Global Economics

Germany Back on Growth Track


The German economy is expected to grow at its fastest pace since 2000 thanks to steady exports and rising consumer demand. Unemployment should drop to 8.8%

After years of bad news on the economy, Germany is finally getting back into its stride. A leading economic think tank predicts that the German economy will grow at the fastest pace since 2000 and that unemployment could drop to under 3.75 million.

The German economy has been in the doldrums for years, despite being the world's third largest. Until recently the country had struggled to create jobs and get back on the road to economic recovery. Now economists are predicting that Germany will see even stronger economic growth in 2007 than had previously been forecast.

While 2006 seemed to mark a watershed for Germany's sluggish economy, it seems 2007 could finally be the year that Germany gets back into its stride.

The Institut für Weltwirtschaft (IfW) announced Monday that Germany's economy should grow by 2.8 percent in 2007 on the back of strong domestic demand and fuller than expected company order books. There had been concerns that a sales tax hike from 16 to 19 percent that was implemented at the beginning of 2007 would have a dampening effect on consumer demand, but these fears have proved largely unfounded.

"Germany's upswing is continuing unabated," the IfW's chief economist Joachim Scheide told Bloomberg. The Kiel-based institute expects the gross domestic product (GDP) to grow to 2.8 percent this year, revised upwards from the 2.1 percent predicted in December. Germany's economy grew by 2.7 percent in 2006, the strongest performance since 2000, largely due to booming exports.

The good news is that the growth in 2007 is expected to be driven by strong domestic demand and the IfW predicts that this will "remain in full swing and be the main pillar of the upswing."

Growth in 2008 is expected to fall back slightly to 2.4 percent because of an expected slowdown in exports, which have been hit by the rising value of the euro against the dollar. Last year exports were up 12.5 percent, but they are only expected to grow by 11 percent in 2007 and by 6.8 percent in 2008.

Most importantly, the upswing in the economy is set to have a knock-on effect on the jobless figures. The IfW predicts that, despite an expected increase in wages this year, unemployment will decrease from 10.8 percent in 2006 to 8.8 percent in 2007, with just 3.74 million out of work. Europe's biggest economy has been plagued by high unemployment figures in recent years, hovering at the 4 million mark since 2001.

And the good news keeps rolling in: This weekend the International Monetary Fund (IMF) said it expected robust, sustained growth in Germany. The IMF's Deputy Managing Director John Lipsky told the financial daily Handelsblatt: "I am optimistic the recovery in Germany will continue for some time." He added, "There is still room for improvements ... room for growth." He said that economic reforms are beginning to bear fruit and German companies are becoming more competitive, and that the country is attracting investment again.

Another of Germany's major economic institutes, the Deutsche Institut für Wirtschaftsforschung (DIW), is now predicting that the current quarter will see a 0.5 percent growth compared to the last quarter, instead of the 0.4 percent it had predicted last month -- largely driven by more industrial production, which "should gain ground again after its stagnation in the final quarter of the previous year."

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