It will also act as a drag on the medium to long-term growth prospects of the German economy. The declining population and rising average age of the labour force will cause the potential growth rate to shrink. An economy’s potential output is determined by its inputs of labour and capital as well as production technology.
Potential output is understood to mean the highest possible level of economic output that can be achieved with a given level of technology using the available production factors of labour and capital at normal capacity. The percentage change in potential output therefore denotes an economy’s trend rate of growth.