World Economy

OECD: Germany Should Address Future Challenges

OECD: Germany Should Address Future Challenges OECD: Germany Should Address Future Challenges

Germany's economy will remain solid in the near term, but as Europe's growth engine it should boost investment and productivity to build a stronger economy and more inclusive society, the Organization for Economic Cooperation and Development said Tuesday.

In its latest economy survey of Germany, the Paris-based institution called on the country to increase its currently subdued investment activity to help raise productivity and living standards, Nasdaq reported.

While unemployment levels are low, partly because of past labor market reforms, the OECD criticized Germany for not doing enough to boost productivity growth.

"The recent large inflow of refugees may help damp the impact of demographic change on labor supply in the medium term, but comprehensive policies will be needed to integrate the newly arrived immigrants into German society and the labor market."

Around one million migrants arrived in Germany in 2015 alone, fleeing war-torn and crisis-hit regions mostly in the Middle East and northern Africa.

The arrival of migrants poses a challenge to Germany and the government would be well advised to make labor market access for migrants easier, the OECD said.

"Experience with past immigration waves shows that immigration reinforces the need for policies which keep labor markets and product markets open to entry," the report said.

"Less restrictive entry regulation in some services, notably the crafts, would raise the economic benefits of immigration and steps to facilitate firm creation, for example by improving access of all self-employed to low-cost public health insurance, would also help."

Prepare for Diversification

OECD Secretary-General Angel Gurria said the German economy remains robust, with a strong export performance and low unemployment, but he also called on the government to address future challenges more decisively.

"Germany must use its position of strength to prepare for the future, notably by ensuring the successful integration of the wave of refugees who have been offered asylum," Gurria said. "These population inflows are an opportunity to counter demographic trends and lay the basis for a more diversified and productive economy."

The OECD reiterated its growth forecast for Germany released in February, forecasting that the economy should accelerate by 1.4% this year and 1.5% in 2017 in unadjusted terms. This is more cautious than the 1.7% growth forecast by the German government for this year.

"Demand is...shifting from external sources to private households, which are projected to remain the main driving force for growth in the near-term aging society and influx of migrants," the OECD said.

"Household consumption will be supported by strong real wage growth, as cheap oil has damped consumer prices, while a tight labor market and the introduction of the national minimum wage have pushed up nominal wages."

But it said that Germany should embrace labor market reforms to eliminate the barriers for women to develop their professional careers and lower the tax burden on households' second earners that discourages many women from working full time.

It also called on Germany to address challenges posed by demographic changes, such as refraining from reducing pensions for old-age pensioners who work and indexing the pensionable age to increases in life expectancy.

Exports Slip

As exports have slipped, the mood in Germany has turned glum.

Pessimists outnumbered optimists in February for the first time since late 2014, according to the survey of business managers by the Ifo Institute in Munich, which is considered a reliable predictor of the growth. Although there was a small uptick in March, manufacturers remain wary. If confidence remains weak, they are likely to cut back plans to invest in new equipment or hire people, prompting growth to slow.

A weaker German economy would have political consequences for Europe.

As much as other Europeans like to bash the Germans, it is doubtful that the eurozone could have survived its recent debt crisis without Germany’s checkbook. Germany contributes more than a quarter of the financing for the European Stability Mechanism, the new bailout fund used to prevent the total collapse of countries like Greece.