ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION OE COOPERATION ET OE OEVELOPPEMENT ECPNJMIdOES BASIC STATISTICS OF GERMANY (F.R.) THE LAND Area, 1971 (thousand km») 249 Majorcities, 1.1.1971: Million Agriculturalarea, 1971 (thousand km") 135 inhabitants Forests, 1971 (thousand km') 72 Berlin(West) 2.1 Hamburg 1.8 Munich 1.3 Cologne 0.8 Ussen 0.7 Dusseldorl" 0.7 Frankfurt 0.7 Dortmund 0.6 THE PEOPLE Population, 1.7.1972(thousand) 61674 Netimmigration, 1971 430000 No.orinhabitantsperkm1 248 Labourforcetotal, 1972 27200000 Netnaturalincreaseinpopulation, Employmentinindustry, 1972 9873000 1971 48000 PRODUCTION GDP, 1972(billionsofDM) 829.9 OriginofGDP, 1972(percent): GNPperhead, 1972(USJ) 4160 Agriculture,forestry,fishery 3 Grossfixedinvestment Industry(incl.construction) 53 (average 1970-1972): Services 44 PercentofGNP 26 Homefood productionasapercentage Perhead(USI) 950 oftotalfoodavailability (agriculturalyear 1970-1971) 60 THE GOVERNMENT Publicconsumption, 1972 CompositionofFederal Parliament: (percentorGNP) 17.8 Christian Democrats 224seats Generalgovernmentcurrentrevenue, Social Democrats 230 1972(percentofGNP) 39 Free Democrats 42 Publicdebt,1971 (ratiotogeneral Lastelection: 19thNovember 1972 governmentcurrentrevenue) 48 Nextelection: 1976 FOREIGN TRADE Exports: Imports: ExportsoFgoodsandservicesaspercent Importsofgoodsandservicesaspercent ofGNP(average 1970-1972) 23 ofGNP(average 1970-1972) 21 Mainexports, 1972(percentoftotal Main imports, 1972(percentoftotal merchandiseexports): merchandiseimports): Productsofagriculture, Productsofagriculture, forestryandfishing 1 forestryand fishing 13 Basic materials and semi-finished goods 27 Basicmaterialsandsemi-finishedgoods 35 Manufacturedfoodsandtobacco 3 Manufactured foodsandtobacco 9 Otherconsumermanufactures 11 Otherconsumermanufactures 17 Investmentgoods 56 Investmentgoods 23 Otherexports 2 Otherimports 3 Total Ï00 Total TOO THE CURRENCY Monetaryunit: DeutscheMark CurrencyunitsperUSdollar, central rate: asfrom21.12.1971 3.2225 asfrom 14.2.1973 2.9003 asfrom 11.3.1973 2.8159 Note FiguresincludetheSaarandWestBerlin. Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. OECD ECONOMIC SURVEYS GERMANY ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation for Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December, I960, which 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 maintaining financial sta¬ bility, and thus to contribute to the development of the world economy; to contribute to sound economic 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 accord¬ ance with international obligations. The Members of OECD are Australia, Austria, Belgium, Canada, Denmark, Finland. France, the Federal Republicof Germany, Greece, Iceland,Ireland,Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Por¬ tugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Socialist Federal Republic of Yugoslavia is associated in certain work of the OECD, particularly that of the Economic and Development Review Committee. The annual review of Germany by the OECDEconomicand Development ReviewCommittee took place on 18th April, 1973. The present Survey has been updated subsequently. © OrganisationforEconomic Co-operation and Developement,1973. Queries concerning permissions or translation rights should be addressed to : Director ofInformation OECD 2, rue André-Pascal, 75775 PARIS CEDEX 16, France CONTENTS Introduction 5 I Current policy issues and short-term prospects 6 II Particular nature of the current upswing 14 m The past policy record 22 (a) Public finances 24 (b) Monetary policy 36 IV Conclusions 53 Annexes I Fiscal and monetary indicators technical note on methods and concepts 57 II Counter-cyclical fiscal policy measures~1967-1971 71 m Chronology of main economic policy measures 1972-1973 75 TABLES Text: 1 Official short-term target projections 7 2 Public sector account 10 3 Recent monetary indicators 11 4 Trends and prospects ofdemand and output 12 5 Balance ofpayments 20 6 Economic growth and cyclical variability in international com¬ parison 22 7 German relative price performance in international comparison 23 8 Public sector account Comparison between projected and actual developments 30 9 German tax burden in international comparison 35 10 Lags from peaks and troughs in level of