Lowballing German growth

The latest IMF annual surveillance report for Germany has been released. Within the constraints of the structure of these documents — by the time they are published, they reflect consensus views — it is quite interesting. The most striking thing, at least for those who don’t follow the German real economy closely, is the estimate of the economy’s potential growth rate: 1.25%. Which, by the way, it is expected to reach by the end of 2012. Nor is any prospect of this changing seen:

Moreover, with the aging of the population, the shrinking of the labor force would adversely affect potential growth over the longer term. In addition, productivity growth in the services sector unrelated to manufacturing, which provides some 60 percent of private employment and about 70 percent of value added, was about a quarter of that in goods production during 2000-07. Investment has also lagged and has contributed to external imbalances despite healthy corporate balance sheet positions.

With this perspective comes a host of conclusions that are not promising for the Eurozone as a whole: with growth about to hit potential, there’s not much room for fiscal stimulus, because even if Germany wanted to stimulate an overheated economy, the ECB would react accordingly by tightening monetary policy. So there’s a lot riding on that 1.25 percent projection.

Potential growth is roughly comprised of labour force growth and productivity growth and it seems odd that an economy of Germany’s dynamism can only eke out such a low number for these combined elements. More concretely, the IMF report notes elsewhere that (1) Germany is picking up increased migration as a result of the Eurozone crisis and (2) there has been a massive current account switch from outward capital flows to inward flows, again as a result of the crisis. In other words, Germany is going to have more workers, and it will invest more. Which sounds like the ingredients of higher potential growth — and thus more room for expansionary fiscal policy and at least accommodative monetary policy.

Thus the irony: the Eurozone crisis is having side effects that undermine the economic rationale for Germany not doing more to help ease the Eurozone crisis. Why could these effects not be incorporated into the growth discussion?

4 thoughts on “Lowballing German growth

  1. I always wonder, whenever I see remarks to the effect that “but of course, the central bank would put up rates”, why nobody ever responds “well, why not ask the central bank what it thinks?”

    Even if you’re not meant to try to influence it, I can’t think of any theoretical objection to seeking its advice about a policy in advance.

  2. I agree Alex. It’s one of the strangest sentences in the report (paragraph 24):

    The authorities also pointed out the potentially negative implications in the periphery economies if the ECB were to tighten monetary policy in response to fiscal relaxation in Germany given its cyclical position.

  3. Interesting post Mr O’Neill. Actually, I’m not that surprised by the 1.25%, and it might even be lower if we strip out things like the China effect recently. Certainly if it is 1.25%, it is 1.25% and falling, since the ageing and declining workforce thing only goes in one direction. Immigration, as you say, can help, but if this immigration comes from the European periphery and there is a fiscal union then this is a zero sum game.

    Basically, I think the developed world has still to face up to what this crisis is all about, and what the implications are. Sorry, let me correct myself, this isn’t a crisis anymore, it’s a way of life.

  4. “Thus the irony: the Eurozone crisis is having side effects that undermine the economic rationale for Germany not doing more to help ease the Eurozone crisis. Why could these effects not be incorporated into the growth discussion?”

    Because that would “undermine the economic rationale for Germany not doing more to help ease the Eurozone crisis.” Which would adversely affect the IMF relationships with the German government and and the ECB.