I. 2. b. Q. OECD ECONOMIC SURVEYS GERMANY APRIL 1970 BASIC STATISTIC OF GERMANY (F.R.) THE LAND Area, 1968 (thousand km*) 249 Major cities, June 1968 Million Agricultural area, 1968 (thousand km') 139 inhabitants Forests, 1968 (thousand km") 72 Berlin (Wesi) 2.2 Hamburg 1.8 Munich 1.3 Cologne 0.9 Essen 0.7 Dusseldorf 0.7 Frankfurt 0.7 Dortmund 0.6 THE PEOPLE Population 1968 (thousand) 60184 Net immigration (annual average No.ofinhabitantsperkm1 242 1966-1968) 78000 Net natural increase in population Labourforce,total 1969 26822000 (annual average 1966-1968) 11000 Labour force in industry, April per 1000 inhabitants 5.2 1969 12741000 PRODUCTION GNP 1969 (billions of DM) 601.4 Origin ofGDP, 1969(percent): GNP per head 1968 (US 1) 2240 Agriculture, forestry, fishery Gross fixed investment (average 1966- Industry (incl. construction) 1968): Services per cent of GNP 24 Home food production as a percentage per head (US J) 510 of total food availability (agricultural year 1966-1967) 63 THE GOVERNMENT Public consumption 1969 (per cent of Composition ofFederal Parliament GNP) 15.5 Christian Democrats 242 seats Generalgovernmentcurrentrevenue1968 Social Democrats 224 (percentofGNP) 37 Free Democrats 30 Publicdebt,1968(ratiotogeneral govern¬ Last election: 28th September 1969. ment current revenue) 59 Nextelection: 1973. LIVING STANDARDS Caloriesperhead,perday1967-1968 2900 Energy consumption per head 1968 Average gross hourly earnings ofmale (kg oil equivalent) industrial workers, 1969 (DM) 5.63 No.oftelevisionselsend1968(per1000 No. ofpassenger cars in use, mid-1968 inhabitants) 248 (per I000 inhabitants) 194 Publiccurrentexpenditureoneducation No. oftelephones end 1967 (per 1000 per head, 1968 (US S) 50 inhabitants) 172 FOREIGN TRADE Exports: Imports: Exportsofgoodsand servicesaspercent Importsofgoodsandservicesaspercent ofGNP (average 1967-1969) 22 of GNP (average 1967-1969) 20 Mainexports 1969(percentoftotalmer¬ Mainimports, 1969(percentoflota)mer¬ chandise exports): chandise imports): Productsofagriculture,forestryand fish¬ Products of agriculture, forestry and ing 1 fishing 15 Basicmaterialsandsemi-finishedgoods 29 Basic materials and semi-finished goods 41 Manufactured foods and tobacco 3 Manufactured foods and tobacco 8 Other consumer manufactures 11 Otherconsumer manufactures 13 Investment goods 54 Investment goods 19 Other exports 2 Olher imports 4 Total 100 Total Too THE CURRENCY Monetary unit: Deutsche Mark. Currency units per US dollar 3.66 Note.FiguresincludetheSaarandWestBerlin. OECD ECONOMIC SURVEYS Archives - Références - DOC PRÊTÉ - RETOUR BUREAU 70S GERMANY ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation for Economic Co-operation and Development wassetup undera ConventionsignedinParison 14th December 1960 by the Member countriesofthe Organis¬ ation for European Economic Co-operation and by Canada and the United States. This Convention provides that the OECD shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintainingfinancial stabi¬ lity, and thus to contribute to the development of the world economy; to contribute to soundeconomic expansion in Member as well as non-member countries in the process of economic development; to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The legalpersonality possessed by the Organisationfor European Economic Co-operation continues in the OECD, which came into being on 30th September 1961. The members ofOECD are: Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republic ofGermany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Socialist Federal Republic of Yugoslavia is associat¬ ed in certain work of the OECD, particularly that of the Economic and Development Review Committee. This document was approved by thi Economic and Development Review Committee April 1970 CONTENTS Introduction 5 I The current situation S Strong Demand Growth 5 Production, Employment and Productivity 7 Prices, Wages and Income Distribution 14 Balance of Payments 16 II Monetary and fiscal developments 24 Monetary Policy 24 Fiscal Policy 31 HI Prospects and policy issues 35 Internal Prospects 37 Balance of Payments Prospects 43 Conclusions 46 Annex I Chronology of measures affecting monetary developments and interna¬ tional capital flows 51 Annex II German average value and price data in foreign trade 55 TABLES (a) In text : 1 Demand and Output-Comparison of Forecast and Outcome 7 2 Percentage Changes in Production by Sector 8 3 Labour Force 10 4 Structure of Industrial Employment 12 5 Wages and Profits 16 6 Balance of Payments 17 7 Foreign Trade 19 8 Import/Expenditure Elasticities 20 9 Long-Term Capital Transactions 22 10 Speculative Short-Term Capital Movements Before and After DM Revaluation 24 11 Bond-Market New Issues 31 12 The Budget of the Total Public Sector-Estimated Impact on Domestic Demand 35 13 Trends and Prospects 40 14 Financial Surplus (deficit) ofthe Principal Economic Sectors 43 (_>) Statistical annex A Gross National Product 63 B Distribution of National