Economic Survey - Germany 2004: Main issues and policy challenges

 

How is economic recovery progressing?

With the effects of adverse external shocks diminishing, the German economy is currently recovering, ending a couple of years in stagnation on the back of its traditionally strong, competitive and innovative export-oriented manufacturing sector. However, the economy is far from operating at full strength due to the weakness of final domestic demand. Poor labour market performance continues to weigh on consumer sentiment and business confidence remains volatile. The labour market suffers from weak growth and distorted incentives, with both contributing to problems in taking up work and providing employment. Although monetary conditions should remain supportive for GDP growth in the euro area, a persisting German inflation differential relative to the euro area average would mean that real short-term interest rates risk damping the recovery of demand in Germany to an extent, which may not be compensated by the corresponding gain in competitiveness. Cyclical weakness and the structural problems of the economy impact strongly on public budgets, while uncertainty about how public finances will be put on a durably sustainable path is a further factor undermining confidence. Re establishing Germany’s traditional economic strength requires a comprehensive policy response within a coherent framework.

Accounting for growth, 1993-2003 1
Average of annual changes, per cent

1. Growth in real GDP per capita is decomposed into growth in labour input and growth in labour productivity using the identity [gdpv/pop] = [(et X H)/pop]X[gdpv/(et X H)] in logarithmic differences, where gdpv is real GDP, pop is total population, et is employment and H is average annual hours actually worked by persons in employment.
Source: OECD.

How can economic performance be raised?

The German government has responded to this challenge by taking significant steps to reform labour and product markets, and substantial reforms to the social security system have recently been legislated. While not all measures are yet in force, the thrust of these reforms is appropriate and can be expected to improve labour market performance and business dynamism in the medium term. To create confidence it is necessary that reforms reflect a coherent vision about the reorientation of economic policy and are implemented according to a transparent and predictable roadmap. For economic performance to be raised in a durable way, it is indispensable that the reforms be continued and deepened. The main challenges in this respect are:

  • Linking sustainable consolidation of general government finances with public sector reform. This would include, inter alia, reforming budgetary procedures, including those governing federal relations, reducing distortions of the tax system, reforming long-term care and continuing with health and pension reform, as well as harmonising public and private sector labour and pension regulations.
  • Enhancing employment creation through better incentives to supply and demand labour, a more efficient management of labour market policies and greater responsiveness of wage formation to labour market imbalances.
  • Strengthening productivity growth by fostering product market competition and the economy’s capacity to innovate.

Moving in parallel to address these challenges simultaneously is essential for reaping the synergies across reforms in the different fields.

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The full edition of the OECD Economic Survey for Germany is available from:

Return to the OECD Economic Survey - Germany 2004  homepage

A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages

 

 

 

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