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Last Updated: Thursday, 11 January 2007, 11:24 GMT
German growth hits six-year high
Workers at German Volkswagen factory
Export demand helped spur strong German growth
The German economy grew at its fastest pace in six years during 2006, Federal Statistics Office figures have shown.

Gross domestic product (GDP) rose by 2.5% last year driven by demand at home and abroad, and up from 0.9% in 2005.

Better economic and export conditions have boosted business confidence, cut unemployment to four-year lows and trimmed the problem budget deficit.

But, analysts have warned the recovery is a two-speed one, with firms faring well, while some households struggle.

Lagging behind

The problem facing many Germans is that even though demand for exports has helped to drive production and corporate profits, wage growth has been limited. As a result, consumer spending has failed to pick up as quickly.

"We know that households did not fare very well," said Lehman Brothers analyst Sandra Petcov.

"Household income was up 1.7% year on year," she added. "If you consider that the inflation rate in Germany was still fairly strong last year, at about 1.8%, that's still stagnation in real income in Germany."

The main driver of economic growth has been corporate investment and a recovery in the construction industry, Ms Petcov explained.

Recent figures showed that German industrial production rose by 1.8% in November, the fastest rate in seven months and led by construction, cars and goods like office equipment.

At the same time, the country's trade surplus rose to a new record 18.5bn euros (12bn) in November, its highest since 1990. Exports were worth 85.2bn euros, up 19.2% on a year earlier.

The German recovery has also enabled the government to cut its public deficit back to 46.5bn euros, or about 2% of total GDP. That is in line with European rules, which ban countries from running up deficits of more than 3% of GDP.

Germany breached this part of the European Stability and Growth Pact every year between 2002 and 2005.

Caution

But despite signs of an improvement in Germany's fortunes, experts maintained a cautious outlook amid concerns that an increase in German sales taxes and a global economic slowdown may hamper expansion.

The government's decision to raise value added taxes to 19% from 16%, may eat into consumer finances and spark a slowdown in spending, analysts said.

Last month, research group GfK warned that the impact of the new taxes was worrying shoppers, sending its consumer confidence index lower.

Official figures showed that retail sales slipped in November as shoppers tightened the purse strings ahead of the new duties.


SEE ALSO
German business confidence soars
19 Dec 06 |  Business
German trade surplus hits record
08 Dec 06 |  Business
German jobless at four-year low
30 Nov 06 |  Business
Germans still upbeat on economy
23 Nov 06 |  Business

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