THE WEST GERMAN ECONOMY IN THE SPRING OF 1970

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030043-1
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: October 31, 2011
• Sequence Number: 43
• Publication Date: March 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Kest German Economy In The Spring Of 1970
COME vidreol-It
ER IM 70-43
March 1970
Copy No.
47
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WARNING
This document contains infoumation allecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
C.Jud I hom ,oIo ode
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1970
INTELLIGENCE MEMORANDUM
The West German Economy
In The Spring Of 1970
Introduction
West Germany's 30-month old economic boom is
continuing, but signs point to a slowdown late this
year. Revaluation of the Deutschemark (DM), in
October 1969, has not yet had much of a moderating
effect. Prices and wages have risen more rapidly
in recent months than at any time since the Korean
economic expansion of two decades ago. The govern-
ment and monetary authorities face the delicate
task of devising the proper policy mix that will
reduce inflation to an acceptable rate without pre-
cipitating a recession. Facing important elections
in several states during the current year and ob-
taining divided counsel on economic prospects and
prescriptions, the Brandt coalition government thus
far has moved cautiously in applying fiscal brakes.
Less inhibited by political constraints, the Bundes-
bank, as in 1966, has again assumed the more active
role in economic policy formulation. Its recent
increase in the rediscount rate, the bellwether for
the entire structure of domestic interest rates,
from 6% to a postwar record high of 7.5% is the
most severe anti-inflationary action thus far taken.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current In-
telligence and the Office of National Estimates.
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The Boom Continues
1. The West German economy today exhibits most
of the symptoms characteristic of the late phase of
a prolonged boom -- virtually full capacity utili-
zation of plant and equipment., depleted labor re-
serves, rapidly rising wages and prices, and
lengthening delivery schedules but a dropoff in the
growth of new orders. The continuing large foreign
trade surplus is the only incongruent element in
the picture.
2. By straining available resources to the
limit, West Germany in 1969 was able to increase its
GNP (in constant prices) by 8.4%, exceeding the
already very high real growth rate of 7.6% registered
in 1968. The output of goods and services is still
expanding vigorously, but at a declining rate.
Whereas GNP (in constant prices) in the first quar-
ter of 1969 exceeded the level of the corresponding
period in 1968 by 9.4%, growth by the fourth quarter
had slowed to 7.4%. Industrial production in 1969
increased 12.5%, compared with 11.8% in 1968. As
in the case of GNP, however, the rate of growth
declined in the course of the year. Compared with
the corresponding periods in 1968, industrial pro-
duction was up 16% in the first quarter of 1969 but
only about 10% in the fourth quarter.
3. Demand has been putting increasing pressure
on capacity. Its composition has begun to change.
Export orders have declined and investment demand,
although still very strong, has shown signs of
softening. Consumer demand, on the other hand, has
been strengthening in the wake of the rapid growth
of wages.
Order Books at Record High
4. Industry's order books remain at record
highs, but new orders are coming in at a slower
pace than earlier in the year (see Table 1). Back-
logs of current orders insure near-capacity produc-
tion for several months in most industries, and
virtually through the end of the year in such
branches as machine building, electrical and
electronic machinery, and steel construction. Pros-
pective purchasers of luxury automobiles, such as
the prestigious new Mercedes line, must wait nearly
a full year for delivery.
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Table 1
New Orders in Industry
Percent Change from Preceding Year
January
1st Qtr
2d Qtr
3d Qtr
4th Qtr
1969
1970a/
All industry
27.2
23.7
23.1
16.5
28
4
Domestic
X7.1
22.8
23.2
20.0
29
7
Export
30.1
28.3
25.5
5.8
28
-6
Basic industry
20.9
18.7
16.5
14.6
23
6
Domestic
20.2
18.6
18.0
19.8
24
Export
22.7
19.1
12.1
-0.6
20
Capital goods industry
36.2
35.6
34.5
20.8
Domestic
37.9
37.8
36.5
26.9
41
9
Export
33.6
31.8
32.8
8.1
30
-8
Consumer goods industry
19.6
8.7
10.6
9.5 a/
19
-2
Domestic
17.8
6.0
9.4
9.7 a/
16
4
Export
34.4
32.1
21.2
9.8 a/
45
-11
a. Pry urinary data.
