"The German economy appears to be in a position where it could now realize a shift from a regime where demand tended to undershoot supply to one in which more expansionary supply conditions and resulting improved growth prospects feed through into more buoyant demand," the Organization for Economic Cooperation and Development wrote in a special report on Germany released on Tuesday.
"The challenge in this context is to make improvements in a variety of areas -- long-term growth, employment creation, public finance sustainability -- while at the same time preserving what could well be a genuine recovery in short-run activity extending beyond the export sector," the report found.
The OECD is penciling in gross domestic product (GDP) growth of 1.8 percent for Germany this year and growth of 1.6 percent next year. Unadjusted for the differing number of working days, German GDP was projected to expand by 1.6 percent in 2006 and by 1.5 percent in 2007, the organization said.
The German government, for its part, is penciling in growth of 1.6 percent this year and just 1.0 percent next year.
More work ahead
"Despite courageous reforms, a lot remains to be done to reduce unemployment and boost employment creation," the OECD said. It said that the hurdles "to labor force participation of older employees and females need to be further reduced." It continued: "More flexible employment contracts are necessary. Wage rigidities need to be reduced further to fight very high unemployment rates among the low-qualified."
The OECD also said that the education system needed to become more effective. Universities should be funded according to performance and incentives made for universities to raise research performance and improve teaching quality on a broader and more sustained basis.
Finally, in the area of public finances, the OECD found that "a credible consolidation policy is needed that links expenditure control with public sector reform covering federal fiscal relations, removing distortions in the tax system and making the key government services more efficient."