BERLIN (MNI) – The Organization for Economic Growth and Development
expects German GDP to grow by 1.3% in 2010 and by 1.9% in 2011, the
Paris-based organization wrote in its latest Economic Survey released

On a workday-adjusted basis, the OECD puts German GDP at +1.1% in
2010 and +1.9 in 2011.

“Even though the economy is recovering from the severe recession
since the second quarter of 2009, actual growth will remain slow until
around mid-2010,” the OECD predicted.

Investment is lagging due to massive under-utilisation of capital
stock and is expected to contribute to growth from the second half of
2010 onwards, the report stated.

“Private consumption is likely to suffer for somewhat longer from
the phasing out of the car scrapping scheme and a further rise in
unemployment,” the OECD asserted. Moreover, low wage growth is seen
dampening personal income growth.

The German recovery will, thus, continue to be mainly driven by
developments in world trade as demand for capital goods picks up and the
country regains the market share that was lost in the downturn, the
organization said.

The OECD expects that domestic investment spending will pick up
next year and private consumption will stabilize. Despite growth above
potential — which is estimated to be 0.8% over the period from 2009 to
2011– a sizable output gap will remain even at the end of 2011. That is
likely to restrain inflationary forces, the report said.

The OECD cautioned that its forecasts are highly dependent on
developments in the world economy and on financial markets. “In
particular, there is a risk that banks restrict credit as the loss
burden due to the financial crisis as well as credit losses related to
the recession adversely affect their lending capacity,” it said.

The growth rate of loans to the private sector, notably to
non-financial companies, has slowed down significantly, the OECD noted.

Credit supply factors may play a role as credit standards of German
banks, as measured by the ECB Bank Lending Survey, showed a significant
tightening since the beginning of the financial crisis, the report
noted. Moreover, there are reports of reduced credit supply in certain
sectors and for large companies.

However, cyclical factors like low credit demand due to the
sluggish real economic activity and increased macroeconomic risk appear
to be the main explanation for the reduced lending activity, the report
stated. “In order to limit the risk of a broad based credit crunch going
forward, it should be ensured that banks remain adequately capitalized,”
the OECD advised.

Unemployment has barely increased during the downturn as firms
substantially reduced working time instead of laying off employees, the
association observed. This reflects primarily increased flexibility on
the company level and earlier labor market reforms, as well as the
subsidized short-time worker scheme, it remarked.

Going forward, labor market policy needs to prepare for a marked
increase in the jobless rate, notably by ensuring sufficient job
counselling capacities and reforming the administration of the basic
income scheme for jobseekers, the OECD urged.

As a result of the downturn, the fiscal deficit continues to widen
considerably, owing to automatic stabilizers and the fiscal stimulus
packages, the organization noted.

However, the OECD expects that Germany’s new debt limitation rules
should help to bring public finances back onto a sustainable path in the
medium term, “though some implementation issues are tricky and need
careful monitoring.”

Compliance with the new rule will require a combination of spending
cuts and revenue-raising measures, it said. “Priority should be given to
spending cuts as they are likely to be less harmful for economic growth
than tax increases,” the OECD advised.

–Berlin bureau: +49-30-22 62 05 80; email:

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