Germany: Further contraction
After a strong start into 2008, activity has contracted reflecting muted consumption and weakening export growth. Activity is projected to contract further in 2009 on the back of falling investment spending and weakness in the main trading partner economies. Private consumption will make a small positive contribution to growth because disinflation increases the purchasing power of past wage settlements. Activity is expected to pick up in late 2009 and return towards trend growth rates in the second half of 2010.
The government balance may be around zero again in 2008 but will turn negative next year as income tax revenues suffer and unemployment spending starts to rise again due to deteriorating labour market conditions. Automatic stabilisers should be allowed to operate but discretionary measures that involve long-term spending programmes should be avoided. A stimulation programme should be timely, well targeted and temporary.