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Sat, Aug 02, 2003 - Page 12 News List

Germany could see recovery this year, as retail sales rise

BLOOMBERG

German retail sales rose for the second time in three months in June, adding to evidence Europe's largest economy may recover later this year.

Sales rose 1.9 percent in the month, after declining a revised 1.7 percent in May, the Federal Statistics Office said.

Economists had forecast a gain of 1 percent. Sales fell 0.5 percent from a year ago.

"We've reached the bottom," said Bruno Saelzer, chief executive officer of Hugo Boss AG.

Germany's largest clothing company said it expects this year's earnings to increase.

Germany's economy has barely grown for about three years and may be in recession after shrinking in the first quarter. Growth may pick up as borrowing costs at a 127-year low, slowing inflation and the prospect of 21 billion euros (US$23.6 billion) in tax cuts lured more shoppers into stores and boosted confidence.

Business confidence rose for a third month in July, to a one-year high. Metro Group, Germany's largest retailer, on Thursday raised its full-year sales forecast.

To boost growth, Chancellor Gerhard Schroeder plans to speed up income-tax cuts, ease labor laws and trim jobless benefits.

The plan entails cutting the top rate of income tax to 42 percent from 48.5 percent and the lower rate to 15 percent from 19.9 percent.

"If consumers actually have to pay 10 percent less in taxes, they will surely put a part of that into consumption," said Hugo Boss' Saelzer.

Unemployment has fallen in May and June after reaching a five-year high in April. Consumer spending -- more than half of Germany's US$2.3 trillion economy -- rose in the first quarter and may help the economy grow, the Ifo economic institute said Thursday.

"The boost from domestic demand is bigger than we had thought just half a year ago," said Jan-Egbert Sturm, an economist at Ifo. The Munich-based institute yesterday raised its growth forecast for next year to 1.7 percent, citing the tax cuts.

The ECB left its benchmark interest rate at 2 percent Thursday, amid signs the worst may be over for the economy in the dozen euro nations. The ECB's rate is the lowest benchmark rate in any euro country since 1946 and the lowest in Germany since 1876.

Slowing inflation is keeping rates low and leaving consumers with more money to spend. German inflation slowed to 0.9 percent last month from 1 percent in June, half the ECB's limit.

European inflation dropped to 1.9 percent from 2 percent.

Some investors expect another rate cut later this year, interest rate futures trading shows. The yield on the three-month Euribor contract maturing in December was 2.02 percent at 2:38pm in Frankfurt on Thursday, compared with a money market rate of 2.12 percent.

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