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The following OECD assessment and recommendations summarise Chapter 1 of the Economic Survey of Germany 2006 published on 30 May 2006.

Contents                                                                                                                           

A recovery is slowly gaining ground

German economic performance continues to be marked by strong exports, reflecting many years of trend improvement in external competitiveness, but persistently weak domestic demand. To some extent these two trends are linked. Wage moderation, while strengthening competitiveness, has meant weak household income growth, holding back consumption; and lower inflation than in other euro area countries has raised the real interest rate in Germany, while the absence of exchange rate movements due to the single currency is likely to have supported exports. Signs of a pick up of domestic demand have emerged, and soft data on business confidence and incoming orders signal that the recovery may become broader in the near future. However, hard data from quarterly GDP statistics indicate that this process was not yet firmly established until the end of 2005. Overall, the OECD projects that real GDP will grow somewhat above potential in 2006, at around 1¾%, after growth of 1.1% in 2005 (working day adjusted). Continued structural reform can contribute to stronger domestic activity and would improve the capacity of the economy to turn favourable external impulses into higher growth and employment.

Is downward adjustment coming to an end?

The adjustment process of the German economy during a long period of relatively low growth, beginning in 1993, was characterised by a slow, but successful restoration of international competitiveness. Current information on export performance does signal that price competitiveness is by and large restored, lifting the external pressure on wages and prices. The German economy could well be in a position now to realise a shift from a regime where demand tended to undershoot supply which was itself weakening because of inadequate framework conditions, to one in which more expansionary supply conditions and resulting improved growth prospects feed through into more buoyant demand. The challenge confronting Germany in this context is to make improvements  in a variety of areas – long-term growth, employment creation, public finance sustainability – while at the same time preserving what could well be a genuine recovery in short-run activity extending beyond the export sector.

German exports in comparison

1. Export performance of country X is export volumes of X divided by potential export volumes of X, i.e. divided by a weighted sum of imports of the countries to whom X exports. Estimate for 2005.
2. Goods-specific export market growth is computed as a weighted average of imports in the nine major SITC goods categories.
Source: OECD Economic Outlook and International Trade Statistics.

Policy makers need to show good teamwork

To meet such a multifaceted challenge a well-integrated strategy is necessary, with policies interacting positively with each other. Labour market reforms can be particularly difficult to implement, especially as there is a risk of impacting negatively on household confidence. This is why they need to be part of a global package, where further progress is achieved in areas with a potential to boost aggregate growth and labour income.

• Over the medium term, fiscal consolidation – in quantitative and qualitative terms – will have to take place in such a way that potential growth prospects are preserved, with the implication that the bulk of adjustment has to fall on the spending side (including the elimination of distorting tax expenditures)and needs to be linked to public sector reform.
• Despite courageous reforms, a lot remains to be done to reduce unemployment and boost employment creation.
• Product market reform is precisely an area that has the potential to boost long-term growth and labour income and reduce public deficits through a strengthening of the tax base.

How to obtain this publication                                                                                      

The Policy Brief(pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
Der Policy Brief (pdf-Format) steht zum Herunterladen zur Verfügung. Er enthält die Gesamtbeurteilung und die Empfehlungen der OECD aber nicht alle Abbildungen auf den Seiten oben.

The complete edition of the Economic Survey of Germany 2006 is available from:

• SourceOECD  for subscribing institutions and many libraries
• OECD Online Bookshop for non-subscribers
• OLISnet, under "Publication Locator", for government officials with accounts (subscribe)
• Accredited journalists (password required)

Additional information                                                                                                  

• Economic Surveys and Country Surveillance
• List of recent Germany surveys
• OECD Economics Department homepage
• OECD Germany website 

For further information please contact the Germany Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Eckhard Wurzel and Andrés Fuentes under the supervision of Andreas Wörgötter.