Tax hike shakes German economic confidence

25th January 2007, Comments 0 comments

25 January 2007, Berlin (dpa) - The deeply unpopular tax rise introduced by German Chancellor Angela Merkel's government this month has shaken economic confidence in Europe's biggest economy, key surveys released Thursday. While business confidence posted a surprise fall in January, a forward-looking consumer climate indicator plunged after the hefty 3.0-percentage-point increase in the country's value-added tax came into force at the start of the year. "The shock of the VAT increase and subsequent sudden

25 January 2007

Berlin (dpa) - The deeply unpopular tax rise introduced by German Chancellor Angela Merkel's government this month has shaken economic confidence in Europe's biggest economy, key surveys released Thursday.

While business confidence posted a surprise fall in January, a forward-looking consumer climate indicator plunged after the hefty 3.0-percentage-point increase in the country's value-added tax came into force at the start of the year.

"The shock of the VAT increase and subsequent sudden halt of purchases brought forward to beat the tax have drastically curbed the propensity to buy," the GfK market research institute said while releasing its latest consumer confidence survey.

The Nuremberg-based GfK said its forward-looking consumer confidence index is set to drop to 4.8 points in February from 8.5 points in January. The institute also revised down the January reading.

The drop in the February index was more than what analysts had forecast. It had been predicted that the survey would edge down to about 8.4 points next month.

At the same time, the Munich-based ifo institute said that its German business confidence index unexpectedly fell in January from recent record highs, as concerns have grown about the impact of the VAT increase on growth in the nation's economy.

Based on a survey of 7,000 executives, the ifo institute said its business climate index slipped to 107.9 points in January from 108.7 in December. Economists had expected the index, which is one of Europe's key economic indicators, to edge up to 109.0.

Analysts have expressed concerned that the VAT increase would result in a setback to growth in Germany, which emerged from a protracted period of stagnation last year.

In particular, analysts have been worried that private consumption in Germany could slump just as a slowing global economy and possible stronger euro hit the nation's key export machine.

Added to this, the German economy is expected to face stiff head winds this year following the European Central Bank's six interest rate hikes in about 12 months and Berlin's plans to keep the nation's deficit in check by screwing down on public spending.

Indeed, the VAT increase from 16 per cent to 19 per was part of part of Merkel-led government efforts at ensuring the German deficit remained within the strict 3.0 budget deficit target for euro member states.

With this in mind, economists expect German economic growth to slip back a gear in 2007 from last year's solid 2.6 per cent expansion rate.

A copy of a draft official report to be released next Wednesday, which is in the hands of the dpa, shows the German government expecting growth to drop back to 1.7 per cent this year.

Releasing its latest survey, the GfK institute went on to say households were significantly less optimistic about spending money following the sharp 3-percentage-point increase in Germany's value-added tax.

Based on a survey about 2,000 people in Germany, the GfK's index measuring consumers' willingness to spend plunged by 65 points from a month earlier to minus 5.1 points in January.

"It is still too early to gauge the impact of the VAT hike on the economy," wrote Morgan Stanley economists Elga Bartsch and Thomas Gade in a note to clients.

"But," they said, "with the (ifo index) correction this month, we reiterate our forecast of a 0.1 per cent growth contraction in the first quarter."

Nevertheless, both the Gfk and the ifo expect the impact of the VAT hike on Germany economic performance to be relatively short lived.

This is despite reports that many German retailers have so far refrained from passing on the VAT increase to consumers.

"The assumption that the sharp decline in propensity to buy is simply a temporary blip is supported by the fact that it does not seem to have had any negative effect on income expectations," the GfK said in its report, noting that consumer sentiment regarding income expectations is less pessimistic than a month ago.

In the meantime, while the ifo survey showed German business leaders' assessment of current economic conditions falling this month to 112.8 from 115.3 in December, the index component measuring business expectations for six months down the track climbed to 103.2 from 102.5.

The slump in current business conditions was probably in part the result of the VAT increase, said ifo president Hans-Werner Sinn.

"With regard to the outlook for the coming six months, however, the firms are somewhat more confident," Sinn said with business expectations having risen for the fourth time in a row and a pickup in sentiment in Germany's retailing sector underpinning business sentiment.

"This indicates that after a brief pause the cyclical recovery will continue in the coming months," the ifo chief said.

DPA

Subject: German news

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