interest rates to cyclical turning points in business investment 46 11 Cyclical changes in maturity composition of external investment financing 47 12 Special measures against capital inflows during restrictive policy periods 51 Statistical Annex: A Gross national product 83 B Distribution ofnational income 84 C Employment and labour market 85 D Industrial production, new orders and deliveries 86 E Wages and prices 87 F Volume of money, monetary capital formation and bank liquidity 88 G Merchandise trade by area 89 H Merchandise trade by commodity groups 90 I The balance ofpayments 91 DIAGRAMS 1 Development ofprices 8 2 Output and new orders in manufacturing 9 3 Wage development 13 4 Indicators ofcyclical instability 15 5 Indicators ofdemand pressure 16 6 Cyclical fluctuation ofmain expenditure components 17 7 Main sources ofcyclical instability 18 8 Prices, costs and incomes 21 9 Cyclical behaviour ofpublic finance 25 10 Budget impact indicators 27 II Civil engineering orders from public sector 28 12 Cyclicalbehaviourofexpenditureandrevenuebylevelsofgovernment 31 13 Cyclical behaviour ofmain budgetitems 33, 34 14 Main features ofthe german financial system 38 to 40 15 Posture ofmonetary policy and interest rates 41 16 Growth ofmonetary aggregates 43 17 Investment expenditures and monetary policy changes 45 18 Monetary aggregates and external surpluses 49 INTRODUCTION * The economic downswing which followed the exceptionally strong 1969/70 boom was mild and short-lived. It has since the fourth quarter of last year given way to a new export-led upturn which appears to be stronger than anticipated in the Government's 1973 target projections. Given the small margin of slack existing at the beginning of the upswing, an optimum degree of resource utilisation will be reached at an early stage of the cycle. This, combined with a less strong competitive position of German industry, should enable Germany to make a further contribution to the reduction of international payments disequilibrium and to a better distribution of inter¬ national reserves. Against this generally favourable background, the short and medium-term price outlook is less comfortable and raises important policy issues. Germany shares the experience of deteriorating price performance with most other Member countries; but relative to the earlier post-war record her loss of price stability has been particularly pronounced. The Government has refrained from direct intervention into the price/wage formation process, not only because of political inopportunity, but also because this approach is not regarded as tackling the problem at its roots. It is rather seen as post¬ poning the problem, and indeed aggravating it in the future. The burden of stabilisation policies lies therefore with demand management policies. Indeed, both fiscal and notably monetary disinflationary measures were imposed at an early stage of the recovery, but these measures may not be sufficient to reverse the tendency towards accelerating inflation. Part I of the present Survey discusses recent economic trends and short- term prospects on the basis of the present policy stance. Part II examines in what respects the starting point for the current upswing and the economic and political environment are different from those of previous recoveries which have typically seen a high degree of cost and price stability. Part HI attemptsan assessment oftheshort-run demand impact offiscal and monetary policies against the background of the relatively steady advance of the economy up to the mid-1960s and its less stable behaviour thereafter. The main policy issues and conclusions are summarised in Part IV. A calendar of main economic events and policy measures, and technical notes and comments on the measurement of fiscal and monetary demand impacts are given in Annexes I, II and HI. * This SurveywaspreparedinApril and doesthereforenottakeaccountofthemost recent Government measures announced in May (see Annex TU). These measures are important and should progressively serve to slow down the growth ofdemand and prices. But the main effects may not be felt before the end ofthis year. OECDEconomicSurveys I CURRENT POLICY ISSUES AND SHORT-TERM PROSPECTS 1972 marked the second consecutive year of relatively moderate growth. The real