In the 1970s and 1980s, Germany was known as the economic locomotive of Europe. Thats a long time since and the German economy has been stagnant ever since unification, with domestic demand growth averaging 1.2% a year over the past ten years.
Although Germany like many other European coun-tries has a low potential growth rate owing to aging and subdued productivity gains, at least part of the current weakness will not continue to mar Germany for ever. For instance, the German construction indus-try, which was badly handled after unification, has now been slimmed down. Likewise, German house prices have been subdued for many years owing to overbuild-ing and inefficient subsidies for new construction. German wage costs were high after unification be-cause the D-mark was locked in to the euro at a fairly expensive rate. And the former Eastern Germany de-veloped into a nation of welfare benefit recipients living on transfers from the West.
But the German economy has shown signs of revival during the past year. Adjustment in the construction industry is over; German wage costs are no longer that far away from those of competitor countries; German businesses are generating strong earnings; and em-ployment and consumer spending are picking up, with domestic demand growth running at 2.6% over the past year. True, the VAT rate hike will put a damper on the economy for a brief period early in 2007, and the German economy will not see a repeat performance of its growth of the 1970s and 1980s; but the domestic economy is reviving after more than ten years in the doldrums.
