German economy sets fastest pace since 2000

FRANKFURT: Growth in Germany’s economy, Europe’s largest, last year accelerated to the fastest pace since 2000 as companies boosted spending and hiring to meet orders. Gross domestic product rose 2.5% after increasing 0.9% in 2005, the Federal Statistics Office said. The economy probably grew 0.5% in the fourth quarter from the third, the statistics office said. That’s the slowest pace in a year.

German growth may cool in 2007 as a stronger euro and a US slowdown damp exports and a sales-tax increase weighs on consumer spending. With Asia snapping up goods from around the world, any slowdown may be limited. German investors and executives last month both became more optimistic on the outlook.

“We’ve seen rather broadly based growth in 2006,” said Klaus Schruefer, an economist at SEB, Frankfurt who expects an expansion of 1.8% this year. “We’re still positive on the outlook for 2007. We’ll see further growth impulses from investments and exports while private spending may weaken.”

Company investment in plants and machinery last year climbed 7.3% in 2006 from a year ago, exports jumped 12.4% and imports rose 12.1%. Consumer spending advanced 0.6% and construction investment rose 3.6%. Companies have stepped up spending and hiring to meet increasing export demand, boosting consumer optimism. The trade surplus rose to a record in November and industrial production grew the most in seven months. Unemployment fell in December by the most since reunification in 1990 to a rate of 9.8%.

Employment last year increased 0.7%, while labor productivity rose 1.9%, both measures recording their biggest gains in six years, the statistics office said. German builders expect to hire 5,000 workers this year, increasing their workforce for the first time in more than a decade, the HDB construction association said today in a separate report.

Continental, the world’s fourth-largest tiremaker, said December 28 it expects to hire more workers and to increase investment in 2007 as profit rises. German truckmaker MAN on November 2 boosted its 2006 sales estimate.

The US may be the biggest drag on global growth in 2007. The world’s largest economy, which buys one-fifth of European exports, grew at the weakest pace in a year in the third quarter.

At the same time, the euro’s 8% gain against the dollar over the past year is making goods less competitive abroad. The euro rose as much as 0.3% to $1.2979 and traded at $1.2970 at 11:19 am in Frankfurt.

To help bolster earnings, German companies have been seeking ways to expand into faster-growing economies. Volkswagen, Europe’s biggest carmaker, said January 9 it returned to profit in China last year as it boosted sales there 24%.

Business confidence jumped to a 16-year high in December and companies such as Continental and Adidas, the No 2 sporting-goods company, still plan to spend and hire more.

Today’s data “prove that we are on the right track with our economic policies”, economy minister Michael Glos said in a statement. Germany must “use the recovery for further reforms”.

Thanks to the acceleration in growth, Germany last year managed to meet the European Union deficit rules for the first time since 2001, the statistics office said. EU rules oblige member countries to keep the shortfall below 3% of GDP.

The German economy may not be able to rely on consumer demand to boost growth this year. Angela Merkel’s government raised value-added tax 19% from 16% on January 1. Germans will also have to pay more for health insurance and cope with a cut in some tax breaks.

Businesses may also have to cope with higher interest rates. Futures trading shows investors expect borrowing costs to rise to at least 4 percent this year from 3.5 percent now, though none of the 35 economists polled by Bloomberg News expect the European Central Bank to adjust rates at its meeting in Frankfurt today.

The yield on the three-month Euribor contract due December was at 4.1 percent yesterday. The contract settles to the three- month euro area inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB’s benchmark rate since the currency’s launch in 1999.

The ECB’s decision is scheduled for 1.45 p.m. and President Jean-Claude Trichet will hold a press conference 45 minutes later.