Germany Puts the Sluggish Years Behind It As Confidence Returns

Strong global demand for manufacturing exports has pushed business confidence in Germany to its highest level since reunification, it was announced today.

After years of sluggish growth, the latest survey from Munich-based Ifo Institute showed that the labour market in Europe's biggest economy was also improving and consumers were beginning to spend more in the shops.

Analysts said that part of the recovery in the retail sector might be due to consumers buying ahead of next month's increase in VAT, from 16% to 19% - a move designed to bring the country's budget deficit down to a level permitted under the rules of monetary union.

According to the Ifo's index, business confidence rose from 106.8 in November to 108.7 in December, beating market expectations of no change. The survey added, however, that Germany looked strong enough to shrug off any slowdown caused by weaker global growth, or from higher taxes, and that the European Central Bank was likely to respond to the upbeat message by raising rates in early 2007.

Peter Vanden Houte, an analyst at ING financial markets, said: "Private consumption has shown signs of life again - not only because of the effects linked to the VAT hike. An improving labour market will offer further support in 2007."

Ifo said the upward trend since autumn 2005 had continued. "Firms assessed their current situation more positively than in the previous month, and also their expectations for the coming six months are clearly more optimistic than in November. The German economy is experiencing a very strong economic boom."