Germany to meet deficit criteria early

Strong economic growth and good tax revenue mean Germany is on course to meet the Maastricht deficit criteria this year for the first time in five years and a year earlier than planned.

The news follows a lower-than-expected drop in the closely watched Ifo index, measuring the confidence of German business leaders.

Germany's federal statistics office yesterday said that the budget deficit for the first six months of 2006 was 2.5 per cent, well under the Maastricht ceiling of 3 per cent and a considerable drop on 3.7 per cent in the same period last year.

Finance minister Peer Steinbrück has said there is a "high possibility" of coming in under three per cent this year and the Bundesbank and most economists agree with him.

Germany's new borrowing in the first six months was €28.2 billion, around €12 billion less than in the first half of 2005. While income rose by 3.2 per cent this year, expenditure rose by just 0.6 per cent.

There has been a run of good news on the German economic front of late.

The economy grew by 0.9 per cent in the second quarter, the fastest growth in the last five years. The Bundesbank has said that 2 per cent growth was "possible" in 2006 and unemployment, although still high at 10.5 per cent, is dropping month-on-month.

Even the troublesome construction sector came alive after a long and cold winter, with a 4.6 per cent jump in investment in the second quarter, while machinery spending jumped 2.5 per cent.

Opinion is divided about what awaits the German economy in 2007 when VAT jumps three percentage points to 19 per cent. Some economists suggest the economic momentum will overcome the tax hike, while others say it is prompting an artificial spending boom of expensive items now, which will stop cold in January.

Of concern in yesterday's data is the fact that, as domestic demand rises, German exports have dropped back to 2004 levels. That could bode ill for 2007 as exports are all that held the German economy above water in the recent lean years.

The statistics office failed to find any evidence of a "World Cup boom" for hotels, shops and restaurants.

Meanwhile, Ifo economist Klaus Abberger said the slight drop in his institute's confidence index from 105.6 to 105 per cent in August was "not at all negative".

"We expect a good and robust economic development," he said.