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Questions:

Discuss about the Economic Condition of Germany.
 
 

Answers:

Introduction

The economy of Germany has continued to be one of the leading and powerful economies despite a number of economic headwinds within the European Union. Since the Global Financial Crisis of 2008, the German economy has come a long way forward supported by long-term investment freedom and entrepreneurial growth (Maitah, Toth & Kuzmenko, 2015). In the meanwhile, Germany has been ranked nineteenth richest country of the world economy based on the GDP per capita of US$ 45551.51 in 2016 (Worldbank.org, 2017).

Currently, the financial, as well as political challenges with the eurozone, have taken a toll on the economic growth of the nation. In this particular study, the current economic condition of Germany has been elaborated describing the Gross Domestic Product, GDP growth rate, and GDP per capita. Evidently, the existing economic condition in Germany has seemed to be stabilised due to a decline in unemployment rate to 3.8 percent in the last quarter. Notably, the FDI inflow of US$ 31.7 billion has contributed the growth sustainability, to say the least (Worldbank.org, 2017).

Production Output Performance Analysis

The analysis of the production output performance can identify the current status of the German economy in terms of GDP, GDP annual growth rate, and GDP per capita. Interestingly, in the late 1990s and early phase of 2000s, the economic growth of Germany was relatively slower than most other eurozone countries. Also, the fundamentals of the economy were inflexible to some extent. Coming back to the present state of affairs, the German economy can be recognised as the fourth-largest GDP in the global stage worth US$ 3466.76 billion in 2016 (Worldbank.org, 2017). In the underlying figure, Germany’s GDP data of last 10 years has been charted.

Figure: Germany Gross Domestic Product (in USD billion)

Source: (Worldbank.org, 2017)

In the meanwhile, the current GDP of the German economy has represented 5.59 percent of the entire world economy. However, the trend of GDP has not evidently upward. Over the last decade, in 2014, the GDP of the economy was valued worth US$ 3879.28 billion highest in the last 10 years. In terms of economic growth, the pullback of the economy has been remarkable. In the first quarter of 2017, the economy of Germany has expanded at a rate of 1.7 percent (Worldbank.org, 2017). In the first quarter of 2009, due to the impact of GFC, the GDP annual rate of the German economy was contracted by 6.8 percent. Since then, the recovery stage of the German economy was staged by the government as well as the Central Bank of the nation.

Figure: Germany GDP Annual Growth Rate

Source: (Worldbank.org, 2017)

As illustrated in the above figure, in 2011, the economy has registered a yearly growth of 5.9 percent which is the highest in the last decade. Precisely, the yearly growth rate of the German economy is hovering around 1 to 2 percent since the third quarter of 2014 showing the steady economic status of the nation. On the other hand, the exiting GDP trend of the economy has continuously supported the GDP per capita of the country. Since 2009, the German GDP per capita has improved at a significant rate. As shown in the figure below, the GDP per capita has been recorded at US$ 45551.51in 2016 from 40086.1 in 2009 (Worldbank.org, 2017). The steady growth in the GDP per capita has pointed towards the economic stability as well as income status of the citizens of Germany.

Figure: Germany GDP Per Capita (in USD)

Source: (Worldbank.org, 2017)

Through the identification of the economic performance trends, it is quite clear that the German economy has outperformed over the last decade. According to the reports of Deutsche Bank, the central bank of Germany, most of the economic indicators are showing sustainable growth patterns. The largest economy of the eurozone is also supported by the fiscal policy. The economic policy reforms such as modern tax policies have been effective to draw improved government revenue. Currently, the government runs a budget surplus that is expected to reach US$ 25 billion in the recent year (Spitz-Oener, 2017).

Invariably, the tight monetary policy of Deutsche Bank has contributed towards money inflow to attain long-term public as well as private sector growth. Evidently, the German government has worried about the financial situation among the other eurozone economies that have added significant pressure on the economy. On the other hand, the German government is thinking about declining the regulatory costs so that unproductive expenditure can be controlled. However, improved consumer demand and expenditure have largely contributed towards the growth of the economy. Also, the export of the country has reached to a whooping figure of $1.3 trillion that values half of the GDP of the nation (Spitz-Oener, 2017). In this way, the long-term policy benefits of the government have fuelled the economic growth.