GNP increase of 2.9 per cent and the resulting easing of pressures on resources were consistent with the Government's 1972 target projections (Table 1). However, two important developments ran counter to expecta¬ tions. First, partly influenced by special factors, the advance in consumer prices accelerated sharply in the second half of last year (Diagram 1); and at the turn of the year, soaring import prices, a steeper trend in industrial producer prices and growing inflationary expectations as suggested by IFO business surveys gave rise to renewed concern. Second, the moderate recov¬ ery in activity which had been predicted by most observers did not come through as smoothly as foreseen. Following weaker trends during the summer months, the last quarter saw a spectacular rise in foreign demand and domestic investment, tendencies which have been confirmed by more recent indicators (Diagram 2). Pressures on the labour market and industrial capacities rose rapidly, and regained their long-term average levels, pointing to the re-emergence of boom conditions at an early stage of the upswing. Demand management policies have been speedily adjusted to the change in business conditions. To prevent a further strengthening of inflationary pressures the Government's 1973 target projection aims at keeping the advance in output at close to capacity rate. Growth of public expenditures is expected tobekeptwithin reasonablebounds bythefreezing oftax revenue, and other measures envisaged include the issue of a stabilisation bond of up to DM 4 billion1. To curtail the growth of private demand, the Government has proposed increases in direct and indirect taxation equivalent to about i per cent of GNP. A further quasi-automatic rise in revenue equivalent to almost 1 per cent of GNP will result from increases in social security contri¬ bution rates in line with earlier decisions. Overall, increases in revenues and public expenditures are expected to imply a restrictive swing in the public sector's financial balance equivalent to about le per cent of GNP (Table 2). Since about mid-1972, monetary policy has maintained a restrictive posture, aiming at strict control of banks' "free liquid reserves". However, domestic credit and money supply M2 continued to grow rapidly until the end of last year, while money supply Ml grew at considerably lower rates in the second half of 1972. The deceleration of monetary growth early this year was temporarily brought to a halt by heavy inflows during the recent international monetary crisis (Table 3). Banks' liquidity position has been severely squeezed in recent months, suggesting a significant deceleration in the growth of monetary aggregates in the months ahead. However, existing money stocks originating from excessive monetary expansion over the last 12 to 18 months could cushion the impact of credit policy on non-financial sectors. 1 SeeAnnexHI. Table 1 OfficialShort-TermTargetProjections Percentagechangesagainstpreviousyear 1968 1969 1970 1971 1972 1973 RealGNP projected 4 .0 41 4 -5 3 -4 2 -3 4-5 actual 7 .3 8 .2 5 .8 2 .7 2 .9 GNPdeflator projected 2 .1 21 5 4* 5 51 actual 1 .6 3 .6 7 .1 7 .7 6 .1 Privateconsumptiondeflator projected 2 .5 2 3 3 41 5J- 6 actual 1 .9 2 .5 3 .5 5 .2 5 .8 Foreignbalance(percentofnominalGNP) projected 21 2* 11-2 U-2 H actual 3 .3 2 .4 1 .6 1 .3 1 .6 Unemployment ratio in per cent of depen¬ nearly just above nearly dentlabourforce projected 1 .4 1 1 1 1 1 actual 1 .5 0 .8 0 .7 0 .8 1 .1 Compensationofemployees projected 4 .7 8 1 121-131 9*-10J 7 -8 101-111 actual 7 .4 12 .7 17 .7 13 .3 9 .7 Incomefromproperty andentrepreneurship projected 11 .8 1 4 -5 3 -4 6 -7 9 -10 actual 17 .5 6 .6 9 .7 3 .7 7 .1 Source:Jahrawirtsctufuberlcbte. OECDEconomicSurveys Diagram 1 Deretopment ofPrices CONSUMER PRICES seasonal), adjustedquarterly increases at annual rates INDUSTRIAL.PRODUCER PRICES - quarterlychangesoverpreviousyear PRICES IN MANUFACTURING J 30 (BusinessSurvey) / 20 V S Ns Charriesovernex13months2 ^(cid:9)l^j 10 0 Changesoverpreviousmonth 6 IMPORT PRICES- 4 quarterlychangesoverpreviousyear 2 0 L -2 . -4 » I IV I II III IY I II III IV 1 II III IV I II III IV 1969 1970 1971 1972 1973 1 1973 Secretariatestimate. 2 Predictionsattributedtoend ofpredictionspan. Sources: StatistischesBundesamt,IFO, OECD. 8