Economic surveys and country surveillance

Economic survey of Germany 2008: Sustaining higher economic growth

 

Contents | Executive summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Germany published on 9 April 2008.

 

Contents                                                                                                                             

The major policy challenges are sustaining high economic growth...

Germany has been experiencing a strong economic recovery after a prolonged period of stagnation in the early years of the current decade. With corporate balance sheets and profitability robust and the government structural budget near balance, solid foundations have been laid for the continuation of the upswing. Nevertheless, for high economic growth to be more enduring, as intended by the authorities, it will be necessary to raise the growth rate of potential output. Past reforms, notably in the labour market have helped to lift growth in potential output recently, but there is still considerable scope to increase hours worked per capita, despite the progress made during the current upswing, and to improve productivity, notably in certain network industries. In the long run, improving education outcomes, including by reducing the impact of socio-economic background on outcomes, will be central to sustaining high economic growth and social cohesion.

… maintaining macroeconomic stability, and achieving fiscal sustainability

A factor that aggravated the downturn in Germany that preceded the current recovery is that it was necessary to consolidate the government budget during the downturn, structural public finances having deteriorated during the preceding upswing. Avoiding such pro-cyclicality would contribute to making economic growth more stable; it could also help to raise productivity by reducing investment risk. As in other OECD countries, the overarching objective of fiscal policy is to ensure that public finances are on a sustainable path. Despite major pension reforms in recent years, some further budget consolidation may still be needed to pre-fund future budget pressures related to population ageing. Germany also shares with other OECD countries the challenge of containing and financing long-run growth in healthcare expenditures not related to population ageing.

The economic upswing is set to continue

Following the traditional business cycle pattern in Germany, the current upswing began in the export sector. Exports have grown strongly since 2004, underpinned by high growth in Germany’s export markets and its specialisation in capital and intermediate goods (demand for which is sensitive to the global business cycle). So far, appreciation of the euro has not had much effect because exporters make their supply decisions on the basis of their assessment of sustainable exchange rate levels, absorbing exchange rate fluctuations via margin compression, and because real unit labour costs have been declining. Investment expenditure turned around next, following the slump in such expenditure that occurred in the early years of the decade. In contrast to previous recoveries, private consumption expenditure is lagging the recovery. This performance is attributable to unusually weak growth in household incomes, despite much higher growth in total hours worked than in previous upturns, reflecting low growth in real wage rates, which has lagged far behind productivity growth. The upside of these developments for the continuation of the economic upswing is that companies are well placed to continue to invest and expand employment, albeit at a slower pace than in recent years owing to the headwinds coming from the global credit crunch and rising commodity prices. The OECD projects that the economic growth rate will slow from 2½ per cent in 2007 to 1½ per cent in 2009, which is around the estimated potential growth rate. Such growth would see a small positive output gap from 2008 onwards.

There is scope to raise living standards by increasing labour utilisation and productivity growth

With relatively low economic growth over the past decade, potential GDP per capita (converted to dollars at PPP exchange rates) has slipped from 78% of the United States level in 1995 to 73% in 2006 (the United States is typically taken as the benchmark as it is the global productivity leader in most sectors). This divergence of potential GDP per capita levels is attributable to lower growth in both hours worked per capita and labour productivity in Germany than in the United States. Focusing on the current gap in potential GDP per capita, the main factor accounting for this shortfall is lower hours worked per capita in Germany, despite the progress that Germany has made in increasing labour utilisation in recent years. An examination of productivity data by sector suggests that there is substantial scope to raise productivity in the energy and transport sectors. These are sectors in which the quality of regulation can have a large impact on competitive pressures and hence on productivity and prices charged to clients.

 

Decomposition of GDP per capita relative to the USA, per cent

 

Note: EU11 is the original EU15 except for AUT, LUX, and PRT, for which data are lacking, and DEU.
Source: OECD (2007), OECD Economic Outlook No. 82 and OECD (2007), National Accounts Database.

 

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 2008 is available from:

Additional information                                                                                                       

 

For further information please contact the Germany Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by David Carey, Felix Hüfner and Nicola Brandt under the supervision of Andreas Wörgötter. Research assistance was provided by Margaret Morgan.

 

 

 

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