German Economy: Good Times Are Here Again

Some of that growth might be owing to the fact that the VAT is being raised to 19 percent at the beginning of 2007, which might have led many people to do their major purchases well in advance. But that’s not half the story. Jobs are increasing and unemployment is going down, again a trend which is expected to continue in 2007.

Till the other day, Germany was a backbencher in the EU when it came to business activity and the trade cycle – and people as well as the international press were talking about the ‘German disease’. That’s all over now. Germany is not only experiencing the highest economic growth since the German reunification towards the beginning of the 90s, it has reclaimed its position as the economic motor of Europe. The economy of no other European country is growing at such a pace – and Germany is by far the largest national economy in Europe. The growth rate is 2.5 percent at present, but nobody will be surprised if the Federal Statistical Office eventually comes out with a higher figure. The chances that the boom will continue beyond 2007 are not bad either.

Employment

What is especially important – and encouraging – is that employment is increasing. The number of jobless fell below the 4 million mark in November: which means that the reforms regarding unemployment insurance are beginning to take hold. On the other hand, firms, companies and business enterprises had already reduced their work force to such a level that the only way to go from there was up. Full order books mean that they have to hire more people. The decrease in unemployment is again going to give an impetus to business – both as regards private consumption and as regards relieving the public exchequer of the costs of unemployment dole. And nobody’s talking about the upbeat mood that comes as a bonus.

Competitiveness

The truth is that the German economy has never been stronger. The business undertakings had already reduced their staff and gone on a diet, so to speak, so that they are fairly fit today and in a position to concentrate on their core activities. They have modernised their products and the production processes and gone global. Many small and medium sized German businesses are operating world wide today: not just by way of sales offices but also by way of assembly and production. German export products will be found to carry more and more components delivered by suppliers sitting in countries with low labour costs. The whole trick here is to organise such complicated production processes without compromising on quality. Naturally, the fact that the German labour unions have been showing restraint as regards pay rises has helped: the labour costs in Germany in the past six years haven’t grown at even half the pace as in the other EU countries. In other words, the unit cost of labour has gone down in Germany, which has increased the competitiveness of German products on the international market.

Shock absorbers

Germany is going to be the world champion in exports in 2006 as well. That the US economy is showing signs of cooling down is no danger signal by itself, since German exports to other parts of the world have developed a dynamics of their own: one could count East Europe and Russia, as also China, India and the Middle East. Even a strong Euro is not going to act as a brake since there are enough instruments provided by the financial market to insure oneself against such currency fluctuations – not to speak of the fact that a strong Euro means cheaper imports, which ensures price stability in return.

The German economy is looking forward to good times: record turnovers and record profits. The upswing is so strong that the business cycle will be able to digest the expected damper of a reduction in private consumption because of the hike in VAT.

In other words, 2007 is going to be a grand year for the German economy.