NEVER?:

If not now, when?: In a new report, six think-tanks have slashed their forecast for German economic growth in 2005, citing high oil prices and an unfavourable exchange rate. If Germany’s export-driven economy cannot recover when the world economy is racing along, how will it fare during a slowdown? (The Economist, Apr 29th 2005)

IN THEORY, Germany should be booming by now. Sizzling global economic growth in 2004, and more of the same expected for 2005, has raised demand for its exports, a boon to its large manufacturing sector. The European Central Bank (ECB) has kept interest rates in the euro area at an easy 2% for 22 months, and looks set to keep doing so well into 2005. Fiscal policy is also expansionary: the government’s budget deficit has breached the Maastricht treaty’s 3%-of-GDP limit for three years running, and by all accounts will do so again this year. Yet for all this, for the past four years Germany has struggled to produce GDP growth of even 1% a year.

The future looks little better than the past. This week a consortium of German think-tanks released its semi-annual report, slashing its forecast for German growth this year from a lacklustre 1.5% to an almost pulseless 0.7%. The German government then altered its own forecast to 1.0%, down from its previous one of 1.6%, made in January. More worryingly, the think-tanks' report argues that the German economy is not stuck in a particularly vicious cyclical slowdown. Rather, its structural problems, particularly the highly regulated labour market, have reduced trend growth (the average growth rate of the economy) to a meagre 1.1%, in contrast to roughly 2% for the rest of the euro area, and about 3% for the United States. Unless these trends reverse, Europe’s largest economy could eventually wind up as its economic backwater.

The most stagnant pool is undoubtedly the labour market. Germany’s unemployment rate fell to 11.8% in April from the record 12% it hit in March, pushing the number of jobless back below 5m for the first time in months. However, this may have more to do with changes in benefits for the unemployed, and a cold spell in March that made that month's figures unusually low, than any improvement in hiring conditions. On Tuesday April 26th Bert Rürup, head of Chancellor Gerhard Schröder’s panel of economic advisers, said that the country will not begin adding significant numbers of jobs until annual economic growth hits 1.5-2%. High unemployment has helped keep consumer spending depressed, leaving the economy dependent on exports to drive recovery. But global economic growth, which the International Monetary Fund’s World Economic Outlook puts at 5.1% in 2004, is forecast to slow a bit, to 4.3%, in 2005. If 5.1% wasn’t enough to pull Germany out of its doldrums, what will?

To be fair, Germany knows that it has a problem.

What theory is it that holds that a secular social welfare state whose people aren't having children should ever be booming?

Posted by Orrin Judd at April 30, 2005 5:20 PM