expected to continue increasing, both through an extension of working hours and new hiring, thus supporting wage income. Some investment spending is likely to be shifted into 2010 in anticipation of the phasing out of favourable depreciation allowances at the end of 2010. Firms continue to benefit from favourable financial conditions. The consolidation measures announced by the government are envisaged to have only moderate adverse growth effects in 2011. However, the phasing out of the government’s infrastructure spending will weigh on construction activity.
Labour market performance is robust
The labour market has remained exceptionally robust during the crisis with unemployment barely rising. Employment has started to increase this year and unemployment has fallen below its pre-crisis 1 2 http://dx.doi.org/10.1787/888932347009
Germany: Employment, income and inflation
Percentage changes
2008 2009 2010 2011 2012
Employment 1.4 0.0 0.2 0.4 0.1
Unemployment rate1 7.3 7.4 6.9 6.3 6.2
Compensation of employees 3.6 0.3 2.0 2.8 2.1
Unit labour cost 2.8 5.2 -1.5 0.3 -0.1
Household disposable income 3.2 -1.0 2.0 2.6 2.6
GDP deflator 1.0 1.4 0.8 1.0 1.2
Harmonised index of consumer prices 2.8 0.2 1.0 1.2 1.4 Core harmonised index of consumer prices2 1.3 1.3 0.6 1.1 1.3 Private consumption deflator 1.7 0.0 1.9 1.4 1.4 1. As a percentage of labour force, based on national accounts.
2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 88 database.
Germany
Note: Core refers to the harmonised index of consumer prices (HICP) excluding food, energy, alcohol and tobacco.
Source: Eurostat; OECD, National Accounts database.
2005 2006 2007 2008 2009 2010
38.0 38.5 39.0 39.5 40.0 40.5 Million
6 7 8 9 10 11
% Employment
Unemployment rate
Unemployment has fallen below pre-crisis levels
2006 2007 2008 2009 2010 -2
-1 0 1 2 3 Core 4
Energy Food HICP
Core inflation remains low Contributions to annual growth, %
levels. The stability of employment during the recession is reflecting to a large extent the significant adjustment in hours worked (and equivalent in compensation) per employee. Though the government’s short-time work scheme supported this adjustment, most of it was due to increased working time flexibility at the firm level as agreed between the social 1 2 http://dx.doi.org/10.1787/888932347028
1 2 http://dx.doi.org/10.1787/888932347047
Germany: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 11.7 11.1 11.5 11.6 11.4
General government financial balance2 0.1 -3.0 -4.0 -2.9 -2.1
Current account balance2 6.7 4.9 5.1 6.0 7.0
Short-term interest rate3 4.6 1.2 0.8 1.1 1.8
Long-term interest rate4 4.0 3.2 2.7 3.0 3.8
1. As a percentage of disposable income.
2. As a percentage of GDP.
3. 3-month interbank rate.
4. 10-year government bonds.
Source: OECD Economic Outlook 88 database.
Germany: Demand and output
Fourth quarter 2010 2011 2012
Current prices
€ billion
Percentage changes from previous year, volume (2000 prices)
Private consumption 1 411.4 -0.1 1.3 1.6 0.9 1.5 1.5 Government consumption 472.1 2.6 0.7 0.6 2.3 0.8 0.6 Gross fixed investment 421.7 4.9 2.7 1.2 7.6 1.0 1.6 Public 39.3 3.1 0.5 -15.9 0.8 -9.6 -13.3 Residential 134.2 3.5 1.6 2.0 4.4 1.5 2.0 Non-residential 248.2 6.0 3.7 3.6 10.6 2.5 3.7 Final domestic demand 2 305.2 1.4 1.4 1.3 2.4 1.2 1.3 Stockbuilding1 - 27.8 0.8 0.0 0.0
Total domestic demand 2 277.4 2.3 1.5 1.3 3.9 1.2 1.3 Exports of goods and services 976.7 15.2 9.0 5.6 16.9 6.3 5.5 Imports of goods and services 859.2 13.6 7.4 4.1 18.6 4.9 3.9
Net exports1 117.6 1.4 1.1 1.0
GDP at market prices 2 395.0 3.5 2.5 2.2 4.1 2.1 2.3 Memorandum items
GDP without working day
adjustments 2 397.2 3.6 2.5 2.0
Investment in machinery
and equipment 182.2 7.1 3.0 1.7 10.2 1.4 1.6 Construction investment 239.6 3.3 2.5 0.8 5.7 0.7 1.6 Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).
Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
1. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
partners. In addition, structural unemployment has probably continued to fall owing to past labour market reforms. Furthermore, skilled labour shortages in some sectors have induced companies to hold on to their employees, thereby limiting the decline in manufacturing employment during the crisis. A further supporting factor for the labour market was the trend rise in service sector employment, for example in the education sector, which continued throughout the crisis. With jobs now being added again in manufacturing, overall employment is set to continue growing.
As the unemployment rate will fall further below its estimated structural level and working hours continue to normalise, wages per employee are likely to rise substantially over the projection horizon. As inflationary pressures are projected to remain moderate, real disposable incomes are set to increase markedly, supporting private consumption spending.
Government finances are set to improve in 2011
The high growth in real GDP and the decrease in unemployment translate into higher tax revenues and lower social security benefit payments, thus limiting the increase in the budget deficit in 2010 that is induced by the fiscal stimulus measures implemented since 2009.
From 2011 onwards, the government is assumed to implement its ambitious consolidation programme, amounting to around 3% of GDP until 2014, in addition to phasing out the temporary fiscal stimulus measures. Around two-fifths of overall consolidation is set for the expenditure side, notably higher public sector efficiency and streamlined social benefit payments. Revenues are to be raised by phasing out some tax exemptions and by introducing some new levies, such as a tax on air travel. While the overall focus of the package is welcome, some of its elements still have to be specified in more detail, such as the planned financial transactions tax from 2012 onwards. The discretionary consolidation in 2011 and 2012 will amount to around ½ per cent of GDP in each year which is in line with the requirements set by the fiscal rule and appropriate given the state of the economy and government finances.
While in 2011, the decrease in discretionary spending primarily reflects the impact of the consolidation package, the lowering of the structural deficit in 2012 is also due to the phasing out of the government’s spending on infrastructure. On current projections, the headline deficit may fall below 3% of GDP in 2011.
The recovery is likely to continue into 2012
The outlook over the projection horizon is fairly bright. Growth is likely to remain dynamic during 2011 with world trade projected to remain on an upward trend. In addition, private consumption growth is envisaged to be stronger than usual at this stage of the upswing, owing to continued employment gains and solid wage increases. The improved financial situation of households and favourable financing conditions should contribute to growth in residential investment. Increased capacity utilisation will underpin investment growth going forward. Real GDP is expected to grow by 3½ per cent in 2010 and 2½ per cent in 2011, implying that the pre-crisis real GDP level will be reached in the course of 2011.
thus above its trend growth rate. Nevertheless, the output gap is set to remain in negative territory over the whole projection horizon, thereby damping inflationary pressures. Notwithstanding the growth of domestic demand, the current account surplus is set to rise to around 7% of GDP. A more balanced growth outcome could be achieved by implementing structural reforms that would raise domestic investment spending. In view of the ageing of the population and the low share of tertiary graduates by OECD standards, reforms of the education system and increased high-skilled immigration should have priority. In addition, reducing the degree of regulation of some segments of the services sector would be beneficial.
Risks are broadly balanced The risks surrounding these projections are broadly balanced.
Developments in world trade pose risks in both directions. Domestically, private households may choose to lower their saving rate, boosting private consumption further. Also, business investment may turn out to be stronger than projected. On the negative side, financial conditions, notably the situation in the banking sector, may deteriorate with adverse consequences for investment spending.