OECD points to German investment deficiency as growth risk

[BERLIN] Germany has failed to take advantage of cheap borrowing costs to boost investment that is essential to longer-term economic growth, the Organisation for Economic Cooperation and Development (OECD) said on Tuesday.

In an economic survey, the Paris-based OECD also said weakness among Germany's trading partners could weigh on consumer confidence, which is crucial to supporting the private consumption on which the economy is increasingly reliant. "A sharper slowdown of activity in emerging markets and renewed weakness of activity in the euro area could weaken exports more strongly than projected, dampen investment, and spill over to consumer confidence," the OECD said.

In January, Germany lowered its growth forecast for 2016 to 1.7 per cent - the same rate as last year - citing the effect of an emerging market slowdown on its exports.

In its report, the OECD said: "The government and businesses have taken little advantage of low interest rates to boost investment, despite sound government finances and strong profitability." It singled out a weakness in investing in 'knowledge-based capital' - spending on intangible assets such as intellectual property, software and management skills - where it said Germany lagged other leading economies.

Manufacturing firms that invest more on software generate more patents per dollar spent on research and development, the OECD said.

"Reforms to foster investment in knowledge-based capital and unleash the potential of key services ... would also boost the competitiveness of manufacturing, fostering the transition to'Industry 4.0'," it added - a reference to the government's push to connect manufacturing to the Internet.

Rather than exploiting record-low borrowing costs to ramp up investment, the German government's priority has been on maintaining a balanced budget.

Last month, the cabinet approved fiscal plans for 2017 that Finance Minister Wolfgang Schaeuble said catered for higher spending on migrants, security and infrastructure without having to borrow more money.

To boost investment and strengthen productivity, the OECD urged Germany to reduce restrictive legislation in professional services, sell government stakes in regional Landesbanks and provide more support for municipal investment projects.

Turning to Germany's foreign trade surplus, the OECD added:"A large current account surplus contributes to global imbalances." Germany has faced international pressure before to boost economic demand at home to balance out its trade position, and its economy has become less reliant on exports for growth in recent years.

REUTERS