Institutes Urge Reforms to Reverse German Economic Slowdown

Calls for more economic and labor reforms are not what Angela Merkel wants to hear

Leading economic institutes called on German Chancellor Angela Merkel's government on Thursday, Oct. 18, to step up reform and warned that Europe's biggest economy faced slowing growth next year.

The institutes told the government in their autumn report presented in Berlin on Thursday that German growth will slip back to 2.2 percent in 2008 from 2.6 percent this year, with a soaring euro, the global credit crunch and surging oil prices undercutting the nation's expansion rate.

Some economists are more pessimistic and believe Germany will be lucky to reach a growth rate next year of 2 percent. The International Monetary Fund said this week it expects German growth will slip to 2 percent next year from 2.4 percent for 2007.

Thursday's report was drawn up by four leading German economic institutes in conjunction with research groups from other European nations.

Criticism of ineffective reforms

Coming in the wake of criticism by German business about the failure of Angela Merkel's government coalition to press on with economic reform, the institutes said: "Much more additional work needs to be done rather than roll back the reforms so far discussed.

"The labor market reform course of the last few years has not progressed," the institutes added.

The US housing market crisis had a knock-on effect

The report comes as economists attempt to size up the ramifications of the shakeout in global share prices in August following the credit crunch triggered by the US housing market crisis.

At the same time, the institutes joined a growing list of forecasters who have revised down their growth outlook for Germany.

High oil prices, the strong euro and financial market uncertainty will "dampen growth," Roland Döhrn, an economist with the Essen-based Institute for Scientific Research (RWI), told a press conference following the release of the report.

In their last report in the spring, the institutes projected a growth rate for Germany of 2.4 percent in both 2007 and 2008, with strong export demand powering the nation's economic performance.

Export growth likely to decline

Since then, however, the euro has climbed to an all-time high of $1.43 as fears have set in about the US economic outlook, consequently fuelling concerns about the prospects for Germany's key export machine.

The institutes predict German export growth will decline to 3 percent in 2008 from 3.5 percent this year, with stronger private consumption emerging as a key pillar of growth.

The institutes are also forecasting private consumption to grow by 1.5 percent next year compared to just 0.2 percent in 2007.

The release of the institutes' report is expected to lead to the German government also scaling back its growth projections for the nation.

Germany emerged last year from a protracted period of stagnation, with a recent solid growth rate helping to ease the nation's high unemployment.

Larger reduction in unemployment that expected

German unemployment dropped in September

The number of people out of work in Germany fell more than expected in September, data released last month showed, with employers continuing to hire on the back of the economic upswing and years of wage restraint.

The institutes expect unemployment to continue falling to average 7.9 percent in 2008 compared to 8.7 percent in 2007. Germany's jobless rate stood at 10.3 percent last year.

Apart from the RWI, the German institutes involved in drawing up the report included the Kiel Institute for the World Economy (IfW), Halle Institute for Economic Research (IWH) and the Munich- based Ifo Institute for Economic Research.

DW staff / DPA (nda)

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