IMF urges Germany to spur domestic demand

BERLIN — The International Monetary Fund on Tuesday praised Germany’s strong economic record in the face of turmoil in financial markets and Europe’s debt crisis, but urged Berlin to take the opportunity to boost domestic demand in case exports drop off.

In an annual report on Europe’s biggest economy, the IMF said low unemployment and healthy pay increases for workers would normally lift consumer spending, and recommended the government allow this to happen.

It also suggested that Germany should take advantage of favorable economic conditions to encourage investment outside manufacturing, the country’s traditional area of strength.

This year has seen significant pay rises for many workers in Germany, increases that came after a long period of relative restraint and two years of strong economic growth.

In May, Germany’s biggest industrial union, IG Metall, secured a 4.3 percent pay raise over 13 months for some 3.6 million manufacturing workers. In March, some 2 million public-sector employees won a raise totaling 6.3 percent over two years.

Meanwhile, Germany’s year-on-year inflation rate hit an 18-month low of 1.7 percent in June and unemployment stands at 6.6 percent.

“The performance of the German economic has been remarkable so far,” the IMF report’s lead author, Subir Lall, told reporters in a conference call.

“With incomes rising and healthy balance sheets you should expect naturally domestic demand to pick up,” he said, adding that by spurring domestic demand Germany would also benefit other countries in the troubled 17-nation eurozone.

The IMF report identified the eurozone’s debt woes, undercapitalized banks and the possibility of a global downturn as the biggest risks to the German economy.

It concurred with a recent German central bank forecast of 1 percent economic growth in 2012. The IMF predicts growth will rise to 1.4 percent next year.