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VAT fears will not stall German growth

Strong business confidence, healthy demand for German products and an increasing share of income going to capital belie fears that Germany’s growth rate is under threat.

As we start 2007, value added tax rates in Germany have been increased by three percentage points to 19%. This compares with a single percentage point on the five previous occasions when the VAT rate was increased since the 1970s. The majority view, particularly in Germany, is that this could well hit the pace of the country’s economic growth, taking it down to below 1.5%.

I beg to differ. I reckon real GDP growth could accelerate to 3% this year. The key to my view lies in the corporate sector. For a start, German business executives are not as pessimistic as the economists. The official business sentiment index is at its highest level since German unification. And at no other time has it been higher immediately before a VAT increase.

German business leaders have good reason to be optimistic. External and domestic demand remains buoyant. Foreign manufacturing order volumes have sustained expansion at a double-digit pace and domestic orders are accelerating.

Capital’s share gets bigger
% of Germany’s national income, going to capital and workers
Source: Datastream

Moreover, a slowing US economy this year will matter little to German exporters, as the US accounts for less than 10% of total exports.

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