Income 64 C Employment and Labour Market 65 D Industrial Production, New Orders and Deliveries 66 E Wages and Prices 67 F Volume of Money, Monetary Capital Formation and Bank Liquidity 68 G Merchandise Trade by Area 69 H Merchandise Trade by Commodity Groups 70 I The Balance of Payments 71 DIAGRAMS 1 Production, Capacity and Employment 9 2 Foreign Labour Force 11 3 Productivity per Employed Person in Industry 12 4 Price Developments 13 5 Industrial Producer Prices and Unit Labour Costs 15 6 Capital Flows 21 7 Bank Liquidity 25 8 Money Market Rates and International Yield Differentials 28 9 Bond Yields 29 10 Credits, Volume ofMoney and Monetary Capital Formation 30 II The Business Situation in Industry 36 12 Order Position of Industry 38 13 Relative Trends of Costs and Prices 45 14 Cyclical Movement ofGNP and some Main Components 47 INTRODUCTION Thepastyearhasseendemandpressuresbecomingincreasinglyserious, and costs and prices rising fast. The balance of the economy suffered from the delays which intervened before essential policy changes were undertaken both the decision to revalue the currency and to moderate domestic demand. The prospects are now for some easing of demand pressures and for progress towards a more satisfactory price performance. But with demand management heavily dependent on monetary restraint, uncertainties are attached to the prospects for balanced development, both on the upward and the downward side. These prospects together with their implications for policy are discussed in Part III of the present Survey. Part III also considers the prospect for the balance ofpayments: in particular the question ofhow far a falling surplus on current account might be accompanied by a strengthening of the capital account. The Survey seeks to look aheadto themiddle of 1971. I THE CURRENT SITUATION Strong Demand Growth In 1969, real GNP rose by some 8 per cent, even more than in 1968 (7ipercent). Withcapacityutilisationrisingrapidlyinthecourse of1968, the economy entered 1969 with considerable momentum. In the first halfofthe year weather-induced stagnationinconstructionandtheunwind¬ ing of anticipatory effects on exports related to the introduction of the border taxes in late 1968 servedto reduce the growth ofactivity. Butwith businessinvestmentandprivateconsumptionrisingfast,real GNPincreased at an annual rate ofsome 6£per cent. By the middle oftheyear, demand pressures were much stronger than during the peak ofthe 1964-65 boom, with capacity utilisation in industry at a record level and unem¬ ployment very low. Nevertheless, in the second half, real GNP rose at an annual rate ofabout 8 percent,helpedby a sharprisein theforeign labour force; between March and September the number offoreign workers rose by 270 000, or more than 1 percent ofthe dependent labourforce. OECD Economic Surveys The continued strong expansion took most observers by surprise. Forecastspublishedatthebeginningoftheyearrangedfrom3ito5percent, and most forecasters felt that there was a risk of undue slowdown in the second half1. The reasons given for the envisaged slower growth in 1969 were generally as follows: (a) German export markets were thought likely to grow significantly less than in 1968, mainly because ofthe expected slowdown ofthe expansion of home demand and imports in certain important countries, notably the UK and the US. It was also assumed that stronger demand and cost pressures would adversely affect export performance. Demand in the UK and the USA was, however, rather stronger than expected, and the imports of France, Ger¬ many's most important customer, expanded very strongly indeed; (b) The IFO-test of September 1968 pointed to a slower rise in business fixed investment in the second half of the year. Such a development seemed plausible given the likelihood of weaker export growth and the fact that business fixed investment in 1969 was likely to reach a level high in relation to its long-term trend; (c) No further stimulus was to be expectedfrominventory accumula¬ tioninview ofthe strong build-up which had taken place in 1968. Table 1 compares the OECD forecast with the actual outcome. It can be seen that, in terms ofex post arithmetic, most ofthe difference was dueto greaterbuoyancy ofdomesticdemandincludingstockbuilding. The stronger-than-expected foreign balance " explains " only one half of one per cent of GNP. But this sort of calculation greatly underestimates the importance of the foreign balance. The fact that the volume of exports ofgoodsandservicesroseby 12percentratherthanthe7percentenvisaged represented additional demand equivalent to almost 1£ per cent of GNP2. Even though much ofthis, as far as GNP impact is concerned, was offset by a stronger-than-expected risein imports, the sharp rise in exports clearly had an important influence on the business climate, andthus onthespend- 1 The German Institutes ofEconomic Research were at that timeforecasting the followingannual increaseinreal GNP: IFO3.2 