Private consumption should firm up as disposable incomes rise on the back of phased income tax cuts. Personal outlays for some routine healthcare expenses will rise as part of current cost-cutting reforms, and some indirect taxes are being raised as Germany reins in its fiscal deficit.

Overall, the latest Economic Survey of Germany expects rising demand at home and abroad to lift profits and feed into stronger investment in machinery and equipment. Construction, though, should remain in the doldrums, and the survey sees no rapid turn-around in the labour market.

For more than ten years real GDP growth has lagged that of some other OECD countries. Sure enough, productivity has grown in what continues to be a highly innovative economy, but it has not risen fast enough to compensate for the weaker contribution to growth from employment. In fact, there has been a rise in unemployment, caused mainly by structural blockages in the economy, with high overall wage costs and tight legislation weighing down on labour. Even when business is up, these obstacles make employers think twice before hiring new workers.

The government is taking action. Reforms to reduce barriers for higher employment and other structural reforms under Agenda 2010, affecting pensions and competition for instance, are to be welcomed. However, the survey urges these reforms to be broadened further to reduce government debt, remove fiscal distortions and make the labour market more responsive to supply and demand.

While German innovation remains among the world’s best, it has slipped back a little in recent years. Restoring it demands measures to reignite German entrepreneurship, and the report points to “considerable scope” to foster the creation of new enterprises and deepen competition.

The 150-page OECD Economic Survey on Germany comes complete with basic statistics, graphs and tables. As well as analysis on the German business cycle, chapters cover issues arising from unification, public sector reform, fiscal consolidation, employment, competition and innovation.

OECD Economic Surveys are published for all member countries as well as selected non-members. They are a reference for economists, business analysts and policymakers the world over. Other recent surveys have been published on the Euro area, the Netherlands and non-member Russia.

©OECD Observer No 244, September 2004