Labour Market Analysis

The existing labour market analysis of Germany is pointing towards a significant improvement in unemployment rate since 2010. By considering the economic uncertainties with the eurozone and high rate of unemployment in the most of the eurozone economies, the jobless rate of Germany can be termed as an exception (Juessen, 2016). Over the last decade or so, the number of jobless people has been reduced by as much as 50 percent. Remarkably, the jobless number in Germany has come down to 2.6 million as the seasonally adjusted unemployment rate has recorded at 3.8 percent in the recent June quarter. Instrumentally, the services and industrial sector in Germany have contributed the most in adding employments over the last decade (Pollmann-Schult & Büchel, 2015).

Figure: Germany Unemployment Rate

Source: (Worldbank.org, 2017)

As shown in the above presented chart, in 2007, the unemployment rate was recorded at more than 9 percent. Effectively, the fiscal policy of the German Government has supported the long-term growth structure to create more jobs (Fitzenberger & Wilke, 2010). As a sign of recovery, the unemployment rate in Germany has continuously maintained a downward curve although Germany has provided suitable accommodation for more than1 million refugees since 2015. Notably, positive economic outlook and industrial growth opportunities in the private as well as public sector have emerged new competition in the job markets (Fendel, 2014). Slowly but steadily, the government policy and government expenditure have transformed the job market of the country adding significant number of jobs each year. Clearly, the federal labour market reforms initiated way back in 2003 has shown its long-term effect in case of Germany (Klemmer & Wink, 2016).

 


By considering the last ten years statistics of the labour market in Germany, it can be seen that three different types of unemployment can be evident in the economy. Firstly, the adverse impact of cyclical unemployment can be seen in the nation during and after the Global Financial Crisis. It can be seen that the downfall in the global economy directly impacted several industries of Germany leading to a fall in the demand for labour. Hence, a rise in the unemployment rate from 7 percent to 8 percent can be seen during that phase (Ilmakunnas & Pesola, 2013). Alternatively, another type of unemployment that occurs in an economy is known as structural unemployment. The structural unemployment occurs due to the lack of technical skills and knowledge among the younger generation people that are required by the multinational companies to hire an employee (Mclaughlin, 2013). According to the statistical figures, it can be seen that the youth unemployment rate of Germany is considerably higher than the total unemployment rate due to the lack of skills that leads to structural unemployment. However, the Government of Germany has been quite effective in reducing the youth unemployment rate from around 12.5 percent to around 6.75 percent between 2009 and 2016 (Flórez, 2017). Furthermore, the third type of unemployment that occurs in the nation is known as frictional unemployment. This type of unemployment occurs due to the voluntary retirement of the workers in search of a new well paid job. Frictional unemployment is a type of unemployment that cannot be avoided in an economy due to the job changing behaviour of the employees. Hence, a minimum level of unemployment cannot be avoided in a well developed nation like Germany.

The German Government has introduced an explicit policy to shorten the work hours in place of laying-off the workers. The “shorting of work hours” policy has helped the government to increase the number of job and provide employment to more number of people. Moreover, the Government of Germany has increased the minimum hourly wage rate by 4 percent from €8.50 per hour to €8.84 per hour and a special wage commission has been announced in order to minimise the frictional unemployment in the nation (Lange & Georgellis, 2017). Additionally, the Government has used its tax rate policy in order to attract foreign investment and promote business in the nation to increase job opportunities in the Germany (Geest, Siegers & Bergh, 2009). Hence, it can be seen that the German Government has worked effectively in order to control the unemployment rate in the last ten years.

Price Level Analysis

Inflation rate presents the rise of average price level in an economy for a particular time period. It can be seen through the statistical report of the World Bank that the inflation rate in Germany has always remained under 4 percent throughout the last 10 years. During the Global Financial Crisis, the supply of money reduced in the market due to the downfall in the global economy and high interest rate (around 4 percent) that led to a rise in the aggregate price level to around 3.25 percent (Worldbank.org, 2017). However, the economy has faced a small rate of deflation after the end of the GFC in 2009 and during 2015. The German Government has effectively controlled the flow of money using its monetary policy and supply of products and services in the market using its fiscal policy to manage a balanced inflation rate in the nation. Currently, the inflation rate of Germany is around 1.75 percent (Worldbank.org, 2017). A figure has been given below to present the last ten years inflation rate of Germany:

Figure: Inflation rate of Germany

Source: (Worldbank.org, 2017)

There are two major reasons for the occurrence of inflation in an economy, which are known as cost push inflation and demand pull inflation. The two types of inflation that have occurred in the German economy have been explained in details in the section given below.

