Economic Recovery

The Kiel Institute for the World Economy (IfW) has increased its predictions for the growth of Germany's Gross Domestic Product in 2007 from 1.0 to 2.1 percent. In its Business Cycle Forecast released on Tuesday, IfW said there were "good chances of a long lasting upswing and significant reduction in unemployment."

IfW expects a considerable expansion of aggregate production triggered by a rise in net exports. The forecast points to increased employment as an indicator of business confidence in Europe's biggest economy.

"Obviously, firms expected a continuous rise in aggregate demand, otherwise they would not invest in capital goods and personnel," the survey found.

Business confidence up

The ZEW index compiled by the Mannheim-based Centre for European Economic Research climbed 9.5 points to minus 19 after a 1.1 point drop in November and a bigger 5.2 point decline in October.

The investor index, which surveys more than 300 financial experts about their confidence in Germany's economy six months down the track, rose to its highest level this year, but was still well below its historical average of 33.7.

After 10 months of consecutive declines, "expectations have passed through the trough and are now on the rise, thanks to robust economic perspectives," ZEW President Wolfgang Franz said in a statement released on Tuesday.

Outlook rosy

The ZEW index corresponds with the newest business confidence survey conducted by the German Economy Institute in Cologne, which found that economic expectations for 2007 were at the highest levels since the study began in 2002.

Michael Grömling, the head of the Macroeconomic Unit at the Cologne institute, said the bounce in German business confidence was across the board in areas of production, exports, investment, earnings and job creation.

"The healthy global economy is driving the recovery in Germany," Grömling said. "As a result, German firms are quite optimistic about their global position and they are widening their capacities."

The study found that business confidence for 2007 was slightly lower in the east of Germany where 40 percent of those surveyed were optimistic compared to 58 percent in the west.

Across the country, the building sector showed the most significant rise in confidence, with 63 percent expecting better conditions in 2007.

The improved economic optimism comes despite the three-percent increase in Germany's value-added tax from 16 to 19 percent to be introduced on Jan. 1.

According to Grömling, the postive outlook for 2007 has more to with Germany's strong exports sector rather than domestic reforms.

"The recent tax reform has brought some benefits, but only small progress has been made on other government reforms such as the overhaul of the labor system."