OECD Predicts Slower Growth for Germany

The OECD also urged Berlin to press ahead with its economic reforms following Chancellor Gerhard Schröder's decision to bring forward the general election in a high-stakes gamble aimed at defending his ambitious program of social and labor market reforms.

In its spring Economic Outlook, the OECD predicted that the German economy would grow by around 1.25 percent this year and 1.75 percent next year as the upswing broadens.

The forecasts are drastically lower than those in the OECD's autumn report, when the think-tank had been penciling in growth of 1.4 percent for the euro zone's biggest economy in 2005 and 2.3 percent in 2006.

The forecasts are adjusted to take account of inflation, seasonal factors and the differing number of working days.

"Growth remains weak and heavily dependent on foreign demand," the OECD wrote. "But both non-residential investment and -- somewhat later -- household consumption are projected to pick up in the course of 2005."

Public deficit problem

Nevertheless, growth would still not be strong enough to curb Germany's public deficit which has already exceeded EU limits for the past three years and is expected to do so again both in 2005 and 2006.

Under the terms of the European Growth and Stability Pact, euro zone countries are not allowed to run up deficits in excess of 3 percent of gross domestic product (GDP).

The German deficit ratio stood at 3.6 percent in 2004 and the government has vowed to bring it back below the 3 percent limit this year.

However, most experts remain skeptical and even Finance Minister Hans Eichel conceded recently that the goal was becoming increasingly difficult as growth consistently disappoints, tax revenues fall short of target and unemployment payments soar.

Need for further reforms

The OECD predicted that the German deficit would amount to 3.5 percent of GDP again in 2005, falling only slightly to 3.25 percent in 2006, adding that further structural reforms were necessary to pull Germany out of its current economic quagmire.

"For economic performance to be raised in a durable way, reforms have to be continued and deepened within a coherent framework," the organization wrote.

But it was precisely the vast program of such reforms introduced by the current administration under Schröder that has seen the popularity of the ruling Social Democrat SPD party slump to all-time lows in the opinion polls.