Accelerated Tax Cuts Boost German Business Confidence

by Ulrika Lomas, Tax-News.com, Brussels

29 July 2003

German business confidence has risen for a third consecutive month, fuelled largely by the government's decision to bring forward tax cuts by one year to 2004, according to the monthly Ifo Institute survey.

The key economic indicator of Europe's largest economy rose from 88.8 in June to 89.2 in July, although it fell short of analysts' expectations of 89.7. The survey polls 7,000 German firms on a monthly basis about their opinion of the economic climate, and is keenly watched by financial markets around the globe.

"Based on previous experience, an improvement in the Ifo business climate three months in succession signals a coming economic upturn," Ifo President Hans-Werner Sinn observed, according to a CNN report. Sinn added that an improvement in confidence was seen in all sectors of the economy except construction.

Volker Nitsch, an economist at Bankgesellschaft Berlin concurred with Sinn's assesment: "(Ifo) is the best leading indicator that we have and it's showing us the third increase in a row, a very clear picture that says we will see an economic revival in the coming months," he told CNN.

However, whilst some experts have suggested that this may be the tentative beginnings of an economic recovery, they have warned that the improvement in business confidence is largely based on anticipation of tax cuts next year, and that underlying economic factors remain unchanged.

The Ifo climate index is derived from two separate indicators; the current conditions index, which fell slightly from 79.4 to 78.7 and the expectations index, which rose from 98.6 to 100.2.

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