Economy of Germany

Germany is the world's third largest economy and the largest in Europe. Recent performance has not been dynamic, however, and the German economy is marked by vulnerability to external shocks, domestic structural problems, and continued difficulties in integrating the formerly communist East.

From the 1948 currency reform until the early 1970s, West Germany experienced almost continuous economic expansion, but real GDP growth slowed and even declined from the mid-1970s through the recession of the early 1980s. The economy then experienced eight consecutive years of growth that ended with a downturn beginning in late 1992. Since reunification in 1991, Germany has seen annual average real growth of only about 1.5% and stubbornly high unemployment. The best performance since reunification was registered in 2000, when real growth reached 3.0%. Most forecasters expect growth of about 1.5% in 2001 while unemployment remains above 9%.

Germans often describe their economic system as a "social market economy." The German Government provides an extensive array of social services. Although the state intervenes in the economy through the provision of subsidies to selected sectors and the ownership of some segments of the economy, competition and free enterprise are promoted as a matter of government policy. The government has restructured the railroad system on a corporate basis and is privatizing the national airline, telecommunications, and postal service.

The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. As a result, exports traditionally have been a key element in German macroeconomic expansion. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined by agreements among European Union (EU) members. Germany uses the common European currency, the Euro, and its monetary policy is set by the European Central Bank.

Despite this external vulnerability, most foreign and German experts consider domestic structural problems to be the main cause of recent sluggish performance. An inflexible labor market is the main cause of persistently high unemployment. Heavy bureaucratic regulations burden many businesses and the process of starting new businesses. German employers, even during periods of relatively fast growth, say they often prefer to invest overseas or install more machinery, rather than make job-creating investments at their domestic facilities.

Ten years after the unification of the two German states, great progress has been made in raising the standard of living in eastern Germany, introducing a market economy and improving infrastructure there. At the same time, the process of convergence between East and West is taking longer than originally expected and, on some measures, has stagnated since the mid-1990s. Eastern economic growth rates have been slower than in the West in recent years, unemployment is twice as high, prompting many skilled easterners to seek work in the West, and productivity continues to lag. Eastern consumption levels are dependent on public net financial transfers from West to East totaling about $65 billion per year, or over 4% of the GDP of western Germany. In addition to social assistance payments, the government plans to extend funds to promote eastern economic development through 2019.

The United States is Germany's second-largest trading partner, and U.S.-German trade has continued to grow strongly. Two-way trade in goods and services totaled $88 billion in 2000. U.S. exports to Germany were $29.2 billion while U.S. imports from Germany were twice as high, $58.7 billion. At $29.5 billion, the U.S. trade deficit with Germany is the United States' fourth-largest, after China, Japan, and Canada. Major U.S. export categories include aircraft, electrical equipment, telecommunications equipment, data processing equipment, and motor vehicles and parts. German export sales are concentrated in motor vehicles, machinery, chemicals, and heavy electrical equipment. Much bilateral trade is intra-industry or intra-firm.

Germany follows a liberal policy toward foreign investment. From 1995 to 1999, annual average flows of U.S. direct investment in Germany were $3.4 billion, while those of German investors in the United States reached $21 billion. Americans accounted for 18% of all foreign direct investment in Germany during 1998-99, the third-largest source after France and Britain. In terms of cumulative position (historical cost basis), German investment in the United States was valued at $111 billion in 1999, having more than doubled since 1995, while U.S. investment in Germany was worth just under $50 billion, having grown just 12% since 1995.

Despite persistence of structural rigidities in the labor market and extensive government regulation, the economy remains strong and internationally competitive. Although production costs are very high, Germany is still an export powerhouse. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries. The current government has addressed some of the country's structural problems, with important tax, social security, and financial-sector reforms. Although the Germans face fundamental economic adjustments to boost growth and job creation, they have the discipline and the resources to meet the challenges ahead.

Economy - overview: Germany possesses the world's third most technologically powerful economy after the US and Japan, but its basic capitalistic economy has started to struggle under the burden of generous social benefits. Structural rigidities - like a high rate of social contributions on wages - have made unemployment a long-term, not just cyclical, problem, while Germany's aging population has pushed social security outlays to exceed contributions from workers. The integration and upgrading of the eastern German economy remains a costly long-term problem, with annual transfers from the west amounting to roughly $100 billion. Growth slowed to 1.5% in 1999, largely due to lower export demand and still-low business confidence. Recovering Asian demand, a push for fiscal consolidation, and newly proposed business and income tax cuts - if passed - are expected to boost growth back to trend rates around 2.5% in 2000 and beyond. The adoption of a common European currency and the general political and economic integration of Europe will bring major changes to the German economy in the early 21st century.

GDP: purchasing power parity - $1.864 trillion (1999 est.)
GDP - real growth rate: 1.5% (1999 est.)
GDP - per capita: purchasing power parity - $22,700 (1999 est.)
GDP - composition by sector:

agriculture: 1.2%

industry: 30.4%

services: 68.4% (1999)

Population below poverty line: NA%

Inflation rate (consumer prices): 0.8% (1999 est.)

Labor force: 40.5 million (1999 est.)
Labor force - by occupation: industry 33.7%, agriculture 2.7%, services 63.6% (1998)
Unemployment rate: 10.5% (1999 est.)

Budget:

revenues: $996 billion

expenditures: $1.036 trillion, including capital expenditures of $NA (1999 est.)

Industries: among world's largest and technologically advanced producers of iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, food and beverages; shipbuilding; textiles

Industrial production growth rate: 0.9% (1999)

Electricity - production: 525.356 billion kWh (1998)
Electricity - production by source:

fossil fuel: 65.77%

hydro: 3.2%

nuclear: 29.06%

other: 1.97% (1998)

Electricity - consumption: 488.041 billion kWh (1998)
Electricity - exports: 39.1 billion kWh (1998)
Electricity - imports: 38.56 billion kWh (1998)

Agriculture - products: potatoes, wheat, barley, sugar beets, fruit, cabbages; cattle, pigs, poultry

Exports: $610 billion (f.o.b., 1999 est.)
Exports - commodities: machinery, vehicles, chemicals, metals and manufactures, foodstuffs, textiles (1999)
Exports - partners: EU 56.4% (France 11.1%, UK 8.6%, Italy 7.4%, Netherlands 6.8%, Benelux 5.7%), US 9.4%, Japan 1.9% (1998)

Imports: $587 billion (f.o.b., 1999 est.)
Imports - commodities: machinery, vehicles, chemicals, foodstuffs, textiles, metals (1999)
Imports - partners: EU 53.7% (France 11.1%, Netherlands 7.7%, Italy 7.8%, UK 6.8%, Benelux 5.6%), US 8.3%, Japan 5.0% (1998)

Debt - external: $NA

Economic aid - donor: ODA, $5.6 billion (1998)

Currency: 1 euro = 100 eurocent

Exchange rates: euros per US$1 -0.9867 (January 2000), 0.9386 (1999); deutsche marks (DM) per US$1 - 1.69 (January 1999), 1.7597 (1998), 1.7341 (1997), 1.5048 (1996), 1.4331 (1995)

Fiscal year: calendar year

See also : Germany