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Wicked French invention hits Germany

Fri, Nov 24 2006, 16:59 GMT
by Carsten Valgreen

Danske Bank A/S

On January 1, 2007, the general VAT rate in Germany will be raised from 16% to 19%. Value added tax - a less charming French invention - is often referred to as the finance minister’s favourite tax, since few taxes generate so large revenue for the state coffers while meeting with so little political opposition. What is more, VAT rate hikes tend to prompt a boom in the economy before they are implemented - which is, not least, interesting in a political context. During the months up to a VAT rate hike, consumers usually rush to buy as many goods as possible before prices in-crease.

That’s how the situation is in Germany right now. We are witnessing one of the strongest economic booms since unification. But there is a downside. Customers will be few and far between in the German shops in the first half of 2007.

On balance, German VAT rate hikes have not changed the underlying trend of the economy in the past (see Research Germany: VAT rollercoaster - but recovery intact). Also, as we wrote on the cover of last week’s issue of Weekly Focus, German economic trends are looking really good fundamentally. But that may be a little difficult to see as orders decrease and confidence plummets in the spring of 2007. The downturn in sentiment will coincide with a slowdown in the European industrial cycle triggered by weakening industrial trends on a global scale. Hence, while European - and especially German - data are looking strong relative to the rest of the world right now, the data may well soften in spring 2007. We expect this to put the European Central Bank on hold after it has hiked rates in December and March.

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Published on  Fri, Nov 24 2006, 17:05 GMT