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5. The sharp dropoff in new export orders in
the last quarter of 1969 probably reflects in large
measure the inevitable reaction to the pre-revalua-
tion foreign buying spree earlier in the year.
Contributing factors include the slowdown in
business activity in the United States, the de-
valuation in France, and the deterioration in the
international competitive position of West German
industry as a result of the revaluation. While all
sectors of industry will be affected by the decline
in new foreign orders, the impact probably will be
most severe in the capital goods industry -- Germany's
most important industrial sector -- which is much
more dependent on exports than either the basic or
consumer goods industries:
Exports as a Percent
Industry of Production
Basic 20
Capital goods 32
Consumer goods 12
Domestic orders are still growing rapidly with
perhaps some slowdown in capital goods but an accel-
eration in consumer goods.
Shortage of Manpower and Physical Plant
6. The recent slowdown in the growth of in-
dustrial production reflects the limitations imposed
by available manpower and production facilities.
The labor market was tight throughout 1969. Never-
theless, contrary to all expectations, German industry
was able to expand its labor force more than 5%, by
increasing the number of foreign workers and recruit-
ing labor from other sectors of the economy. A
similar increase in industrial employment in the
current year, however, is not likely. Reversing
normal seasonal trends, unemployment declined in
February 1970 to 264,000 -- only 1.2% of total wage
and salary earners -- nearly one-third below the
level in February of last year. At the same time,
reported vacancies increased to 788,000, more than
one-quarter above last year. The foreign labor
force in February exceeded 1.7 million, a new record
and half a million more than last year.
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7. Insufficient productive capacity is becom-
ing an increasingly severe bottleneck. German
industry is still suffering the consequences of
the sharp decline in investment activity during
the 1966-67 recessions. As shown in the data be-
low, net fixed investment fell off sharply in 1967
and did not exceed the 1965 pre-recession high
until 1969.
Net Fixed
Investment
Net Investment
Index
Year
(Million DM)
(1965
= 100)
1965
57,940
100
1966
57,010
98
1967
44,650
77
1968
49,390
85
1969
62,980
109
8. Because of lagging investment in plant and
equipment during 1966-68, as well as rapidly grow-
ing demand, West German industry has been forced
to operate at increasingly high rates of capacity
utilization. According to data prepared by the
German Institute for Economic Research, the average
rate of plant utilization for all manufacturing
industries rose from 78.3% at the bottom of the
recession in mid-1967 to a record of nearly 96% in
the last quarter of 1969. Even higher rates for
the last quarter of 1969 were indicated for capital
goods industries (98.2%) and consumer goods indus-
tries (98.8%).*
Soaring Wages
9. Two years of relative moderation in labor's
wage demands came to an end in 1969. Collective
bargaining agreements negotiated in 1967 and early
1968 -- in the shadow of the recession -- had pro-
vided wage increases of 3.5% to 4.5%. As these
* Probably using a somewhat different formula for
estimating the rate of plant utilisation, other
research institutes, notably the Munich IFO insti-
tute, calculate a somewhat lower rate of plant
utilization which nevertheless represents a record
rate for postwar years.
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agreements ran out in 1969, labor took advantage
of its strong bargaining position under conditions
of full employment to stiffen its demands. The
first round of 1969 wage negotiations produced
settlements providing for wage increases of 5.5%
to 7.5%. But even these were still quite modest
compared to what was yet to come.
10. With the economy continuing to forge ahead
at full steam, management was not inclined to put
up stiff resistance against labor's sharply rising
clamor for higher wages and miscellaneous fringe
benefits. (Indeed, a further upward adjustment in
wages was generally considered justified to compen-
sate labor for its earlier restraint.) A wave of
wildcat strikes -- unprecedented for the traditional-
ly highly disciplined German labor movement -- at
some of the major iron and steel, coal, and ship-
building firms was quickly settled in the fall, but
at the expense of wage increases ranging as high as
11%. These settlements in turn set the stage for
new wage increases in other sectors of industry and,
subsequently, throughout the economy. Average hourly
wage rates in the last quarter of 1969 were up nearly
9% over the last quarter of 1968. Counting both
overtime pay and the premium wage rates that firms
were increasingly required to pay to attract addi-
tional workers, wages and s%4laries per person em-
ployed in industry averaged 14% higher in the last
quarter of 1969 than in the year before.
