Abstract
This 1999 Article IV Consultation highlights that the monetary conditions in Germany have eased significantly since late 1998, reflecting both policy actions and exchange rate developments. Short-term interest rates were reduced by the Bundesbank to 3 percent in December 1998 and, in the new context of European Monetary Union, by the European Central Bank to 2½ percent in April 1999. The depreciation of the euro against other currencies since its inception in January 1999 has also been supportive of activity.
This statement provides information on economic and financial developments that has become available since the staff report for the 1999 Article IV consultation with Germany (SM/99/249) was issued on September 30, 1999. This information does not alter the thrust of the staff appraisal.
1. Recent indicators support the strengthening of activity for the near term envisaged in the staff report, with GDP growth projected to pick up from 1½ percent in 1999 to 2½ percent next year.
Business confidence, as measured by the IFO business climate index, improved further in August to 95.3, from 93.6 in July. Confidence has now recovered almost to the level of mid-1998, before German exports were hit by the emerging market shock.
Manufacturing orders rose for the third month in a row in August and were 9 percent higher than a year earlier, with foreign orders particularly strong. Manufacturing output increased by 2½ percent between June and August.
The long-dormant construction sector shows signs of recovery, with latest data on orders showing a rise of 2½ percent from the previous month.
Retail sales have firmed, and in August were 1½ percent higher than a year earlier.
2. In the labor market, unemployment has remained stable in recent months at a standardized rate of about 9 percent, helped by active labor market measures including the authorities’ initiative to reduce youth unemployment. Monthly employment statistics have not been published since the beginning of the year owing to a changeover in social insurance reporting procedures.
3. Inflation remains subdued, despite energy price increases associated with world oil market developments and the increase in energy taxes in April this year. 12-month CPI inflation was 0.7 percent in September, unchanged from August.
4. In financial markets, short- and long-term interest rates have both risen by more than 50 basis points since August, in response to evidence of strengthening activity in Germany and the euro area, as well as financial market developments in the United States. Three-month rates are now 3.5 percent and ten-year bond yields 5.4 percent. Monetary conditions (including also the effects of recent exchange rate movements) have become somewhat less easy, returning toward early 1999 levels.