German Consumer Confidence Deteriorates

Consumer confidence in Europe's biggest economy fell despite Germany's economic upswing, as higher value-added tax discouraged spending, according to a forecast of consumer sentiment for March.

The Nuremburg-based GfK research group said its forward-looking consumer climate indicator fell to 4.4 points, down from a revised reading of 4.9 points in February and well below 8.7 points in January, a decrease blamed on the 3% rise in Germany's value-added tax.

Germany raised its value-added tax from 16% to 19% at the beginning of January with the aim of keeping the budget deficit in check.

The nation saw much-improved economic growth in 2006 after years of sluggish growth that kept unemployment stubbornly high and strained public finances.

Chancellor Angela Merkel's government is committed to taming the budget deficit in the long term, and pushed through the VAT increase that was largely meant to fulfill that aim.

"Although the effects of the VAT increase were far less severe than feared and the anticipated price shock effect has not materialized," the GfK said that consumers remained reluctant to make major purchases, but it said that reluctance was likely to level off, if not decline, by spring.

On Friday, a widely watched survey showed that German business confidence slipped in February, the second month in a row.

The Munich-based Ifo's business climate index declined to 107 in February from 107.9 in January. Economists polled by Dow Jones Newswires had expected a slight drop to 107.5. Current business confidence dropped from 112.8 to 111.6.

Business expectations also fell going from 103.2 in January to 102.6 in February but the Ifo dismissed any fears that Europe's biggest economy was poised for a slowdown.

The GfK group's forward-looking survey is based on around 2,000 interviews with consumers each month, conducted on behalf of the European Commission, and is geared toward measuring consumer spending habits in the month ahead.