Transcript of the Concluding Press Conference of the 2013 Germany Article IV Mission

June 3, 2013

By IMF Mission Chief Mr. Subir Lall
Berlin, Monday, June 3, 2013

MR. LALL: Thank you for joining us at this press briefing. We have provided you with some background material, but let me make some brief opening remarks to underline a few key points. Please also keep in mind that we are here today to discuss the findings of this mission to Germany, and prospects for the Germany economy. This will not be the appropriate occasion to discuss broader European issues not directly related to the terms of reference of this two-week mission. My colleagues and I will then be happy to take some of your questions.

We have revised our outlook for growth in Germany down from 0.6 percent to 0.3 percent for 2013. In part, this reflects the lower than expected growth in the first quarter of this year. However, it also reflects our view that growth for the remainder of the year will be somewhat weaker than what we had originally projected.

Looking towards the sources of growth, we see the domestic fundamentals in Germany as strong. Household, corporate and government balance sheets are strong, and there is no evidence of imbalances in these sectors. Related to this, the strength of German labor markets is remarkable with unemployment remaining near post-reunification lows. This, coupled with a healthy rise in wages, has allowed private consumption to remain healthy and provide support to overall growth.

However, we do not expect a robust recovery in business investment until later in the year. This is mainly related to external factors. In our view, uncertainty is a key factor weighing on the investment decisions of German firms. This uncertainty is largely related to prospects and policies in the euro area more broadly. As we saw, business investment contracted during the course of 2012, and for this year as a whole, we project a decline in investment as well.

Looking to next year, our projection of a robust pick up in business investment and a return of growth to its potential in Germany is predicated on an alleviation of the uncertainty that businesses perceive. This would allow many investment plans that have been put on hold, as companies adopt a “wait and see” attitude with respect to the uncertain environment, to again be reactivated.

As a result, given how much our outlook is shaped by developments especially in the rest of the euro area, we see several downside risks to our outlook. One is that euro are conditions remain unsettled for longer than we expect in the baseline, and this continues to be a drag on investment plans. This would cause output gaps in Germany to widen further. Another is any re-intensification of financial stress, of which we have seen bouts over the past few years, which would amplify the impact of low external demand and uncertainty. There is a more medium-term risk of having an extended period of low growth, which could harm the economy’s growth potential.

Let me now turn to some policy issues. We are of the view that the government’s fiscal stance for this year is appropriate. We envisage a marginal loosening of the stance, and we expect only modest consolidation in future years. Against the revised outlook that I just presented to you and the numerous risks, we think this is appropriate as fiscal policy would not act as a drag on the recovery of the economy that we project.

It will be important to ensure that fiscal overperformance is avoided. While the fiscal balance has exceeded plans over the past three years, in large part due to unanticipated factors including strengthening labor markets and low interest rates, going ahead this overperformance needs to be avoided given the much weaker growth outlook.

Turning to the financial sector, we see the financial system’s resilience as having improved although vulnerabilities remain. The capital of banks has been strengthened, their reliance on wholesale funding has been reduced, and overall financial conditions in Germany remain very supportive. Vulnerabilities remain with regard to some exposures to the shipping sector, international commercial real estate, and some foreign asset holdings. Despite the overall strengthening of the financial system, credit growth remains benign, nevertheless, because of low demand for credit rather than any supply constraints. This low demand is tied to the uncertainty I mentioned before. We welcome the macroprudential policy framework that has been put in place, but in the current environment there is no need to tighten policies.

The financial reform momentum in Germany and at the regional level must be sustained. Further augmenting capital buffers in Germany, improving profitability and efficiency and adjusting business models ahead of new regulatory requirements will be key priorities. The surveillance of cross border banks requires ongoing close cooperation of supervisors. At the regional level, a clear, harmonized and coherent roadmap towards achieving domestic and European objectives, including steps to reverse the fragmentation of banking systems in Europe along national lines, would help alleviate uncertainty greatly and support an economic recovery both here and in the euro area.

