German consumer confidence declines on tax

Dec. 29 | Updated: Dec 30 2006, 05:55am hrs
Consumer confidence in Germany, Europes largest economy, fell for a second month on concern increases in sales taxes and health-insurance costs will reduce household incomes.

GfK AGs confidence index for January, based on a survey of about 2,000 people, fell to 8.7 from a revised 9.2 in December, the Nuremberg-based market research company said today. The index reached a five-year high of 9.3 in November.

We will see a collapse in consumer spending in the first quarter, said Sebastian Wanke, an economist at Deka Bank in Frankfurt. GfKs sub-index measuring income expectations slumped 10.2 points to minus 16.6 while a gauge of households willingness to spend dropped 4 points to 59.9.Chancellor Angela Merkel will raise value-added tax, a sales levy, on Jan. 1 to help cut the budget deficit, and plans to increase health insurance costs. Higher interest rates may also damp economic growth next year. Money-supply growth in the 12- nation euro region accelerated to the fastest pace in 16 years in November, a report today showed, adding to pressure on the European Central Bank to keep raising borrowing costs.

Germanys DAX share index fell 6.60 points at 1:11 p.m. in Frankfurt, led by a 44-cent decline in Metro AG, the countrys largest retailer. The index has risen 22 percent this year.

Interest Rates

Consumer confidence has passed its peak, said Klaus Wuebbenhorst, chief executive officer at GfK. With the tax hike and other burdens, German consumers have 23 billion euros ($30 billion) less in their pocket next year.

By contrast, U.S. consumer confidence unexpectedly rose this month, a report yesterday showed, while Japanese households became the most optimistic in six months in November.In addition to tax increases, German consumers may have to cope with higher interest rates. The European Central Bank raised its benchmark rate for the sixth time in a year this month, to 3.5 percent, and said it still sees inflation risks.

Annual money-supply growth, which the bank uses as a gauge for future inflation, accelerated to 9.3 percent in November, its fastest pace since April 1990, the ECB said today.

With faster economic growth giving companies more room to increase prices and encouraging workers to demand more pay, investors expect the central bank to raise borrowing costs again as soon as March, futures trading shows.

Economic Growth

Still, a measure of confidence in Germanys economic outlook rose 25.4 points to 35.7, the highest in six years, GfK said. Stronger global demand for products from Germany, the worlds biggest exporter of goods, has prompted companies such as tire maker Continental AG to increase spending and hiring.

That may support consumer spending and economic growth as global demand cools.