Big slump in German retail sales

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German retail sales fell unexpectedly for a third month in November ahead of this year's hike in value-added tax, data released Monday showed, with the nation's retailers attempting to counter the VAT increase by offering price cuts.

The 0.3 per cent drop in retail sales in November also came against the backdrop of concerns among German consumers about the impact on their household budgets of Chancellor Angela Merkel's government controversial health reform plans.

Economists had predicted that the data, which was released by Germany's statistics office, would show a one-per-cent rise in retail sales as consumers headed to the shops to beat this month's hefty three-percentage points increase in VAT.

Economic forecasters also expect the deeply unpopular VAT increase from 16 per cent to 19 per cent to result in German economic growth slipping back a gear during the first half of the year as the tax hike undercuts private consumption.

However, a growing number of economists also believe that the economic momentum Germany built up last year and the strong performance of the nation's export machine will help to cushion any economic fallout from the VAT hike.

The Paris-based Organization for Economic Cooperation and Development has forecast that German economic growth will edge down to 1.8 per cent this year after the nation's economy emerged in 2006 from a protracted period of stagnation to report what the OECD expects will have been a 2.6 per cent expansion rate.

The November fall in retail sales also came despite a decline in energy costs in recent months and a pickup in Germany's labour market.

German consumer confidence fell in January, a key forward-looking consumer confidence survey released last month showed as the nation's consumers grew concerned about the impact of the VAT increase and the prospects of higher health insurance premiums on their income.

In the meantime, however, shops across Germany have been offering discounts or claiming that they have so far not passed the three- percentage-point VAT increase onto consumers.

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