Domestic demand bolster Europe's biggest economy to grow 2.1% in 2008 and 1.6%in 2009, the OECD said today in a biennial survey.

Germany's economy is less susceptible to the credit crisis than its main competitors, the OECD said.

The OECD said in its Economic Survey of Germany 2008, that following a prolonged period of stagnation, Germany has been enjoying a vigorous recovery. Business and government finances are robust, laying a solid foundation for a continuation of the upswing provided that headwinds from the global financial market turmoil do not become overwhelming. Nevertheless, for high economic growth to last beyond the cyclical upswing, it will be necessary to raise the growth rate of potential output. Past reforms, especially in the labour market, have helped to raise the potential growth rate recently, but there is still much scope to increase hours worked per capita and to increase productivity, notably in certain network industries. Improving education outcomes, including by reducing the impact of socio-economic background on outcomes, will be important for sustaining high economic growth in the long run.

The OECD said that past achievements in fiscal consolidation need to be preserved. With the structural budget now in balance, the challenge is to avoid pro-cyclical policies and to deal with the long-term fiscal challenges of ageing. Replacing the current fiscal rule, which has proved to be ineffective, with the requirement of a structural budget balance in line with the Stability and Growth Pact should be considered. In addition, securing future tax revenues requires shifting more of the tax burden from mobile to immobile tax bases. The lowering of corporate tax rates is a step in the right direction but more could be done. Finally, the tax collection process should be made more efficient.

Reform momentum in the labour market needs to be maintained to achieve lasting improvements. The focus should be on increasing the low number of hours worked per person employed, notably of women. This could be achieved by lowering financial disincentives for second-earners to work longer and increasing the supply of childcare to allow more mothers to work. Long-term unemployment also remains a problem and while the increase in work incentives implemented with the Hartz IV reform has been a first step to improve labour supply of this group, more could be done. On the labour demand side, lowering the strict employment protection legislation for regular job contracts and avoiding too high minimum wages are important challenges. Plans to further phase out early retirement options are welcome in order to raise employment rates for older workers and should be implemented soon.

Further reforms in education are needed to raise education achievement and attainment and reduce the impact of socio-economic background on outcomes. To improve education achievement and reduce the large impact of socio-economic and/or immigrant backgrounds on outcomes, the authorities should expand participation in pre-school education, improve teaching quality, and reduce stratification in the education system. Giving universities more flexibility over their funding by allowing them to charge students tuition fees, accompanied by loans with income-contingent repayments, would help to enhance the quality of university education, making it more attractive in Länder where these policies have not yet been implemented.

Product market competition needs to be strengthened, notably in network industries. Both the energy and railways sectors are dominated by large vertically integrated companies operating networks. Productivity could be increased and consumer prices reduced by lowering entry barriers, including the option of stronger forms of vertical separation. Also, concentration at the wholesale level needs to be reduced. Privatisation in the railway sector should focus on a strong separation between track ownership and operation, on the one hand, and transport services on the other.
Healthcare reforms should help to increase efficiency but need to be taken further. The government plans to reduce the impact of healthcare costs on non-wage labour costs by increasing budget contributions, but needs to decide quickly on how to finance them. To strengthen price signals in the reformed healthcare system, the government should remove income limits on the surcharge that less efficient insurers charge their members and directly compensate the higher burden for low-income earners. Private insurers should be included in the new financing system to make risk pooling more efficient and to enhance equity.

With relatively low economic growth over the past decade, potential GDP per capita (converted to dollars at PPP exchange rates) has slipped from 78% of the United States level in 1995 to 73% in 2006 (the United States is typically taken as the benchmark as it is the global productivity leader in most sectors). This divergence of potential GDP per capita levels is attributable to lower growth in both hours worked per capita and labour productivity in Germany than in the United States. Focusing on the current gap in potential GDP per capita, the main factor accounting for this shortfall is lower hours worked per capita in Germany, despite the progress that Germany has made in increasing labour utilisation in recent years. An examination of productivity data by sector suggests that there is substantial scope to raise productivity in the energy and transport sectors. These are sectors in which the quality of regulation can have a large impact on competitive pressures and hence on productivity and prices charged to clients.