14 Feb, 2012

Germany Economic Report Issued — Useful Info for ITB 2012 Participants

Paris, 14 February 2012 (OECD News Release) — The German economy recovered rapidly from the 2008-09 recession, with GDP topping pre-crisis rates during 2011 and unemployment falling significantly. According to the OECD’s latest Economic Survey of Germany presented today in Berlin by OECD Secretary-General Angel Gurría, Germany has an impressive economic track record, but now faces a cyclical return to slower growth rates and challenges to lay the foundations for long-term growth. Download the full report here.

The report cites numerous downside risks posed by the global slowdown, the deterioration of world trade and the euro area debt crisis. Given the weight and importance of Germany’s economy for Europe, growth-enhancing structural reforms can make an important contribution to stronger and more balanced growth perspectives not only in Germany but also in the Euro area.

n a long-term perspective, Germany needs to transform its growth model to thrive as a knowledge-based economy. This transition requires policy efforts, investment and reforms in education, skills and innovation and continued leadership in green growth.

But it also needs to work towards less burdensome regulations of services, increased labour participation of women and older workers and, thus, strengthening domestic demand. Germany should also compare itself with other economies in the emerging world, and be ready to compete with countries that have been growing at higher rates for quite some time now

“Germany’s recent economic performance has been exceptional, with low unemployment and solid growth. Many other countries are looking at the German mix of labour market reforms, social partners’ constructive flexibility and sound fiscal policy,” Mr. Gurría said. “But moving ahead towards a knowledge based economy will require further policy reform. With the population ageing rapidly, more needs to be done to raise the medium- and long-term growth potential, notably through reforms that boost domestic demand, increase productivity growth and expand the labour force.”

The OECD says that it is essential that Germany allows automatic stabilisers to operate fully, as allowed under the new fiscal rule (Schuldenbremse). Reforms to further strengthen domestic demand should focus on improving the framework for investment and innovation in Germany’s domestic sector. This should include lowering the strict regulation in some service sectors, notably professional services, and improving support for innovation through creation of an R&D tax credit.

Germany should seek to build on its outstanding recent employment performance -, which was the result of substantial labour market reforms and flexibility – by raising labour inputs to avoid skill shortages. Investing in skills, lowering fiscal disincentives to work for two-income households and further improving the supply of child care would encourage women to take up full-time work. Employment of older workers could be promoted and labour migration could be better focused on economic needs, which would require lowering the hurdles for high-skilled migrants.

A chapter of the Survey notes that while Germany has been a leader in green growth for many years, its environmental policies must become more efficient to meet its ambitious targets for climate change mitigation at a reasonable cost. Eco-innovation should be fostered to maintain the lead on the green markets and develop new competitive sectors.

Excerpts from the survey:

Following a rapid recovery from the 2008 09 recession, growth has slowed in the second half of 2011 and the economy is facing a soft patch with significant downside risks to activity. On the domestic front, a return to lower growth rates from the strong prior upswing was to be expected from a cyclical perspective as potential growth remains weak. This downswing is exacerbated by the substantial deterioration of world trade growth and a loss of confidence due to the euro area debt crisis.

In the current situation, policymakers are faced with a multitude of challenges. As the economy goes through this soft patch, it is essential to let automatic stabilisers work fully as allowed by the fiscal rule. On the structural side, Germany has made major progress, notably on the labour market, which paid off handsomely in the recent recession. However, still more needs to be done to strengthen the growth potential, not least in view of rapid population ageing. Structural policies should focus on the following areas:

• Strengthening domestic demand

Reforms to foster domestic demand should focus on improving competition enhancing framework conditions for investment and innovation in Germany’s domestic sector. This includes lowering the strict regulation in some services sectors, notably professional services, and improving innovation support, for example by introducing a tax credit for R&D complementing direct R&D support. In addition to raising productivity and potential growth, such reforms would also contribute to reducing the structurally high current account surplus and thus make a contribution to reducing global imbalances in a way which benefits Germany as well as others.

• Raising labour input

Past reforms of the labour market contributed to the strong resilience of employment during the past recession by raising working hour flexibility and reducing structural unemployment. The focus now needs to be on raising labour input and avoiding skill shortages. This includes notably increasing female full time labour participation by lowering fiscal disincentives for second earners and further improving childcare supply.

In addition, employment of older workers should be promoted by further removing work disincentives and fostering employability, including by continued reforms of the education and training system, aiming at a higher participation in life long learning. Importantly, labour migration needs to be better focused on economic needs, which requires lowering the hurdles for high skilled migrants, for example by introducing a point system.

• Exploiting new sources of growth in climate change mitigation

Environmental policies are becoming more important for growth, not least due to the government’s recent decision to accelerate the phase out of nuclear power and the ambitious national targets for emission reduction and renewable energy sources. In this context it is essential to implement climate change mitigation policies in a cost effective way, for example by strengthening the carbon price signal, and to carefully monitor the generosity of the feed in tariffs system. Furthermore, competition in energy sectors should be a priority together with fostering framework conditions for eco innovation.