Ifo Economic Forecast 2007: Economic buoyancy forces remain strong

On 14 December 2006 the Ifo Institute presented its economic forecast for 2007 and 2008 at its year-end press conference. As 2006 comes to an end, the German economy is experiencing a strong economic expansion that began at the beginning of 2005. The driving force of the boom continues to be foreign demand, which has expanded robustly as a result of the buoyant world economy, despite this year's strong revaluation of the euro vis-à-vis the US dollar. Export growth in 2006 is likely to be around 10.5%, the largest increase since 2000. But unlike 2005, domestic economic activity is now also buoyant. Investments in buildings and equipment have expanded robustly in the current year. Private consumption, which at a share of 59% of nominal GDP is the most important component on the expenditure side, expanded for this first time since 2001. All in all, total economic output in 2006 will grow by 2.5%, after 0.9% in the previous year. However, this year there were fewer working days than last year. Adjusting for this calendar variation, growth in GDP will amount to 2.7% this year. A turnaround on the labour market has also occurred. The number of the seasonal- and calendar-adjusted hours worked increased strongly in the second and third quarters of 2006. In the wake of increasing capacity utilisation, about 350,000 additional jobs (seasonally adjusted) have been created since the beginning of the year. In the coming year, economic activity will be considerably dampened initially by the massive increase in taxes and fiscal charges, but a continuation of the upswing will then follow. Growth in investments in plant and equipment and in commercial construction will remain quite robust in 2007. All in all, real GDP will expand by 1.9% in 2007, or, after calendar adjustments, by 2.0%. The situation on the labour market will continue to improve.