EZA 781 Report: Economic Outlook

12 March 2007

Germany – Muted response of household consumption to VAT hike

The 3% VAT hike was expected to lead to significant volatility in the German consumption trajectory, crushing spending in 1Q07, followed by a substantial recovery. Our central view is a smoother pattern, with a modest downturn in spending but conversely a modest recovery. The 5.1% m/m (1.9% y/y) slump in Jan retail sales seems in line with the experience of past VAT hikes, in particular taking into account the fact that the decline in sales was confined to durable sectors like cars, furniture and diy stores. Other economic figures like private bank lending and employment corroborate our assessment of modest growth in household spending throughout this year.

Asset conclusions: continuing headwind for private consumption may weigh on profit expectations of German retailers, notably durable goods.

© Graham Bishop