11. Wage increases of such magnitude could not
be offset by increases in 'abor productivity. In
fact, as the rate of plant utilization was pushed
beyond the optimum and as additional jobs of neces-
sity could be filled only by less qualified labor,
the growth of labor productivity declined. As a
result, wage costs per unit output, which had re-
mained essentially unchanged between mid-1967 and
mid-1969, rose sharply in the fall and winter of the
year. In the last quarter of 1969 they were 7.2%
greater than in the corresponding quarter of 1968.
With wage increases continuing to proliferate
throughout the economy and with business facing
additional charges for sick pay and social insurance,
further substantial increases in wage costs per unit
of output must be expected.
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Prices Shoot Up
12. Enjoying an unparalleled sellers' market,
industry was quick to raise its prices in order to
compensate for rising costs of production, thus
shattering the relative price stability that had
prevailed since the recession. Earlier in 1969,
manufacturers had resisted the temptation to raise
prices in the face of heavy demand pressures. This
restraint has been attributed in part to an informal
commitment of major producers to maintain price
discipline pending the fall elections so as not to
jeopardize then Chancellor Kiesinger's re-election
chances in the wake of his "no revaluation" pledge
which was being attacked as inflationary by the
opposition Social Democrats.
13. With the election out of the way and the
Social Democrats and Free Democrats installed as
the governing coalition, politically motivated price
restraint evaporated. Under the combined pressure
of cost-push and demand-pull, industrial prices rose
3.5% between September 1969 and January 1970 -- that
is, at an annual rate exceeding 10%, the highest
rate since the Korean economic expansion in 1950.
In January 1970 the index of industrial prices was
up 5.8% from the year before. Especially marked
were the price increases for capital goods during
this period -- about 15% at an annual rate. Prices
of manufactured consumer goods and basic industrial
materials rose more slowly (at annual rates of 6%
and 7%, respectively). Construction costs also have
gone up sharply and currently are about 10% above
last year's levels.
14. Consumer price increases also have begun to
accelerate. In January 1970, the cost of living
was 3.5% above the level of January 1969, a rate
considered unacceptably high in this highly inflation-
conscious country. Between September 1969 and Janu-
ary 1970, prices rose at an annual rate of more than
7% (compared with an annual rate of 5.7% during the
corresponding period of the year before).
15. The January index, to be sure, reflects
seasonally high prices of selected farm products
that should decline in the course of the year. Some
additional relief, although less than originally
estimated, can also be expected once the reduction
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in domestic farm prices -- required by EEC regula-
tions in the wake of revaluation -- are translated
into lower shelf prices for processed foodstuffs.*
Nevertheless, with industrial price increases,
which currently exceed those at the retail level by
a substantial margin, not yet fully reflected in the
consumer price index, further sizable increases in
the cost of living are likely.
Foreign Trade Surplus Still Very Large
16. As shown in Table 2, the foreign trade sur-
plus in 1969 declined below the 1968 record but
nevertheless remained very large.** Reflecting
growing domestic demand pressures, imports in 1969
rose 21%, substantially exceeding their 1968 growth
rate of about 16%. Exports, on the other hand, in-
creased 14%, about the same rate as in 1968. The
trend of imports rising faster than exports is
expected to continue during the current year, rein-
forced by the effects of revaluation. Official
government estimates for 1970 project growth for
exports and imports at 6% and 1316 to 14%, respec-
tively.
Impact of Revaluation
17. Until very recently the current boom was led
by burgeoning export demand, widely attributed to
the competitive advantage enjoyed by German industry
as a result of the undervaluation of the Deutsche-
mark. Imposition in November 1968 of a 4% tax on
* The price ZeveZ of farm products subject to the
EEC's Common Agricultural Policy is expressed in
units of account, with each unit of account equiva-
lent to US $1. Domestic prices for these products
are calculated by multiplying the units of account
by the dollar parity of the domestic currency. As
a result of revaluation, the Deutschemark equivalent
of the unit account has been reduced from DM 4.00
to DM 3.66 -- that is, by 9.3%. To compensate West
Germany's farmers for this decline in their prices,
the government has been authorized by the EEC Com-
mission to pay temporary subsidies.
