General economic environment
Germany – exports and domestic demand drive upswing
Economic recovery in Germany progressed steadily during the course of 2006. The German Council of Economic Experts and the OECD are both forecasting (as of November 2006) that Germany’s gross domestic product will grow by 2.4 percent in real terms in 2006. In November 2005, this Council of Economic Experts was still forecasting a real increase in GDP in 2006 of only 1.0 percent.
This is the highest growth rate since 2000, and the second highest growth rate in the last 10 years. According to economic researchers, strong export growth continues to fuel this positive economic development. But for the first time, a substantial upswing in domestic demand is also contributing to it. Although domestic demand is driven primarily by higher investments in equipment and construction, private consumption is also playing a significant role. Energy prices, which remained high in 2006, continued to subdue growth. Experts believe that infl ation will be around 1.8 percent.
Labor market – situation eases
Because of significant increases in capacity utilization, companies once again need labor reinforcements. This will lead to a perceptible rise in the number of employed persons, particularly employees for whom social insurance contributions are mandatory. Economists estimate an average of 4.5 million registered unemployed in 2006. This is equivalent to an approximately 0.8 percentage point reduction of the unemployment rate to 10.9 percent.
Private consumption – positive trend
Private consumption is growing in response to the recovery on the labor market, albeit with a delay. However, in response to the 19-percent VAT increase effective as of January 1, 2007, private consumption should be stimulated by advance spending in the second half of 2006. Experts are therefore forecasting a real increase in private consumption of 0.9 percent in 2006.
Retail – mood improves
The mood among German retailers improved in 2006. This is the conclusion reached by a current economic survey carried out by the German retail association, HDE, in September 2006. In view of the improved overall economic situation, issues such as consumer sentiment, discount wars, and a loss of attractiveness in inner cities have slipped into the background. The focus has now switched to the VAT increase and deregulating store opening hours. The German retail associations, BAG and HDE, are unanimous in their forecasts for 2006 that retailers in the narrow sense (i.e. retail sales excluding motor vehicles, mineral oil, and pharmacists) will record nominal sales growth for the fi rst time in four years. BAG is forecasting nominal growth between 0.5 and 1.0 percent for 2006, while HDE is forecasting a 0.75 percent increase in revenues. In real terms, however, this translates as zero growth.
Europe – recovery on a wider foundation
Economic growth in the Eurozone in 2006 took a positive turn. The German Council of Economic Experts is forecasting overall economic growth of 2.7 percent for 2006. Although this is only slightly above the previous year, the upturn has a broader foundation. This is demonstrated by considerably narrower discrepancies between the growth rates of the individual member states. The particularly vigorous economic recovery in Germany has a stimulating effect on the other member states in the Eurozone. Experts believe that private consumption in the Eurozone will increase by 2.6 percent in 2006. This is primarily due to favorable developments on the European job market.
Economic growth was even more dynamic in the 10 southern and eastern European countries that joined the European Union on May 1, 2004. The Council of Economic Experts estimates economic growth in these countries at 5.5 percent for 2006. The economy in the Eurozone not only causes a strong increase in exports, but domestic demand has also increased as a result of a high level of capital expenditure. The easing up the job market leads experts to predict substantial increases in private consumption as well.