Let me also note that we commend Germany’s role as an anchor of stability in the euro area. This is underpinned by Germany’s strong fundamentals, which are in part the outcome of many difficult reforms undertaken in the past. Germany also plays a leadership role in developing policies and improving the architecture at the euro area level. We welcome Germany’s continued leadership in helping achieving further integration within the European Monetary Union (EMU) and in articulating a long-term shared vision for closer economic and financial integration among EMU member countries. This would provide a crucial anchor to the expectations of households and firms.

Germany also needs to do its own structural reforms to guard its economy’s long term potential. This includes measures to increase the labor force as well as ways to increase investment in areas outside Germany’s traditional manufacturing strengths and strengthen productivity in services sector. Last but not least, we would like to thank our counterparts for their close cooperation and candor during our mission.

We will now be happy to take some questions.

QUESTIONER: Two things: I didn't get anything of a vision of your current forecast for 2014. So, may I assume that you stayed with this 1.5 percent, even looking at forecasting in April?

And second question -- if you would name the most significant weakness of the German economy, what would that be?

MR. LALL: In fact, we are looking at our forecast very closely, and we -- in terms of our quarterly projections -- we assume a return to potential growth next year. However, because of low growth this year and the carryover effect, the overall number is likely to be marginally lower than 1.5 percent that you mentioned from before. So, it could be around 1.3 or so, but we still have to work out the year-on-year effects. But the projection is for quarterly growth to be close to its potential by next year.

Now, you asked about what the most significant weakness of the German economy is. As I mentioned before, we actually point to the strengths of German fundamentals. And I mentioned the balance sheets that are strong, and, in fact, that this has provided an anchor of stability for the euro area, and for Europe as a whole.

I also mentioned in the end that there is a long-term structural reform agenda that needs to be undertaken. I wouldn't call it a vulnerability; I would call it more as part of the policy agenda going forward, and these measures have been taken, and we welcome them, and we expect they will continue to be taken to provide resilience for long-term growth, given that this is an aging population. And, as in other OECD countries, Germany has one of the more significant challenges related to aging. So, that's a long-term issue. But, again, as I mentioned before, I've highlighted the strengths of the German economy and strong balance sheets in Germany.

QUESTIONER: When I read through the press release, it sounds a bit like we're warning Germany -- especially policymakers here -- to learn to be overly zealous in cutting the budget, instead of keeping spending up. How do you expect that message to go down in the election year in Germany?

MR. LALL: Let me clarify that. We think that the policies have been very commendable so far, and the point was really, though we agree with the overall fiscal stance, that Germany is well ahead of schedule with the commitments, and the fiscal compact, and domestic rule.

Now, there have been one-off factors that have led to small, very small, over-performance, and we expect that those one-off factors will be gone, so we don’t see over-performance. So, the point was not really about the fiscal stance. We do agree with the plans proposed and the budget for this year. We think that they are fine. We're just making two points. One is that the one-off factors are unlikely to continue, so we shouldn't expect that. But on the other hand, they're cautioning that there might be still some residual effects from before. But we are in agreement with the fiscal stance that has been tabled by the government.

QUESTIONER: I have two questions. Could you specify a little bit your proposal not to increase the much-needed deficit reduction? And the second question -- what do you mean by lowering the tax bills for low wage earners? Does this refer, also, to the social contribution, as far as the low-wage people are concerned?

MR. LALL: I will allow my colleague to get back to you on the second question, on the tax for low-wage earners. On the first question, I'm not sure I fully understood. The question was about not having too much deficit reduction.(…) Well, the way we look at it, there's a strategy. There's the medium-term part, and the objectives have been achieved. And Germany is very much in line with its own medium-term commitments and with the fiscal compact. And we think this is appropriate, and we see very modest consolidation going forward after this year, based on current plans. In fact, we see a marginal loosening of the fiscal stance this year, and very modest consolidation going forward.