** A part of the decline in the trade surplus is
attributable to a bunching of export orders in Zate
1968 to avoid the special 4% export tax that became
effective in 1969.
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Table 2
Foreign Trade Balance of
Billion Deutschemarks
Exports
Imports
Surplus
1967
87.0
70.2
16.8
1968
99.6
81.2
18.4
1969
113.6
98.0
15.6
1968 b/
1st quarter
23.9
19.3
4.6
2d quarter
22.9
19.5
3.4
3d quarter
25.6
21.0
4.6
4th quarter
27.0
21.3
5.7
1969 b/
1st quarter 26.3
23.2
3.1
2d
quarter
28.5
24.7
3.8
3d
quarter
29.6
25.2
4.4
4th
quarter
29.0
24.8
4.2
a. Because of rounding, components may not yield
the values shown.
b. Seasonally adjusted.
exports and a 4% tax rebate on imports for all com-
modities not subject to the EEC's Common Agricul-
tural Policy failed to exert a noticeable moderating
influence on the boom. Increasing foreign trade
surpluses and massive inflows of speculative funds
greatly increased the liquidity of the economy and
jeopardized the Bundesbank's ability to restrain
inflation. In the face of these developments,
Social Democratic Minister of Economics Schiller,
who had opposed revaluation in November, recommended
its immediate adoption as the most effective means
for restoring domestic and external stability.
18. With parliamentary elections in the offing
in September 1969, political considerations persuaded
then Chancellor Kiesinger to reject revaluation.
Following a'dramatic cabinet session, he announced
on ,9 May 1969 that revaluation was out "for all
eternity," and recommended instead a series of mone-
tary measures designed to restrain the inflow of
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speculative capital and slow down the rate of
domestic credit formation. The remedial effect of
these measures was at best temporary. Revaluation
became a major campaign issue with the Social Demo-
crats lined up in favor and the Christian Democrats
opposed. Inflationary pressures continued to build
up and speculative inflows resumed at an accelerated
pace with the approach of the September election
date. The newly elected Brandt government revalued
the Deutschemark from DM 4.00 per US dollar to DM
3.66 per US dollar on 26 October, essentially rati-
fying the free-market rate established since the
Deutschemark had been "floated" on 30 September.
19. Revaluation has set the stage for long-run
internal and external equilibrium in the German
economy and for greater stability in the interna-
tional monetary system. Its most pronounced effect
to date has been the dramatic reversal of the mas-
sive inflow of private short-term capital that had
created excessive liquidity, especially in the non-
banking sector, and placed it virtually beyond the
control of the monetary authorities. As shown in
Table 3, which summarizes West Germany's balance
of payments for 1969, by far the greater part of
the speculative funds that had poured into Germany
during the period up to the "floating" of the Deut-
schemark flowed back abroad. The outflow of foreign
exchange extended beyond the repatriation of specu-
lative funds. Long-term capital exports persisted
after revaluation and indeed reached record propor-
tions ($1.2 billion) in December, as foreign custo-
mers drew heavily on lines of credit established
by German banks prior to the revaluation. Reflect-
ing the large net outflow of short-term and long-
term capital combined -- which far exceeded the
current account surplus earned during the period --
the Bundesbank's gold and foreign exchange reserves
declined sharply from about $12.2 billion just prior
to the "floating" of the Deutschemark to $7.1 bil-
lion at the end of the year. The most recent data
available (for 23 February 1970) show official
reserves, including the special drawing rights
recently distributed by the International Monetary
Fund (about $200 million for West Germany), at about
$7.9 billion. This was approximately the level of
reserves during the mid-1960s.
20. The revaluation, and the massive outflow of
funds associated with it, have significantly
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West Germany:
Balance of Payments
1969
Million Deutschemarks
January-September
October
November
December ai
A.
Current account
Balance of trade
10,648
1,453
1,445
2,013
Exports (f.o.b.)
82,658
10,973
9,598
10,330
Imports (c.i.f.)
