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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Germany published on 26 March 2010.
The economy is slowly coming out of the crisis
After suffering the steepest downturn in post war history, growth turned positive again in the spring of 2009. The current recovery is underpinned by fiscal stimulus, expansionary monetary conditions, an upswing in world trade, an improvement in financial conditions and restocking activities of companies. Even though the economy is recovering, the pre crisis level of production is projected to be reached only by 2013. There will thus be substantial slack in the economy over the medium term, notwithstanding the fact that the crisis is likely to have led also to a temporary reduction in the growth rate of potential output.
Going forward, the main driving force is likely to remain exports, as investment spending in new capacity is projected to pick up only slowly. The reduced level of production will adversely affect the labour market, thereby keeping the savings rate high and damping private consumption growth. Public finances will deteriorate further, not least because the additional permanent tax cuts introduced at the beginning of this year to stabilise domestic demand also add to the deficit.
The crisis has revealed some structural deficiencies
By many measures, the scale and the structure of the recent crisis is different from past experience. The downturn in growth was driven almost exclusively by the sudden collapse of world trade at the end of 2008, hitting the large export oriented manufacturing sector particularly hard. In addition, the crisis in the real economy was accompanied by a banking crisis, not least due to earlier investments by German banks in foreign assets linked to the US housing market, requiring substantial government intervention to safeguard financial stability. Both factors demonstrate how interlinked Germany has become with developments in world markets. Even though it is true that the domestic fundamentals prior to the crisis looked comparatively solid (absence of a housing and construction boom, a balanced government budget and solid household and corporate balance sheets), Germany was exporting goods and lending capital to countries where domestic demand was partly on an unsustainable track.
House price developments
Note: OECD average refers to the group of countries for which data is available from 1970, namely those in the right panel except for Korea and Spain. Refer to Girouard et al. (2006), “Recent house price developments”, OECD Economics Department Working Papers, No. 475 for information on house price concepts.
Source: OECD, House Prices Database.
Large crises always present opportunities for reform, because unsustainable structures become more visible. In this regard, major policy challenges need to be addressed:
- The build up of long term unemployment should be avoided by keeping the labour market flexible enough to allow for structural change.
- Budget deficits need to be reduced considerably from 2011 onwards in order to comply with the new fiscal rule.
- The deficiencies in the banking sector need to be tackled.
- The growth pattern should be broadened beyond exports to increase the potential of the economy.
While many of the recently elected government’s initiatives address the right issues in a sensible way, some might have gone in the wrong direction. The lack of a specified strategy for fiscal consolidation and remaining deficiencies of product and labour market regulation need to be tackled in order to boost potential growth. Improving economic dynamism and increasing the attractiveness of Germany as a location for investment through structural reforms would also contribute to a reduction of external imbalances.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
Eine Druckversion des Policy Brief in deutsch (pdf Format) kann ebenfalls heruntergeladen werden. Es enthält die Gesamtbeurteilung und die Empfehlungen, aber nicht alle oben gezeigten Grafiken.
The complete edition of the Economic Survey of Germany is available from:
For further information please contact the Germany Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Felix Hüfner and Isabell Koske under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.