Germany Economy Update

21Apr07

One of the feared scenarios in the beginning of 2006 was the negative impact of VAT increase by nearly 2% points in 2007. Expectations pointed to a further dampened GDP growth below 1% throughout the first quarter. What turns out to be a far more minimal impact on the overall economy. Increasing tax revenues is helping Angela Merkel close the far reaching budget deficit further down below EU required standard of 3% of GDP levels.

Tax revenue of German state has increased 16.4%, 16.7% and 12.8% in Jan, Feb and Mar. This is a significant improvement for a large base. Increasing company profits due to strong export growth is contributing to this tax stream. Germany GDP forecast is stated to be pushed above 2% that has been estimated around 1.5% for 2007 (Global Insight). GDP outlook for 2008 and 2009 still remain at 2%. Main concern within the GDP elements is consumer consumption that has been week since the beginning of the millennium. As stated earlier, increasing exports is leading to an increase in hiring and a down-push on unemployment, which has fallen to 9%. This will lead to increased salaries and might convince the Germans spend more.

Inflationary expectations are in mid or high 1%s throughout 2008 and 2009. VAT increase contributed to 0.3-0.5% points of inflation increase. Currently, inflation has leveled around 1.6%. As in many other countries core inflation is impacted mainly due to rising commodity prices, especially oil.

So what do we need to monitor: Export is the most important growth driver of the German economy. Key influencer is Euro/USD exchange rate and the latter is bound to devalue further with ever increasing trade deficit in the US and an expectedly weakening US economy. Given that Asian countries, especially China, have pegged their currencies to USD, any sharp dampening of USD will put US and Asia trade lanes under stress. However, accounting for the bulk of Germany exports, intra-Europe together with the new EU member states is helping Germany to expand their exports.

We are seeing the outlook positive for the German economy and the horizon is full of opportunities for businesses focusing on exports.

Please check out the following link for statistical data:

Filed under: Economy   |  1 Comment