German VAT hike sends retail sales plunging 02/03/2007 00:00

Berlin (dpa) - Germany's deeply unpopular value-added tax increase has cut deep into consumer spending in the country, data released Friday showed, with retail sales plunging more than expected in January following the hefty VAT hike at the start of the year.

Drawn up by the nation's statistics office, the figures show retail sales in Europe's biggest economy sinking by 5.1 per cent month-on-month in January in the wake of Chancellor Angela Merkel's government's three-percentage point rise in VAT.

Analysts had forecast a less dramatic 1.5-per-cent fall in retail sales.

"Retail sales were way below expectations, and more than reversed the advanced purchases ahead of the three-point VAT hike," said Elga Bartsch, senior economist with the US investment house Morgan Stanley.

The release of the latest retail sales figures also followed data published Thursday by the nation's auto industry association showing German car sales dropping by a staggering 15 per cent in February as the VAT tax rise hit Europe's biggest car market.

Last month's drop in auto sales followed an 11-per-cent fall in January after the German VAT rate was increased from 16 per cent to 19 per cent at the start of the year.

However, new car registrations rose strongly in the run-up to January 1 rise in the VAT as car buyers piled into showrooms across the country to avoid the tax hike, which was the biggest in Germany's post-Second World War history.

A similar picture emerged in retailing with retail sales rocketing up 2.6 per cent month-on-month in December as consumers rushed into shops to beat the VAT rise.

Sluggish consumer spending in recent years on the back of low wage growth, soaring energy prices and high German unemployment has been a major factor in the protracted economic stagnation in the country which came to an end last year with strong exports helping to drive the nation's growth rate to a sturdy 2.7 per cent in 2006.

But economists are expecting the VAT hike to contribute to a slowdown in Germany's economic growth this year with key economic sentiment surveys released in recent weeks underscoring the downbeat mood among German consumers.

While a forward-looking consumer confidence survey released Monday fell for the fourth consecutive month, the grim mood among German retailers helped to drive down a major business confidence survey.

Although analysts are not expecting retail sales to rebound in February, they believe the recent pickup in Germany's labour market and the prospects of higher pay settlements this year should help to underpin consumer spending in the months ahead.

"Taking a longer term view, it is worth highlighting that strong employment growth and likely rising real wages are more fundamental factors, which should support consumer spending in the medium term," said Bartsch.

DPA

Subject: German news