Economic Upswing
October 20, 2006
The German government has upgraded its forecasts for economic growth for both 2006 and 2007, predicting that the current upturn in the euro zone's biggest economy would remain robust and an anticipated slowdown next year would likely prove only temporary.
The Finance Ministry said in a statement Friday it was joining the country's six leading economic institutes in forecasting gross domestic product (GDP) growth of 2.3 percent this year and 1.4 percent next year.
Previously, Berlin had been penciling in growth of 1.6 percent and 1.0 percent respectively.
"As the six institutes said in their latest prognosis, the government believes that the current economic upturn will continue at a dynamic pace this year. And, on this basis, any consolidation measures that might lead to a temporary slowdown next year are easily manageable," the ministry said.
Finance Minister Michael Glos found that Germany, Europe's economic powerhouse, "is currently in a strong upturn," adding that the most pleasing about it is that the recovery is making itself felt on the labor market and that it isn't any threat to price stability."
External growth
Growth this year would continue to be driven by external, global economic factors.
"But domestic impulses are also increasing," the ministry said. Following the weak consumption of previous years, private consumption is once again contributing to growth, which means the upturn is gaining in depth and breadth and resting increasingly on the two pillars of domestic demand and of exports.
In 2005, the German economy expanded by just 0.9 percent. But at an anticipated 2.3 percent this year, growth would be at its highest rate since 2000 when GDP grew by 3.1 percent.
Temporary
However, growth was likely to slow next year, as the one-off factors that boosted activity this year would not be repeated, the ministry continued.
"Despite the increase in sales tax, the slower growth rate is likely to prove only temporary."
Many experts believe that the government's plans to raise value-added tax (VAT) by three percentage points to 19 percent will put the brakes on private consumption.
The ongoing recovery would have a positive effect on the labor markets, the ministry continued.
"The worst is behind us on the labor market," said minister Glos.
Shrinking unemployment
The government was forecasting a decline in the annual average number of job-seekers in Germany this year to 4.54 million.
The trend was expected to continue next year, bringing the jobless total down to 4.34 million.
At the same time, the German economy was expected to create around 230,000 new jobs in 2006 and a further 220,000 in 2007, Berlin forecast.
The outlook for inflation also remained positive, with consumer prices in Germany expected to rise by 1.5 percent in 2006 and 1.8 percent in 2007, faster than the 1.3 percent recorded in 2005.
That is below the European Central Bank's ceiling of 2.0 percent.
In that context, any further interest rate hikes by the ECB "are not particularly urgent from a German point of view," Glos said.
The ECB has increased borrowing costs five times since December 2005, each time by a quarter of a percentage point. The bank's benchmark "refi" refinancing rate currently stands at 3.25 percent and is expected to rise again to 3.50 percent in December.