchanged one month earlier.

Analysts polled by Dow Jones Newswires had expected prices to shed 4.3 percent on the year and gain 0.4 percent from May.

The figures were in part driven by a decline in energy prices which spiked higher a year ago, and when they were stripped out of the calculation, producer prices fell by a more modest 2.8 percent on the year, Destatis said.

The cost of energy was 8.4 percent lower last month than in the same month a year earlier, and 0.3 percent lower than in May.

Mineral oil products cost 24.9 percent less on a 12-month basis, while electricity prices decreased by 5.7 percent and natural gas was 3.5 percent cheaper.

The data fuels concern over deflation within the 16-nation eurozone, where consumer prices fell for the first time on record last month.

Most economists expected inflation to dip briefly into negative territory but have ruled out a longer Japanese-like bout of deflation, a pernicious downward spiral in prices.

While the prospect of falling prices may delight consumers, deflation, or a run of falling prices, can wreak havoc on the broader economy as households and businesses curb purchases in hope of getting a better bargain in the future.

This can cause a downwards spiral of prices, production, unemployment and further deflation.

Germany is in the midst of its worst recession since 1945, with the steepest decline in output probably occurring in the first three months of this year, when activity contracted by 3.8 percent from the previous quarter.

Meanwhile, Germany may force banks to take state aid to ward off a credit crunch later this year, the Suddeutsche Zeitung newspaper said yesterday.

In exchange, the state may take stakes in the banks, it added.

Until now, German Chancellor Angela Merkel and Finance Minister Peer Steinbrueck have refused to force state aid on banks as was done in the US and Britain.

But credit conditions for businesses and households have continued to deteriorate and tougher measures might be needed to ensure companies can obtain the loans they need to help Germany pull out of its recession, the report said.

The biggest European economy is expected to contract by six percent this year, marking its deepest recession since World War II.

To date, the government has recapitalized just two banks, property lending specialist Hypo Real Estate and the second biggest German bank, Commerzbank.

German banks are heavily exposed to losses stemming from the international financial crisis and the collapse of the US market for high-risk, or subprime, mortgages.

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