That itself is enough to bring debt down on a firmly declining path, and we think this is appropriate. Let me come back to the point I made earlier, that Germany also provides an anchor of stability to Europe and the euro area through its strong balance sheet.

So, this view on the medium-term fiscal stance and the stance this year is consistent with our view that Germany provides this anchor of stability. I will turn over to my colleague, Ms. Ivanova, on the question on tax wages for low-income workers.

MS. IVANOVA: So, yes, this recommendation is in line with the European Commission recommendation, and the idea is that there are some decent incentives, in particular for secondary areas, mostly women who stay at home with children, to participate in the labor force. That's related to the income splitting regime of married couples. There is also a regime for health insurance contribution for nonworking secondary earners. All of these proposals, which are also spelled out in the Commission, we support that. On low-wage earners, we had a proposal in 2011 consultation. It was not really social security contributions, but more for, like, in work programs. That spread is any programs that would stimulate labor force participation.

QUESTIONER: I have another question. I was surprised to see your detailed recommendations that Germany should act to improve childcare, because when you live here, it's sort of an obsession. It's all over the media. It's big. Not much gets done, but it's a big issue.

So, how much of an issue do you think is that for you? How important is it in addressing this challenge?

MR. LALL: On this issue, I can provide a brief answer, and maybe my colleagues may have something to add. But just to put it in context, it's part of an overall package. It's not the only thing. But the issue of demographics and an aging society has to be tackled along various fronts. We welcome the moves done, for instance, towards inward migration of high-skilled workers. As you know, last year, there was an astonishing almost 370,000 inward immigrants, and that, of course, helps. But in addition, on the domestic side, measures have to be continued to increase labor force participation and the size of the labor force.

So, in that broader context, the ability to provide high-quality childcare could help, also, in terms of addressing the challenges associated with declining fertility. And that's not just a Germany issue. It's very much an OECD or advanced economy issue in many countries, you know, post-baby boom. So, I think you should put it in the context of this greater theme of increasing the supply of labor that will be available, because that would be one of the main, if not the most important, factor for long-term, potential growth of the German economy.

QUESTIONER: I just wanted to ask about the cut to the forecast growth which was point six percent, and now at point three percent. It’s only been two months since you raised that forecast from 1.5 percent and 1.6 percent. What went wrong in those two months to change your opinion so drastically?

MR. LALL: Well, the weather, for one. The adjustment before was marginal, just in terms of updating with data. But meanwhile, a lot has to do with the first quarter, which turned out to be worse than we had anticipated. And part of that has to do with special weather-related factors. So, that would automatically get you a reduction in the forecast -- and then, plus, we see a slightly -- as I mentioned -- slightly lower growth for the remainder of the year.

We do expect some of the postponed investment in the first quarter, especially related to consumption, to happen in the second quarter. But still, overall, it's slightly lower, but Q1 data also had quite a bit to do with the revision of the forecast, so that's led me to answer precisely and that's the main thing that changed. In the broader context, we've also received data on Q1 for other countries. So, in the euro area context that I mentioned -- that's been additional information that we would take into consideration.

SPEAKER: Any more questions?

QUESTIONER: When will you release a forecast for 2014?

MR. LALL: As you know, we do many countries around the same time, and they get published. So, I think it will be in the July World Economic Outlook update. I don't have the exact date with me.

QUESTIONER: Do you already have a reaction from the Ministry of Finance or the governments, generally, on your suggestions?

MR. LALL: What I'll just say is that we've had continuous and ongoing discussions with our colleagues in the Ministry of Finance and other places, other ministries, as well and, of course, the Munich Bank.

And so, it's an ongoing dialogue that we have, discussing our outlook and views. And in terms of their reaction, I think they'll be better placed to answer that.

SPEAKER: Well, if there are no more questions, I suspect this concludes this press conference. Thank you again for coming here, and we'll have a full report on the German economy, and the details and the background early in the first week of August, more or less. So, that's when you can see the full discussion after it's been discussed by our Executive Board. Thank you very much, and have a good afternoon.

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