Figure: Cost Push Inflation

Source: (Sanner & Bussmann, 2013)

During the GFC, the aggregate supply of products and services decreased leading to a shift in the aggregate supply curve from AS to AS’. On the other hand, the aggregate demand remained constant at AD. Hence, an increase in the aggregate price level can be evident during the GFC in 2008 (Forstater, 2017). However, an increase in the aggregate supply can be evident after the GFC and in the year 2015-16 that resulted in deflation in the nation. The second reason for inflation is the demand pull factors. A figurer has been presented below for better understanding:

Figure: Demand Pull Inflation

Source: (Sanner & Bussmann, 2013)

For example, during the GFC and few years after GFC, an increase in the aggregate demand can be evident in the German economy resulting in a rightward shift in the aggregate demand curve from AD1 to AD2. On the other hand, the aggregate supply curve remains constant at AS. Hence, a rise in the average price level can be evident from PL1 to PL2 resulting in an inflation in the economy.

The German Government has effectively controlled the aggregate price level of products and services in the nation using its price flooring policy and low interest rate strategy. For instance, in order to control the high inflation rate in the market during the global financial crisis, the government reduced the interest rate to around 1 percent from 4 percent (McCallum & Nelson, 2016). Additionally, the government used to price flooring strategy to set a minimum and maximum price for a product and service in the nation to control the growth of aggregate price level. Hence, it can be clearly seen that the Government of Germany has effectively controlled the price level or inflation rate in the last ten years.

Conclusion

By considering the above analysis, Germany is one of the leading economies of the world with an annual GDP growth rate of around 2 percent. Moreover, the German Government has effective made changes in its economic policies in order to control the unemployment rate in the nation. The increase in the minimum wage rate and promotion of business in the country has helped the economy to minimise its unemployment rate from around 9 percent to 4 percent in the last ten years. Additionally, the low interest rate policy of the government has helped the economy to control the aggregate price level and maintain economic balance in the German market.

 

References

Fendel, T. (2014). Work-related Migration and Unemployment. Journal For Labour Market Research, 47(3), 233-243.

Fitzenberger, B., & Wilke, R. (2010). New Insights into Unemployment Duration and Post Unemployment Earnings in Germany. Oxford Bulletin Of Economics And Statistics, 72(6), 794-826.

Flórez, L. (2017). Informal sector under saving: A positive analysis of labour market policies. Labour Economics, 44, 13-26.

Forstater, M. (2017). Economics (4th ed.). London: A. & C. Black.

Geest, G., Siegers, J., & Bergh, R. (2009). Law and economics and the labour market (4th ed.). Cheltenham [England]: Edward Elgar Pub.

Germany. (2017). Worldbank.org. Retrieved August 2017, from https://www.worldbank.org/en/country/germany

Ilmakunnas, P., & Pesola, H. (2013). Regional Labour Market Matching Functions and Efficiency Analysis. Labour, 17(3), 413-437. Juessen, F. (2016). A distribution dynamics approach to regional GDP convergence in unified Germany. Empirical Economics, 37(3), 627-652.

Klemmer, P., & Wink, R. (2016). Preventing unemployment in Europe (3rd ed.). Cheltenham, UK: E. Elgar.

Lange, T., & Georgellis, Y. (2017). Active labour market policies and unemployment (3rd ed.). Bradford, England: Emerald Group Pub.

Maitah, M., Toth, D., & Kuzmenko, E. (2015). The Effect of GDP per Capita on Employment Growth in Germany, Austria and the Czech Republic: Macroeconomic Analysis. Review Of European Studies, 7(11).

McCallum, B., & Nelson, E. (2016). Monetary and fiscal theories of the price level (3rd ed.). Cambridge, Mass.: National Bureau of Economic Research.

Mclaughlin, E. (2013). Understanding Unemployment (2nd ed.). Hoboken: Taylor and Francis.

Pollmann-Schult, M., & Büchel, F. (2015). Unemployment Benefits, Unemployment Duration and Subsequent Job Quality. Acta Sociologica, 48(1), 21-39.

Sanner, B., & Bussmann, W. (2013). Current status, prospects and economic framework of geothermal power production in Germany. Geothermics, 32(4-6), 429-438.

Spitz-Oener, A. (2017). The Real Reason the German Labor Market Is Booming. Harvard Business Review. Retrieved August 2017, from https://hbr.org/2017/03/the-real-reason-the-german-labor-market-is-booming

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