72,010
9,520
8,153
8,317
C)
0
Services
-117
-16
-200
-220
z
d
[~7
I-
B.
Transfer payments
Capital account
-5,241
-496
-563
-1,525
zI
Long-term capital
0-4
r
Private long-term capital
-12,579
-2,217
-2,458
-3,685
German investment abroad
-14,214
-1,782
-2,13:
-3,446
Foreign investment in Germany
1,635
-435
-324
-439
Official long-term capital
-1,006
-160
-247
-478
Balance on long-term capital account
-13,585
-2,377
-2,705
-4,363
Short-term capital and residual items
Banks
-181
-1,865
-1,191
7,519
Business enterprises
16,259
-1,438
-3,789
-9,537
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West Germany: Balance of Payments
1969
(Continued)
Credits
Residual items
w Balance on short-term capital account
w
Balance on capital account
C. Balance on current and capital account (A & B)
D. Bundesbank losses from revaluation
E. Net changes in official reserves
Million Deutschemarks
January-September October November December ai
5,308 -95 -2,224 -3,177
10,951 -1,343 -1,565 -6,469
347 -463 -66 65
16,425 -3,766 -5,046 -2,c;3
2,840 -6,143 -7,751 -6,416
8,120 -5,202 -7,069 -6,148
-- -4,099 -- --
8,130 -9,301 -7,069 -6,148
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replenished the official reserves of the deficit
countries (although an undetermined amount went in-
to Eurodollar channels) and thereby contributed to
the renewed confidence and stability in the inter-
national monetary system. The internal economic
effect of this outflow was a severe reduction in
liquidity which increased the effectiveness of the
Bundesbank's monetary policy.
21. With operating capital requirements increas-
ing rapidly, the sharp outflow of funds forced the
business community to rely increasingly on the banks
for financing. The fourth quarter of 1969 witnessed
the most hectic demand for bank credit in West Ger-
many's history -- the banks extended more than DM
22 billion (about $6 billion) in credits to the
private sector. With credit expanding much faster
than saving, bank liquidity contracted drastically.
Free liquid reserves of the banks fell from about
12% of total deposits prior to the revaluation to
less than 6% at the end of January 1970, the lowest
level in five years.
22. Under the impact of the tightening credit
squeeze, interest rates began to increase. The
Bundesbank in December raised its Lombard rate --
that is, the rate on its advances against secur-
ities -- from 7.5% to 9% as a precautionary move
to eliminate the differential between domestic
interest rates and the rates prevailing in the
Eurodollar market and thus to dis;;ourage further
outflows of capital.
23. Apart from its impact on export orders
already discussed in paragraph 4, the principal
effect of revaluation on Germany's foreign trade
thus far has been on export and import prices.
According to Bundesbank estimates, export prices
to foreign buyers have increased about 14% to 15%.
With the added effect of the August devaluation of
the franc, French buyers, who ordinarily account
for about one-eighth of German exports, face a 25%
price increase. Because of full export order books,
however, the effects of these price increases will
be slow to affect the volume of exports.
24. The effect of revaluation on import prices
has been far less dramatic. Average import prices
during the last quarter of 1969 were 2.7% below
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those in the pre-revaluation third quarter. This
did not result in a reduction in the domestic price
of imported goods, however, partly because revalua-
tion was accompanied by the elimination of the 4%
tax rebate and partly because an increasing number
of foreign exporters, anticipating revaluation,
reportedly had insisted on negotiating their con-
tracts in Deutschemarks. Nevertheless- revaluation
has slowed the rapid rise in the price of imported
goods experienced earlier in the year. With domes-
tic prices currently increasing at a faster pace,
imports for the time being at least are becoming
relatively cheaper.
Govetinment Policy
25. The continuing boom confronts the Brandt
government with a serious dilemma. Because of
intensifying inflationary pressures, the govern-
ment's economic policies are certain to become a
major campaign issue in the important elections
scheduled in several states in the course of the
year. Although the composition of state govern-
ments is primarily at stake in these elections,
the prestige of the Brandt coalition -- and possibly
its continued cohesion -- are also on the line.
