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 today.
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%.
'The recovery in our view is still hesitant and unbalanced,' said Ajai Chopra, deputy director of the IMF's European department and mission chief for Germany.
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 pressures' in Europe's largest economy.
The IMF's growth forecast for Germany is at the bottom end of a range of 1.5-1.8% predicted for 2006 by Economy Minister Michael Glos. For 2007, the IMF foresaw growth slowing to 0.75-1.25%, due in part to a hike of the value-added tax (VAT) planned for next January to help Germany get its finances in order.
German companies are cautiously investing, the Fund said. 'However, structural labour market weakness, giving rise to slow employment and wage growth, is inducing cautious consumer spending,' it added.
Recent indicators have shown investor and business confidence higher than they have been for years in Germany. But growth has been driven almost exclusively by exports, while domestic demand is lagging.
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, two months after inconclusive elections.
Merkel's left-right power-sharing government has earmarked €25 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 labour costs.
