The sense of vibrancy and optimism in Germany during the World Cup has been unmistakable. In stark contrast to the country’s typically understated celebrations, flags are flying everywhere as the national team has performed unexpectedly well and Germany has burnished its image: 90% of its two million visitors to the event – double most estimates – say they would recommend the country for a holiday. That presages plenty of tourism in the future, but is the Cup giving the economy a fillip over the short term?
World Cup fever seems to have helped business and consumer confidence to respective 15- and five-year highs. But as Dirk Schumacher of Goldman Sachs told the FT’s Richard Milne, “you can’t see a World Cup effect in the hard data”. A poll shows that 44% of the hospitality industry was dissatisfied with World Cup business; just 20% of restaurants said the event met their expectations. Sports firms have been booming – as have breweries, thanks largely to England fans – but for most retailers it has been business as usual, with streets deserted during matches, says Milne. Moreover, retail sales actually slipped in May, when people were expected to make most of their major World Cup-related purchases, such as flat-screen televisions.
The German economy beyond the World Cup
World Cup aside, recent German economic data has been broadly encouraging (by admittedly poor recent standards). Germany is the world’s top exporter, notching up a 16% increase in the first quarter; success in this sector has been underpinned by companies restructuring and squeezing their labour costs. According to the Ifo Institute, the recovery is gradually spreading to the domestic economy, with corporate investment in machinery and equipment now rebounding – and not just among externally orientated firms. The hitherto crisis-ridden construction sector is doing better, with the influential DIW institute forecasting a 12% annualised rise in construction investment for the second quarter of 2006. Long dormant consumer spending has been inching up, having grown by a year-on-year 0.5% in the first quarter, after a slide in the final quarter of 2005. Unemployment is slowly falling and should reach 10.2% this year, down from 11.2% in 2005, says the DIW, which now expects the economy to expand by 1.8% this year and slow to 1.4% in 2007.
Why the slowdown next year if the recovery is supposedly gaining traction? The problem, says The Business, is the government’s “economically illiterate” decision to hike value-added tax from 16% to 19% from 1 January in an attempt to plug the hole in its budget, which will surely negate the “semi-recovery” in retail sales. Another “idiotic” decision is the introduction of a wealth tax, which will simply drive entrepreneurs overseas. According to the Bundesbank, next year’s tax package could reduce growth by 0.75%. And Berlin is hardly helping matters: its health reforms will have the effect of boosting employment tax and it is still arguing about how to lower corporation taxes.
Still, says Thomas Fricke in the FT Deutschland, it’s encouraging that with unit labour costs lower than in 1995, exports healthy, and companies spending and creating jobs – hence the buoyant consumer sentiment surveys – the economy has so far been resilient enough to shrug off the prospect of huge tax hikes and worries over health reform. But if, in addition to the government’s misplaced tax-raising zeal, the economy had to cope with another oil shock and a tumbling dollar (which would boost the euro and make exports more expensive), “that would be the end of this recovery”.