Germany must quintuple productivity growth to maintain prosperity

Germany must increase its annual productivity growth to approximately 1.6% to maintain its current level of prosperity, according to an analysis by the German Institute of Economic Research (IW). This target is more than five times the 0.3% average growth recorded over the last six years.

Productivity gains in the country have been steadily declining. While growth averaged around 2% during the 1980s and 1990s and roughly 1% in the 2010s, the recent slowdown poses a threat to economic well-being. Michael Grömling, head of macroeconomics at the IW, noted that productivity is the primary driver of economic prosperity and has been failing in Germany for years.

Demographic shifts are exacerbating the issue. The aging population is expected to reduce the available workforce, with the number of people exiting the labor market due to age projected to exceed the number of young people entering it. Additionally, there is a rising proportion of young adults who are neither employed, in education, nor undergoing vocational training.

To address these challenges, researchers suggest prioritizing five key areas: digitalization, artificial intelligence, innovation, bureaucracy reduction, and infrastructure investment. The study suggests that increasing research and development investment to levels seen in Israel could boost German productivity by approximately 13% in the long term.