Not least due to the slowdown in the USA, the world economy will move into a slightly lower gear. The performance on the international financial markets will also not be quite as good as last year. Nonetheless, we expect the upswing forces to maintain the upper hand and the world economy to grow by 3.2 % this year after 3.8 % in 2006 (GDP-weighted). For the euro area we see solid growth of 2.5 % this year after 2.6 % last year.
Economic forecast 2007/2008
In Germany economic momentum picked up noticeably in 2006, with growth moving onto a significantly broader footing. The VAT increase prompted only a modest slowdown in the first quarter of 2007. Alongside exports, machinery and equipment investment will remain a driving force. Private consumption will pick up substantially in the course of the year, buoyed by the ongoing rise in employment.
The buildup in employment is continuing apace. Having risen by 0.7 % in 2006, we expect to see an increase of 1.2 % this year. The momentum the recovery on the labor market has now reached is exemplified by a look at the year-on-year figures: in March 2007 there were 875,000 more people in work than a year earlier. We expect the improvement on the labor market to continue over the rest of the year, albeit at a reduced pace. We expect unemployment to average just under 3.8 million this year, down from 4.5 million in 2006.
Machinery and equipment investment again moved up a gear in 2006. The real increase of 7.3 % was the strongest since the boom year 2000. This year we have penciled in an increase of 6.5 %, with next year’s expiry of tax-favorable write-offs on machinery and equipment triggering anticipatory effects. For 2008 we expect to see somewhat weaker growth in machinery and equipment investment of 6 %.
Price trends this year will be largely determined by three factors: the extent to which the VAT hike is passed on to consumers, the further trend in the oil price and the outcome of the forthcoming wage round. January saw the steepest tax-induced jump in inflation, with consumer prices up a seasonally-adjusted 0.5 % on the preceding month. The trend in oil prices early in the year helped offset the impact the VAT hike. In 2007 we expect the oil price to be down on a year earlier. On the other hand, wage settlements look set to be higher, with part of this likely to be passed on to the consumer. All told, we expect inflation to average 1.8 % this year, with a slight acceleration in inflation on the cards in the second half of the year.
In 2008 private consumption is likely to be the driving force behind the upswing, probably accounting for almost half of the increase in GDP. Next year private household disposable incomes are likely to see the strongest growth for years. We expect investment and export momentum to ease. By contrast, there is a good chance that inflation will slip to 1.6 % in 2008. On the labor market front, we expect around 3.5 million people to be out of work on average in 2008.
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