ANALYSIS: Economists expect only limited fallout from VAT rise
Berlin (dpa) - German economists expressed confidence Thursday that Berlin's controversial January hike in value-added tax would have only a limited impact on the solid growth rate that has emerged in Europe's biggest economy this year.
Adding to the optimism about the outlook for the country's economy, Thursday's release of a raft of upbeat economic reports coincided with Germany's premier stock market in Frankfurt climbing to its highest level in almost six years.
"The current climate is fantastic," said Hans-Werner Sinn, the president of the leading Munich-based ifo economic institute, releasing its latest report on the Germany economy.
"We are extraordinarily optimistic," he said, with the ifo joining other German economic think tanks in revising up its economic forecasts as the nation's unemployment level continues to fall from the record high it has hit in recent years.
Powered by Germany's economic upturn this year and a solid round of corporate earnings reports, the Frankfurt stock exchange key index, the DAX edged up 0.2 per cent to 6552 points, its highest level since February 2001.
Faced with the decision by Chancellor Angela Merkel-led government's plans to hike the nation's value-added tax by a hefty three percentage point, signs that growth in the US could be slowing and a round of interest rate hikes, economists had projected growth to slump in Germany in 2007.
But as the year draws to a close a growing number of economists believe that the economic momentum Germany has built up this year will help to propel it into the new and as a result minimise any fall-out from the German VAT rise and the cooling down of the US economy.
The result has been economists raising their forecasts for the coming year with growth climbing again in 2008.
Growth in Germany is expected to climb to up to 2.7 per cent this year with business confidence in the country having zoomed back to a 15-year high and the mood among consumers having risen to a five-year high.
"The basic economic tendency should remain intact, even if the VAT tax rise on January 1 will clearly have a dampening effect", said Axel Weber president of Germany's central bank, the Bundesbank, this week.
Instead of a previous forecast of 1.7 per cent, the ifo expects the German economy to grow by 1.9 per cent in 2007 with the increase in the VAT to 19 per cent having only a minor impact on growth for the year as nation's expansion rate picks up speed again as the new year unfolds.
The ifo is predicting a 2.3 per cent growth rate in 2008.
Likewise, the Essen-based Rheinisch Westfällische Institut für Wirtschaftsforschung (RWI) said it also now expects growth to come in at 1.9 per cent next year instead of a previous forecast of 1.7 per cent.
The RWI also sees a continuing fall in unemployment as helping to offset any negative impact from the VAT rise in consumer spending.
German unemployment fell more than expected in November, Federal Labour Office data shows, with the jobless rate edging down to 10.2 per cent amid signs of skilled job shortages emerging in Europe's biggest economy.
The release of the institutes' reports followed the move earlier this week by the Kiel-based Institute for the World Economy (IfW) to double its forecast for the coming year from 1.0 to 2.1 per cent.
At the same time, the Federation of German Banks also raised its 2007 forecast Thursday from about 1.0 per cent to between 1.25 per cent and 1.5 per cent saying it expects the VAT rise to have less of an impact than previously thought.
But the economists remain critical about the failure of Merkel's ruling grand coalition to use the current economic upturn to press on with long-overdue economic reform. "At the moment I cannot see too much eagerness for reform," said Sinn. // © 2006 DPA
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