Economic growth is strong and wellbeing is high but challenges lie ahead

by Andres Fuentes Hutfilter and Naomitsu Yashiro, OECD Germany Desk

Germany’s strong and steady growth is set to stay – real GDP is projected to grow by 2.1% this year and next. Strong domestic demand and exports drive growth. As a strong exporter of capital goods, Germany is benefiting from the global recovery of trade and investment and the recovery in the euro area. Low interest rates and immigration boost residential construction. At 3.4% unemployment is record low, allowing wages to grow above inflation (Figure 1). Wages have grown across the board, breaking the trend of rising inequality and allowing private consumption to expand steadily. Germany also provides many jobs to immigrants, now mostly from Europe. Poverty is lower in Germany than in most OECD countries. But many workers are still on low wages, especially among women, the low and the middle-skilled (Figure 2). This may hold back growth if workers have little chance to move out of low-wage jobs. During the years of strong performance the government and businesses have reduced debt. Households also continue to save, in part for old age. The external counterpart of this is the large current account surplus.

Germ1

Germ2

In this context, policy makers in Germany must ensure that strong social and economic outcomes are sustained in the future and inequality and poverty risk are reduced further, in the light of several challenges: Trend productivity growth has slowed, in Germany and elsewhere. As elsewhere in the OECD, productivity across firms has increasingly diverged between leaders and other firms. In Germany SMEs are 20 to 30% less productive than large firms and business creation has slowed. New technologies must be exploited more to benefit the whole society, and to realise strong growth consistent with the low-carbon transition. Entrepreneurship should be fostered through a more flexible insolvency regime, good e-government services and better access to high speed Internet. At the same time, technological change requires workers to adapt to new and changing jobs throughout their life time by updating skills. Across the OECD, middle-skill jobs have been the most affected by changes in tasks and automation. Technological change requires workers to adapt throughout their life time. The strong fiscal position provides room in the near term to fund spending priorities that will raise growth and wellbeing durably. Boosting investment in skills and technology and employability at higher age can also help reduce the current account surplus. The new government’s coalition agreement contains welcome steps in this direction.


References: 

OECD (2018), Economic Surveys: Germany, OECD Publishing, Paris.


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