Tax rise hits German business mood
BERLIN, Germany (Reuters) -- German business sentiment fell in February as a sales tax hike hit retailers and optimism in the construction sector dipped, but economists said Europe's largest economy remained on track for robust growth.
The Munich-based Ifo research institute said on Friday its business climate index, based on a monthly poll of 7,000 firms, fell to 107.0 from 107.9 in January. A Reuters poll of 54 economists had forecast a 107.5 reading.
Ifo economist Klaus Abberger told Reuters the economy was feeling the impact of the three percentage point rise in value-added tax (VAT) that took effect last month, but the business environment could improve soon.
"The dry spell should be over in the spring," he said.
Ifo's business expectations index fell to 102.6 from 103.2 in January. A current conditions index fell to 111.6 from 112.8.
The German economy ended 2006 well, with growth accelerating to 0.9 percent in the fourth quarter as exports surged.
Economists expected the economy to rebound after suffering early this year from the impact of the VAT increase, though growth is not seen matching last year's 2.7 percent, the strongest annual expansion since 2000.
"Germany is not facing any dramatic cooling of growth," said Juergen Michels at Citigroup. "The data show that the economy will rebound during the course of the year from a weakening after the value-added tax increase."
The euro shrugged off the fall in the Ifo index.
Although most recent corporate results have surprised on the upside, some firms have suffered setbacks.
Earnings at retailer Puma fell sharply in the fourth quarter despite a jump in sales, after costs surged due to higher spending on marketing and introducing new products.
Capital Economics said the Ifo fall was disappointing, although both index components remain at levels consistent with strong near-term German GDP growth.
The German Economy rose so much last year that the Government increased it's tax by 3%, enough so that the average German felt the effect. Buisness had to raise their prices just to keep up profits, which affected Sales slightly. This sounds like bad news and the German economy might begin its downward spiral, however depsite this tax the German Economy continues to grow at an enormus rate. It is interesting to see how the German economy continues to grow while so many other countries with high taxes crumble at the seams. What's their secret?
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3 comments:
It would be interesting to compare the standard of living there to other countries who are more responsive to taxes. If Germany continues to raise taxes it will eventually affect sales, but as of right now it would seem to me that consumers have the extra money to spend on taxes. Eventually though, the consumers will not be able to afford the taxes which is when we should see the decrease in sales.
I agree with Ashley, it would be very interesting to see what everyday market factors are positively affected in Germany with taxes, in comparison to other countries. Still, with what we've learned in class, the tax may decrease the quantity traded in the market while the total surplus will decrease also (which could also result in dead weight loss).
Ever since E & W Germany rejoined in the late 80's/early 90's, Germany has just been a powerhouse of production. They are probably the strongest economy in Europe. There was some fear that the already very strong W Germany was going to "take over" E Germany (or at the very least, suffer because of the poor infrastructure in E Germany), but that just hasn't really happened.
So - if a 3% tax hasn't really affected them...would a 5% tax? :) There's some elasticity, taxes, and externalities for you.
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