Ifo Economic Forecast 2006/2007: The upswing continues

The world economy is experiencing a robust upswing. The world economic climate, as monitored by the Ifo Institute, improved in the spring 2006 for the third time in succession and is clearly above its long-term average. The expansion of the world economy will continue to be lively in the forecast period but will flatten gradually. The economic situation in Germany is positive in mid-2006. The high level of the Ifo Business Climate Index indicates, that the upswing of the German economy has become broad-based. In addition to the high-speed export locomotive, the domestic economic situation is also improving. Equipment investment has expanded; the recent Ifo Business Survey indicates that not only firms participating in the export boom are investing but now also domestically oriented enterprises. Even private consumption has picked up, after the decline in the last quarter of 2005. Additional impulses will come in the second half of the year from purchases made before the increase in VAT takes effect in January next year. which the higher value-added tax valid from January of coming year can be economized on for a short period of time still. On the whole, real GDP will expand this year by around 1.8%, or by 2% after adjusting for the lower number of working days in comparison to 2005. In the coming year, economic activity will be considerably dampened by the massive increase of taxes and fees, but the upswing will continue none the less. This expectation is based to a large part on the endogenous economic dynamics of the German economy. After a "classical" downturn in the first years of this decade, which was accompanied by a decline in the trend growth rate, the lower turning point was reached in the course of 2004 both for aggregate output and for equipment spending.