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Thursday, September 28, 2006

German Unemployment Falls (slightly)

This is obviously good news:

German unemployment fell in September after companies stepped up hiring as consumer confidence reached the highest level in almost five years.The number of people out of work, adjusted for seasonal swings, fell 17,000 from August to 4.43 million, the Nuremberg- based Federal Labor Agency said today.The adjusted jobless rate held steady at 10.6 percent.

OTOH the drop is small, unemployment is still very high, and the situation is a deceptive one:

An increase in construction fuelled German growth in the second quarter of 0.9 percent, the highest in five years. German builders, doubling their outlook on Sept. 20, expect sales to grow 2 percent this year after a decade-long slump.

And just why has there been this burst of construction activity:

Chancellor Angela Merkel's plan to raise sales tax and curb some consumer tax breaks as well as slowing world growth cloud the outlook for 2007. The government plans to raise value- added tax to 19 percent from 16 percent to cut the budget deficit and reduce unemployment insurance premiums.

The increase of VAT will add 3% to the cost of houses purchased in 2007, so in large part this is economic activity which is being brought forward from 2007 to 2006. This years gains will be next years losses. This is why the German outlook remains a difficult one, expecially since it looks like the ECB will now have little alternative other than to keep raising interest rates.

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