German Economy Robust Enough To Overcome Effects Of VAT Hike

On Jan. 1 the VAT tax increases to 19%.

The German economy, the biggest in the 12-country eurozone, is "currently in a robust upturn" and will quickly overcome potential negative effects from the imminent rise in value-added or sales tax (VAT), the government said on Dec. 15.

Gross domestic product (GDP) had expanded by 0.6% in seasonally, price and calendar-adjusted terms in the third quarter of this year, "the seventh consecutive quarter of growth," the ministry said.

"The fundamental economic momentum is now so strong that the economy will be able to overcome relative quickly the fiscally-induced dampening of domestic demand at the turn of the year," it said.

The government is raising VAT by three full percentage points to 19% with effect from January 1, the biggest-ever single VAT increase. The move has been criticized by many experts and economic observers as potentially detrimental to consumer spending, which has only recently shown signs of recovery after long years in the doldrums.

But a range of institutions and think tanks, including most recently the International Monetary Fund, have raised their forecasts for German growth this year and next year and predicted that the dampening effects of the VAT hike will prove only temporary.

Copyright Agence France-Presse, 2006

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