The Bundesbank today upgraded its forecast for German economic growth this year and said the euro zone's biggest economy was sufficiently robust to stomach any negative effects from the upcoming rise in value-added tax (VAT).
'An increase in real gross domestic product (GDP) of 2.5% is quite a realistic prospect,' the German central bank wrote in its annual financial stability review. Previously, the Bundesbank had been pencilling in GDP growth of 'at least 2%' for this year.
'The cyclical upturn in the German economy has gained considerably in momentum and depth since the autumn of 2005,' the Bundesbank continued.
'Fixed investment now forms the second pillar of the cyclical upturn alongside exports, which set the recovery process in motion,' the report said. It added that overall, economic growth is likely to be robust this year.
Furthermore, the conditions were in place for a continuation of the recovery process, the bank said.
The government's plans to raise VAT by three full percentage points to 19% with effect from January 1 would admittedly put the brakes on private consumption and therefore dampen growth somewhat, the Bundesbank said.
'The upturn may therefore be expected to slow down for a time in 2007. Even so, the German economy is now on a sound enough footing to cope with the contractionary fiscal impulse per se,' it concluded.
