Despite a hefty increase in value-added tax (VAT) that came into force at the beginning of this year, 2007 will be a good year for the German car market, according to forecasters.

CSM Worldwide expects that the market will continue to grow as stronger economic fundamentals and high replacement demand should be sufficient to balance any pull-ahead experienced this year from the recent VAT rise. VAT in Germany rose three percentage points from 1 January to 19%.

Henner Lehne, CSM market analyst based in Frankfurt, expects the total market for light vehicles under 3.5 tonnes to turn out at 3.66m vehicles this year, up from 3.61m in 2006. "The whole economic situation in Germany is very positive, and pent-up demand from the slow market of the last few years means that there is strong replacement demand," said Lehne.

Lehne estimates that around 50,000 car purchases were brought forward into 2006 ahead of the VAT rise (final figures for the December car market were not available at the time of writing). Lehne notes that half of all vehicles registered in Germany are company cars and so are not affected by VAT at all.

Some forecasters had anticipated a strong payback in 2007, but in the current positive economic environment the price increase from the higher VAT rate is likely to be considered as not very important (a few hundred euros in real terms). In the short-term, manufacturers are expected to compensate for the price increase with incentives, said Lehne. Skoda is already leading the way and others are expected to follow. In the longer term, manufacturers may hide the price increase by making equipment such as a first-aid kit or floor mats optional where they might have been included before.

The view is supported by respected automotive analyst Ferdinand Dudenhöffer who was quoted in a German newspaper as saying that he expects the market to be supported by heavy incentives from the vehicle manufacturers and their dealers, particularly in the first half of the year. He is expecting incentives to average up to 19%, in the form of special models, favourable financing deals and offers to pay the first year's car insurance and car tax.

Dudenhöffer is forecasting that Germany will register 3.4m new cars in Germany in 2007, 44,000 more than in 2006. Like CSM, he estimates that around 50,000 car purchases were brought forward into 2006 ahead of the VAT increase, and that, as a result, the first three months of the year will be tough. After that the market should return to a gradual growth path.