Transcript of a conference call with Ashoka Mody, Assistant Director, European Department, on the release of the 2008 Article IV consultation with Germany

January 22, 2009

Washington, D.C. Thursday, January 22, 2009

MR. MODY: Good morning. Our growth projection for Germany for 2009 is minus 2.5 percent. Since we have made our projections, the European Commission and the German authorities have also come out with their projections and they are both at minus 2.3, close enough to where we are. Their projections look a little better for 2010 so we are projecting a slower recovery in 2010 than either the Commission or the German authorities. There are always some compositional differences between them and us.

On the financial sector, the key point is that the Financial Market Stabilization Fund has provided stability. There is a renewed round of financing through this Fund that is ongoing and this is going to be an important vehicle for the German authorities to continue to manage through 2009 as clearly there are going to be more demands on the Fund.

On the fiscal stimulus, I think our documents are relatively clear. First, the German authorities had been criticized for not doing enough. It is clear that with the latest package the effort is substantial, and as it stands today it is at least in a comparable range to anyone else. There remains the possibility that other countries may yet provide a larger stimulus, but in an international comparative sense the German stimulus is sizable. So the real question is is this enough, and our view on that is that given that the economic situation has deteriorated very rapidly something larger could have been justified and may have been desirable. Indeed, the key question then in terms of the effectiveness of the stimulus is its composition, and again there remains scope for doing better with the amount of money that n the proposed packages.

I think with that I can stop, and I'll be happy to take questions.

QUESTIONER: I just wondered if you could clarify the German growth projection for 2009, because the table in the report indicates minus 0.8 which is the same as your projection in November 2006 and now I think I heard you say that you project minus 2.5 for this year.

MR. MODY: Our projection for 2009 is minus 2-1/2. Just before the Board meeting we issued a supplement and that gives the most updated numbers, so our projection for 2009 is minus 2-1/2, and for 2010 is 0.1.

Questioner: Could you please say something about the German growth a little bit further down the road, let's say 2011, 2012?

MR. MODY: Let me try to answer you in a qualitative way rather than to give you an exact number for 2011 and 2012. We are forecasting a relatively gradual recovery at this point. In other words, we are not forecasting a rapid bounce back. And the thinking behind that is that there is the sort of robust growth that Germany enjoyed up until the middle of 2007 was part of a global process which had reached a very strong point in the upswing cycle and Germany benefited from this in a particularly significant manner as demand for German goods, particularly of its investment goods, was very strong. We think that even when this recovery starts, the major global demand in world trade will be such that it will be a while before the global investment cycle reaches a point where that kind of demand will be renewed to a significant extent. Therefore, we are projecting a somewhat more modest growth recovery.

We are also somewhat different from the other projections. Even though some of the aggregate numbers are not very different, we continue to think that German consumption growth will remain moderate if for no other reason than this has been a big shock and our analysis suggests that German consumers take some time before they readjust to such shocks. Moreover, even when the recovery starts, unemployment will be at the highest level and so consumption growth will also in our review recover only very slowly. So for both these reasons we think that 2010 will be relatively moderate growth—positive territory, and then 2011 it will begin to show some recovery. But perhaps in some short-run sense the potential output of Germany has at least for the next 3 to 5 years been scaled down from what it was in the last phases of the upswing that we saw until mid-2007.


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