Taking the German recovery less seriously: a counterintuitive view.

• Author: Posen, Adam S.

The good news on the German economy just keeps on coming. GDP growth in 2006 and the first half of 2007 exceeded all forecasters' expectations by far. Unemployment has fallen further and faster than even the heartiest advocates of labor market reform had hoped. Germany's famed six economic institutes have now started competing over who can raise their economic forecasts the most, instead of who can be the gloomiest. And all this has come at a most fortuitous time for the world economy, when the U.S. growth rate (and thus imports from the rest of the world) is finally slowing, and the world needed another growth engine to carry the load. It seems a far cry from just two years ago when books about Germany's economic malaise or decline or even crisis dominated the country's bestseller lists.

While the benefits of German economic recovery are real and welcome, no one should attribute much lasting meaning to today's German economic recovery. German real per capita GDP--the measure that most closely tracks economic welfare--will not keep growing annually at rates well above 2 percent (even if that is what Germany will average over the course of 2006q38), and Germany will remain a laggard in productivity growth compared to other rich economies that save and invest as much is it does.

Does the recent growth surge mean that the German economy has changed a great deal for the better? Or does it mean that all the diagnoses of doom and gloom were misplaced? Unfortunately, the answer to both of these questions still appears to be no, even taking into account the latest positive data. Yet, even though the mainstream negative assessment of Germany's long-term economic prospects remains correct in its bottom line, that appraisal holds for different reasons than those usually cited.

Remember that Germany over 1991-2005 averaged only 1.4 percent per capita growth, despite positive demand shocks from first the post-unification boom at home and then the growing world economy of the last several years. If Germany was flat on its back for fifteen years, the idea that when the world is booming for many years straight at a level that hasn't been seen since the 1950s, it somehow manages to get off its back for a couple of years, should not be so surprising. Similarly, the current already-peaked cyclical recovery there will not bring the long-run trend up very much, and is not in itself evidence of a structural change. So, no, German real potential growth has not...