Germany is still wrestling with the burden of reunification, but there is no gainsaying the remarkable revival of West German industrial competitiveness. As economist Ralph Suppel of J.P. Morgan & Co. notes, manufacturers have successfully pushed through large-scale reforms while obtaining major concessions from labor unions on wage growth and work-time flexibility.
From its cyclical low in late 1992, Suppel reports, productivity has surged an impressive 15.5% (chart), or close to 10% after adjusting for rising utilization due to faster demand growth. That's the best two-year gain since the 1960s.
As a result of the productivity gain and wage growth below 1.5% last year, unit labor costs in the third quarter were down 10% from their cyclical high. The drop, the largest in postwar history, more than offset a 6% rise in the value of the trade-weighted mark.
Although higher wage gains and slower productivity growth will inevitably push unit labor costs up as the expansion matures, Suppel notes that Germany's competitiveness has already boosted its export performance and has touched off renewed domestic capital spending. That should result in employment growth and, by the end of 1995, a recovery in household spending.