German economy to grow by 2.5%

The German economy is set to grow by as much as 2

The German economy is set to grow by as much as 2.5 per cent this year, Finance Minister Peer Steinbrueck said today, and his deputy foresaw no major slowdown in 2007 due to a planned rise in value added tax (VAT).

Mr Steinbrueck told parliament during a debate on the 2007 draft budget that the recovery had gained in breadth and growth this year would likely be "between 2.3 and 2.5 per cent."

The forecast expansion rate would be the strongest performance by Europe's largest economy since it registered growth of 3.2 per cent in 2000.

Mr Steinbrueck praised the strength of Germany's exports, adding: "At the same time there is for the first time in a long time a pleasing development in equipment investment, (and) the construction industry is pulling out of a trough".

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Earlier, Deputy Finance Minister Karl Diller said the government's plan to increase the VAT rate by three percentage points to 19 per cent from January 1st would not derail the recovery. "There will be a slight dip but not the feared large decrease," Mr Diller said on German television.

The increase in the VAT rate is aimed at easing some of the pressure on Germany's strained public finances and reducing non-wage labour costs.

Germany has breached the European Union's deficit limit of 3 per cent of gross domestic product (GDP) every year since 2001 but has seen tax revenue surge this year as economic growth gathered pace.

The economic expansion would help Germany meet the EU deficit criteria easily this year, and the budget deficit could be as little as 2.1 per cent of GDP, Steinbrueck said.

He reiterated that Germany's net new borrowing this year would amount to €30 billion.