percent, Kiel 3.3 percent,Berlin, Essen and Hamburg4 per cent. TheAnnual Economic Report ofthe Government forecasta rise of4.5 percent, andtheCouncil ofEconomicAdvisers(November 1968)4.7percent (without allowing for effects of revaluation or border taxes). Even in the late spring of 1969 (25.4.1969) 5 ofthe 6 German economic research institutes predicted a (sponta¬ neous) weakening ofthe boom in the second half of 1969. At that time the Institutes were forecasting a GNP rise of 5.5 per cent. According to 5 of the 6 Institutes, the restrictivedemand managementmeasurestaken or envisaged at thattimebythe Federal Government werelikely to aggravatetheweakertrend indomesticdemandwhich would resultfrom reduced investment activityinthesecond halfoftheyear. Bymid-yearthe IFO-institutewasstillmaintainingits5.5percentforecastfor 1969(OECD6.5 percent). 2 This measurement does not takeinto account secondary effects. Germany Table 1 Demand and Output Comparison of Forecast1 and Outcome 1969 1968 OECD DM Billions Outcome Forecast1 Current percentage prices percentage changes changes (volume) (volume) Private consumption 301.1 5 7* Public consumption 83.6 4 4 Fixed investment 124.8 9 12} (Construction) 71.9 4 3} (Equipment) 52.9 16 24* Final domestic demand 509.5 51 8* Plus change in stock building2 11.0 (0) ft) Total domestic demand 520.5 (Exports) 124.4 7i (12) (Imports) 106.4 12 05}) Plus change in foreign balance2 18.0 (-» (-i) GNP 538.5 5 8 1 Economic Outlook No. A, December 1968. 2 Thechangesinstockbuildingandinforeignbalanceareexpressedas apercentageofGNPinthe previous period. Thesetwo figures plus the rate ofchange offinal domestic demand broadly equal the rateofchangeofGNP. ing decisions of both investors and consumers. Investment plans were revised upwards in the course ofthe year, so that real fixed asset formation rose by 12-J per cent rather than the 9 per cent forecast. This, in turn, together with the stronger foreign balance, generated higher employment, personal incomes and consumer expenditure. The failure to forecast exports correctly which was closely related to the fact that the United States' merchandiseimports rose by 8£per cent rather than the 2\ per cent forecast was therefore also a key element in the underestimation of the strength ofdomesticdemand. Production, employment and productivity TheaccelerationoftheriseinGNPwasattributableentirelyto stronger trends in industry and in trade and communications. The growth rate of output in agriculture and forestry dropped somewhat, and the expansion in the service sectors remained at the relatively modest rate ofthe previous year. In 1969itwasofficialpolicytoachieveandmaintaintherateofcapacity utilization experienced in 1965. But with the strong advance in output, OECD Economic Surveys Table 2 Percentage Changes in Production by Sector 1966-1969 Volume changes over previous year 1962 prices Weight in GDP 1966 1967 1968 1969 1969 Agriculture and forestry 3.6 2.5 10.2 4.3 2.4 Industry1 53.9 2.5 -2.4 9.5 10.4 Trade and communications 18.4 2.2 0.1 5.1 7.9 Services 13.8 4.7 3.0 2.6 3.0 Public authorities and private households 10.3 3.9 1.0 3.5 1.5 GDP 100.0 2.8 -0.3 7.0 7.9 1 Including construction and public utilities. Source: Statistisches Bundesamt. the economy apparently exceeded the very high degree of resource utiliz¬ ationreachedduringthe 1960boomwhendemandpressureshadbeenclearly excessive. During 1969 the order backlog in industry continued to rise rapidly, exceeding in December the high level ofthe corresponding month in 1960 (see Diagram 1). The sharp rise in the rate ofcapacity utilisation was made possible by the unexpected elasticity of the labour market. By the end of 1969,the number offoreign workers had risen by some 400000 to a post-war record level of about 1 600000. The number of Germans employed also rose faster than earlier. Largenumbers ofpersons marginal to thelabourforce were recruited, and by the end ofthe year virtually the whole ofthat part ofthe labour force which ceased work during the recession without regis¬ teringas unemployed seems to havebeenre-integrated. Strongerpressures onthelabourmarketalsoledto asharpincreasein overtimework. Bythe end of 1969 the seasonally adjustedunemploymentrate had declined to the very low rate of0.7 per cent. There were sixjobs vacant for each unem¬ ployed person; in key sectors (e.g. metalworking) the proportion was even higher. Female part-time work continued, however, to play a relatively unimportant role. It would appear that further efforts to use the consi¬ derable potential offemale part-time workers could helpinfuturetoreduce strain onthe labourmarket. The large increase in the foreign labour force was accompanied by a marked change in nationality structure (see Diagram 2). Most ofthe new recruitment took place in Turkey and Yugoslavia, whereas the number of Italians and Spaniards did not regain the pre-recession level. These deve¬ lopments were probably related to the decline in unemployment and the 8