IMF Sees Faster German Growth But Appeals For Reforms

Germany's economy is set to expand by a healthier 1.5% this year but needs a fundamental overhaul to cope with daunting long-term challenges, the International Monetary Fund said Jan. 18.

In an annual review of the world's third-biggest economy, the IMF raised its previous gross domestic product growth forecast for 2006 from 1.2%. It projected GDP growth in 2005 of 1.0%. "The recovery in our view is still hesitant and unbalanced," Ajai Chopra, deputy director of the IMF's European department.

German growth relies too much on exports rather than consumer spending, he said, highlighting "low and falling trend growth, high and long-lasting unemployment and persistent fiscal German companies are cautiously investing," the IMF said. "However, structural labor market weakness, giving rise to slow employment and wage growth, is inducing cautious consumer spending."

To turn the situation around, the new coalition government of Chancellor Angela Merkel has made what the IMF called "valuable" reformist commitments since coming to power in November. Merkel's government has earmarked 25 billion euros (US$30 billion) to stimulate the economy and create jobs, including funding for infrastructure improvements and research and development.

The IMF welcomed plans to cut Germany's fiscal deficit, which has surpassed European Union limits every year since 2002, to increase the retirement age, to resume federal state reforms and to reduce non-wage labor costs. In the longer run, the rising bill for pensions and healthcare needed for an aging population make corrective action "urgent", the IMF said, calling for the structural deficit to be eliminated by 2010.

Copyright Agence France-Presse, 2006

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