22 May 2006, 17:02  Buba says outlook for German economy "mainly favourable"

The Bundesbank said the outlook for the German economy is "mainly favourable" as it expects domestic demand will continue to recover. In its May monthly bulletin, the central bank said the German economy will benefit from the global economy in the next months, which will have an impact on investment in equipment and machinery. The construction industry is expected to make a positive contribution to growth in the second quarter, as construction work was shifted to the second from the first quarter due to bad weather at the beginning of this year. A gradual improvement of the labour market could give a boost to consumer demand, it said, though it cautioned that high energy prices continue to weigh. The Bundesbank also said a rise in purchases ahead of the planned increase of value-added tax on January 1, 2007 is seen giving "certain positive growth impulses" to the economy this year. This effect could boost 2006 real GDP by up to a quarter of a percentage point, though this should be followed by a decline in demand in 2007, it said. Turning to consumer prices, the Bundesbank said the long-term inflation risks have risen further in the past months. "On the one hand the strong energy and raw material price increases will have an impact on the consumer level, on the other hand the planned VAT hike will prompt price increases," it said.

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