Short of applying direct wage and price controls --
which are politically anathema and opposed by labor
and management alike -- there is little the govern-
ment can do that would have an immediate effect on
the inflation. But there is a risk that any strong
deflationary fiscal action would have its full
effect at a time when the boom was already spent
and might then turn a slowdown into a recession.
While there are some signs suggesting a slowdown
of business activity toward the end of the year,
the evidence is far from clear. Under these cir-
cumstances, the government has been cautious in
taking anti-inflationary fiscal action, thus leaving
the main burden to the Bundesbank.
26. The cautious fiscal program adopted by the
cabinet on 22 January 1970 reflects the difficulty
in reaching agreement on economic prospects and
prescriptions among members of the coalition. It
includes a reduction in the growth of budgetary
expenditures at the federal and state levels; an
indefinite blocking of DM 2.6 billion in federal
government expenditures pending more appropriate
cyclical conditions; a "freezing" of DM 2.5 billion
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of excess tam rer:eipts in a 'pocial countercyclical
reserve at the Bundesbank; a ,ostponement until
1 July 1970 and 1 January 1971 of previously promised
tax relief measures; selected measures to promote
private savings; and a freeze on government con-
trolled or influenced prices.
27. The federal budget for 1970 generally com-
plies with the government's stabilization program.
Net federal government expenditures are to increase
8.8%, probably less than GNP measured in current
prices, to DM 91.4 billion, of which DM 2.7 billion
is to be released for investment only if the boom
eases. Pending parliamentary approval of the budget,
not expected before May, Finance Minister Moeller
has instituted administrative restrictions designed
to limit the increase in government expenditures to
no more than 4% above the level of the corresponding
period last year. This action is designed to maxi-
mize the anti-inflationary effect of budgetary
policy during the first half of the year, when price
pressures are expected to be at their strongest.
As a result of these measures, the government cur-
rently expects a sizable surplus in its account for
the first half of 1970, and a balanced budget is
planned for the year. Although complete data are
not yet available on the proposed budgets of the
individual states and local authorities, early in-
dications are that they will generally cooperate
with the federal government in cutting back or
blocking planned expenditures.
28. January's unexpectedly sharp rise in indus-
trial prices and in the cost of living raised con-
siderable doubts as to the adequacy of budgetary
restraints in 1970. The opposition CDU/CSU accused
the government of abandoning its gcal of economic
stability, but it failed to advance an alternative
program. In order to strengthen the government's
hand in dealing with the inflation --- now increas-
ingly being fed by consumer demand -- Economics
Minister Schiller recommended that the government
use its discretionary authority, provided for in
the Stability and Growth Law, to impose a temporary
surcharge on income taxes. But the surcharge pro-
posal was rejected by the cabinet as was Schiller's
alternative recommendation for accelerated tax
collection with a provision for repaying or credit-
ing the extra levies assessed to future tax lia-
bilities once the boom had lost its steam. Inueed,
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 Declassified and Approved For Release 2011/10/31 : CIA-RDP85T00875R001600030043-1
CONIC 1 DI NTIAl,
it mat considerable opposition also in some banking
and business circles which were not convinced that
additional restrictive measures were necessary.
Trade union opposition &nd the fear of adverse
voter reaction in upcoming state elections were
among the factors motivating the cabinet decision.
29. The Bundesbank was content to play a rela-
tively passive role during the early months follow-
ing revaluation. In the face of mounting inflation-
ary pressures, the Bank elected to defer a decision
on further restrictive action and lot the govern-
ment take the lead in developing a stabilization
program. The memory of the 1966/67 recession, pre-
cipitated by tight monetary policy imposed in the
face of government inaction, was still fresh in the
mind of the Bank's authorities.
