The IMF slashed its 2008 German growth forecast to 1.5 percent on Wednesday, warning that weaker global economic activity would curb exports from the biggest European economy. In forecasts released in October, the International Monetary Fund had estimated that the German economy would expand by 2.0 percent this year, following growth of 2.5 percent in 2007.
"A slowing US economy and weaker world trade is pulling down GDP (gross domestic product) growth given Germany's strong external dependence," the fund said in comments posted on its Internet site. The euro's strength against other currencies and high oil prices were also putting the brakes on industrial production to a lesser extent, it added. Berlin had forecast German growth of 1.7 percent this year, while the central bank and the European Commission both expected it to slow to 1.6 percent.
Like the German government, the IMF said household consumption should pick up in the coming months owing to lower unemployment and rising wages. The fund also welcomed German efforts that resulted in a balanced budget after six years of deficits. It pointed in addition to increased competitively that was the result of structural reform policies, particularly in the labour market, but urged authorities not to relax their efforts.
The IMF "recommended that a co-ordinated effort be made to raise Germany's growth potential," which was estimated at between 1.5-1.75 percent but expected to decrease as the population aged.
It said that "skills shortages need to be addressed by improving education and training, but also by encouraging the immigration of skilled workers." The debate over opening up Germany's labour market to workers from eastern Europe has been simmering for months.
The country is worried that its position close to new European Union members could see it flooded with workers willing to accept lower pay than Germans and thereby stoking social tensions. But Berlin has been forced to modify a hard line on refusing to grant work permits because German companies have begun to suffer from a lack of skilled labour. Labour Minister Ola Scholz nonetheless indicated Friday that the government was favourable to extending restrictions on workers from former communist countries until 2011.