Modest Recovery in Store for Germany

Reflecting Germany’s role as the world’s second largest exporter, the pickup in global trade is the main factor behind the recovery, although fiscal stimulus continues to provide support to the economy.

In this interview, the IMF’s mission chief for Germany Juha Kähkönen and Deputy Division Chief Helge Berger discuss risks to the recovery, why few jobs were lost in Germany during the crisis, and whether Germany needs to recalibrate its growth model.

IMF Survey online: What are the IMF’s expectations for a German recovery?

Kähkönen: The recovery in Germany is well underway, but we think it will be moderate and fragile. Last year, GDP dropped by 5 percent. For this year, we project a growth of 1.2 percent. Our expectations for 2011 are slightly higher, at 1.7 percent.

The recovery is supported by several factors, but the pickup in global trade is probably the most important factor. As you know, Germany’s economy is open and very export-oriented. The pull from Asia and, to a lesser extent, the United States has a direct and positive impact on the economy.

But policy support also matters. Fiscal policy in particular has supported demand. The government allowed automatic stabilizers to work in full and also implemented other stimulus measures, including a very popular car scrapping program last year. A short-term work program known as Kurzarbeit also helped limit the depth of the recession and will continue to provide substantial support for the economy in 2010.

IMF Survey online: What are the main risks to the outlook?

Kähkönen: There is a chance that the upswing will be stronger than currently foreseen, but the risks are predominantly on the downside. We see two main risks.

First, the demand for exports could be lower than expected. If growth in Germany’s partner countries, especially within Europe and, in particular, Southern Europe, were to fall short of expectations, this will be felt directly in Germany.

Second, we cannot exclude the possibility of a credit crunch. If there are further loan losses in the financial sector, this could constrain the lending capacity of banks, which in turn will impact growth.

IMF Survey online: In light of these risks, is Germany’s fiscal policy adequate?

Kähkönen: The government’s fiscal strategy, in our view, strikes the right balance between supporting the economy in the short term and planning to consolidate government finances once the recovery has taken hold.

The fiscal stimulus in Germany this year is...