30. The Bank decided to act, however, when it
became clear the the government was unwilling or
unable to accept the more stringent fiscal restraints
recommended by Economics Minis ter Schiller. On
5 March 1970 the Bank raised its discount rate
drastically from 6% to 7.5%, the highest rate in
the postwar period. At the same time, it increased
the Lombard rate (the rate on advances against
securities) to 9.5%, also a record high. Both
actions were taken in full accord with the view:: of
the Economics Ministry. Their immediate impact is
largely psychological. They serve as an unmic;tak-
able warning to business and labor to moderate
their wage and price demands and to the govo nitriunL
to intensify its anti-inflationary measure,. The
Bank is employing the interest rate mechanism Lu
induce a slower rate of credit expansion, but hate
so far eschewed action directly restricting the
supply of money and credit, such as increasing the
minimum reserve requirements or reducing the redis-
count quotas of the commercial banks. If the psy-
chological impact of the Bundesbank's warning and
the more tangible effect of the increase in interest
rates precipitated by the discount rate rise are
GG 1 O i4. _ a t.v ._ t. 7 ?f. 1 C1 ,.1 t...r...:`
nuL S u i... &vva %..i8 ln Aai av. a.j I a G
the Bank will take stronger measures.
Prospects for the Remainder of 1970
31. There is little doubt that the slowdown in
economic growth which began in 1969 will continue
in 1970. The labor supply will probably grow at a
CONFIDENTIAL
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 Declassified and Approved For Release 2011/10/31 : CIA-RDP85T00875R001600030043-1
CON FII)I',N'I'IAt,
private eonnumpt.ion
Public consumption
Gross fixed investment
Exports of goods and nervicon
lmporto of goods and nervicos
GNP (current pricer))
GNP (1954 pricen)
GNP deflator
Domestic demand
Private consumption
1969
Minintry
Actual Results
of Economics
10.4
9.5
- 10.5
11.1
9.5
-- 10.5
18.9
13.0
- 14.0
14.1
5.0
- 6.0
19.1
9.5
- 10.5
11.8
9.0
- 10.0
8.4
4.0
- 5.0
3.1
5.0
2.8
4.0
2.5
slower rate t.hnn last year. There is almost no
slack left, in the economy. Export demand may nlow
sufficiently to bring production in some industries
below capacity in the second half of the year.
Fiscal policy will exert a mild restrictive) influence
on the ec:conomy. And, if inflation doors not oase,
the monetary ncrcwr; will probably be tigghtened.
32. The Wort German government projects a slow-
down in economic growth, an shown in Table 4. For
the year a . a whole, nominal growth in expected to
roach 9% or 10% and real growth 4% or 5%, sharply
down from the 8.41 realized in 1969. Becaune of
the large backlog of industrial ordeerr;, however,
the slowdown if; not r_xI>ected to become pronounced
until the second half of the year.
33. The tour no of domestic demand in 1970 will
depend greatly on German monetary and fiscal poli-
cies. Thera are some indications of a slowdown in
- 18 -
GUNFIDF.NTIAL
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Table 4
Wont (;orman Economic Projoctionn for 1970
Percent Chance from Pr.ovioun Year in Current Prices
 Declassified and Approved For Release 2011/10/31 : CIA-RDP85T00875R001600030043-1
(X)N1" 11)F,N'I'IA1,
domestic orders for capital goods, and the govern-
ment is forecasting that growth of fixed investment
will be only half as rapid as last year. High
interest rates should discourage inventory accumu-
lation. On the other hand, the growth of consumer
demand may accelerate, reflecting the rapid growth
of wages, so that the official projection for
private consumption at the same growth rate as last
year may be too low.
34. The government projects a growth of 5% to
6% in exports, as indicated earlier. Exports have
fallen in recent months, but it is too early to
disentangle the effects of domestic inflation and
revaluation on Germany's competitive position
from the aftermath of the speculative foreign buy-
ing spree prior to revaluation. A major source
of uncertainty is the course of the U^ and French
economics. In any case, many German exporters are
likely to have a harder time in 1970, being faced
with rapidly rising labor costs, high interest
rates, and scarce credit on top of the revaluation.
35. While imports will probably grow consid-
erably faster than exports in 1970 (the government
projects about 14%), the trade surplus will probably
not be eliminated. If the government's projections
are borne out, Germany would have an approximate
balance on current account -- still a remarkable
performance at the peak of a boom when most countries
experience a sizable deficit. Imports could rise .such
faster than projected if rapid inflation continues.
But if Bundesbank and government action should force
the economy into a recession, the trade surplus would
soon start growing again.
CONFIDENTIAL
Declassified and Approved For Release 2011/10/31 : CIA-RDP85T00875R001600030043-1