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Germany will raise 2007 growth forecast to 1.7%

The German government will raise its forecast for economic growth this year to 1.7% on expectations that employment will increase, a senior governmentofficial said.

Chancellor Angela Merkel's government will revise its forecast up by 0.3 percentage points from an October 20 estimate of 1.4% growth, the official said on condition of anonymity. The government forecast for 2007 will be published on January 31. „The economy's underlying strength is unbroken,” Bert Ruerup, head of Merkel's five-member panel of economic advisers, said in a separate interview by telephone today. The 1.7% forecast „is realistic and takes into account the dent” expected from a 3 percentage-point increase in value-added tax that took effect January 1. Germany's improved economic outlook may add to reasons for the European Central Bank to raise interest rates further to keep inflation in check. ECB President Jean-Claude Trichet said on January 11 that investors' expectations of a March rate increase to 3.75% from 3.5% may be justified. The government expects growth in household consumption to halve to 0.3% from 0.6% last year, the official said, citing the damping effect of the increase in VAT, a sales tax, to 19%, as well as other measures to raise pension and health insurance premiums, curbs in tax breaks for commuters and increases in insurance tax and the top rate of personal income tax.

German business confidence fell unexpectedly yesterday from a record in January on concern that higher sales taxes will depress consumer spending. Consumer confidence also fell to the lowest in a year, GfK AG's index for February, released yesterday, showed. German unemployment, which fell in December by the most since reunification in 1990, may drop by an unadjusted 480,000 over this year, the official said, noting that employment may expand by an average 300,000. The Federal Labor Agency will release its jobless report for this month also on January 31. German Economy Minister Michael Glos, due to present the 135-page annual economic report at 11:30 a.m. Berlin time on January 31, will make a case for more changes to underpin the improving economy, the official said. The government has so far taken steps to revamp corporate tax as well as health-care rules and agreed to raise the mandatory retirement age. „Further structural reforms are indispensable given the rapid economic change and multitude of challenges that Germany is confronted with,” states the report entitled „Using the upswing for reforms,” according to the official. (Bloomberg)