Tax Tightens Spending
May 15, 2007
Consumers in Europe's largest economy are moving less money across German shop counters since the government upped the sales or value-added tax (VAT) from 16 percent to 19 percent at the beginning of the year.
Official figures released on Tuesday showed that Germany's gross domestic product (GDP) rose by 0.5 percent in the period from January to March compared to the fourth quarter of 2006. The increase was down from 1 percent growth in the preceding three months.
"Consumer spending put the brakes on economic growth, largely in connection with the VAT hike at the beginning of the year," the Federal Statistics Office said in a statement. The GDP measures the value of a country's economic performance within the domestic territory.
However, Economics Minister Michael Glos said the higher VAT had been absorbed. Fresh investments at the beginning of the year had brought significant impulses to the country, he said. According to Glos, Germany was on track for further growth.
"The economic situation in Germany is on a robust growth path," Glos said on Tuesday.
Government optimistic growth will continue
The economic slowdown in Germany was not as sharp as feared, though. Forecasts by analysts had put GDP growth at 0.3 percent in the first quarter of 2007.
According to Glos, the year's good start supported the government's outlook of 2.3 percent growth for the German economy in 2007. He said he expected private consumption to return to normal in the course of the year.
The 3 percent VAT hike marked the biggest-ever single rise in sales tax in a move criticized by many experts as being detrimental to growth.
Strong investments boosting growth
Germany's current economic upturn remained intact, with growth driven both by strong investment and exports, according to official statistics.
On a 12-month basis, GDP grew by 3.3 percent in the January-March period compared with the same period in 2006.
"Growth in the first quarter was powered by a continuation in strong investment activity," the statistics office said, adding that growth impulses also came from net foreign trade, while household spending slowed growth down noticeably.