IMF raises forecast for German GDP growth to 2.5% in 2006 and 1.5% in 2007

 

The International Monetary Fund raised its growth forecasts for Germany for this year to 2.5 % and next year to 1.5 %. This is a significant correction of the September estimates, with growth rates of 2% and 1.3% for 2006 and 2007 respectively.  The high growth rates in 2006 benefited from exceptional one-off effects. The VAT rate hike in Jan 2007 is expected to lower growth but only transitory. For the long run, however, Germany will have to implement more structural reforms in order to alter its low potential growth.

 

Cyclical recovery is well underway with ‘buoyant exports that are progressively spilling over towards domestic demand’. Investment activities accelerated together with high corporate profits and the end of the contraction in the construction sector is underway.

But overall consumption is still lacking momentum in the face of very slow wage growth and only recent upward turn in employment.

 

The IMF is pressing Germany to increase its potential growth rate through reforms. The staff report writes that “overall adjustment in recent years has centered around wage moderation and fiscal containment rather than efficiency-enhancing structural reforms.” The government should use the economic upswing to implement further reforms and raise the low growth potential. While external competitiveness remains strong, domestically oriented sectors are lagging. Labour productivity in the export sector improved continuously while productivity growth in domestic sectors trail behind international performance.

 

Downward risks to growth for the next years to come are volatile oil prices, global monetary tightening and an abrupt unwinding of global imbalances. Research suggests that German exports did benefit more from strong world growth than from cost reductions. The risks are thus high that Germany’s recovery will face more of a hard than a soft landing if the global economy starts to tumble.

 

mundschenk(at)eurointelligence.com

 

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