Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Germany
IMF News, January 22, 2009
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- Published: January 22, 2009
Background: growth, financial stress, and fiscal outlook
- Real GDP:
- 2008 projected growth: 1.3 percent.
- 2009 projected contraction: 2½ percent.
- 2010: slow recovery projected.
- Drivers of slowdown:
- Deceleration in world demand and deteriorating confidence indicators.
- Financial market stress spilling over into sentiment and the real economy.
- Conservative consumer behavior expected to amplify export slowdown; investment decisions likely to be postponed.
- Financial sector vulnerabilities:
- Failures in summer 2007 (IKB and Sachsen LB) required government intervention.
- Post-Lehman Brothers (Fall 2008) pressures (e.g., Hypo Real Estate liquidity rollover needs).
- Public commitment to protect household deposits initially stabilized confidence.
- Mid-October 2008 comprehensive package to support market liquidity and bank capitalization as part of globally-coordinated efforts.
- Fiscal position:
- Fiscal consolidation in recent years and 2007 income/employment growth supported a balanced budget in 2008.
- Deficit expected to widen in 2009 and 2010 due to weakening economy and labor market and due to the authorities' stimulus package.
- Authorities aim to introduce a deficit rule to constrain the structural fiscal balance to about zero.
- More ambitious fiscal federalism reform postponed until 2019.
- Risk assessment:
- Risks remain tilted to the downside.
Executive Board assessment: overall judgment and recommended actions
- Overall view:
- Germany under heightened pressure from global economic and financial turmoil due to high openness and integration with world economy.
- Prospect of a sizeable, possibly extended, economic downturn given sharp drop in world trade and weak domestic demand.
- Corporate and financial sector stresses risk becoming more intertwined.
- Directors welcomed initiatives to strengthen the financial safety net and the economic stimulus; fundamentals of the German economy remain strong; sustained fiscal prudence praised.
- Financial sector measures and recommendations:
- Positive appraisal of creation of the Financial Market Stabilization Fund (FMSF) as vital to shielding the financial sector.
- Guarantees issued to help banks meet short-term funding needs; efforts to buttress capital positions welcomed.
- Recommendation: further recapitalization may be desirable given low capital in several banks and expected asset quality deterioration.
- Recommendation: agency administering the FMSF should use its authority more broadly to enhance financial sector soundness.
- Specific call: proactive restructuring and downsizing of the Landesbanken, noted as a continuing drain on public finances and a threat to financial stability.
- Deposit insurance:
- Call for strengthened deposit insurance due to risks from existing multiple protection schemes that rely on ex post burden-sharing.
- Recommendation: establish a base layer of mandatory deposit insurance—ex ante funded by contributions from all banks—to provide unified terms of protection and reduce incentives to shift deposits among schemes.
- Note: evolving European Union rules should provide guidance on coverage limits.
- Regulation and supervision:
- Case for tighter bank regulatory and supervisory process strengthened by the crisis.
- Recommendation: place greater reliance on timely supervisory assessments independent of banks' annual external audit cycle.
- Recommendation: link prudential regulation and supervision to a system of macro-surveillance and stability analysis.
- Observation: greater consolidation of regulatory and supervisory resources could yield significant benefits.
- Fiscal stimulus and medium-term policy:
- Directors welcomed conjunctural fiscal stimulus packages in the past four months as timely and supportive of domestic demand and confidence.
- Noted components: accelerated reduction in social security contributions and stepped-up spending on infrastructure—considered well-targeted for short-term stimulus and lasting benefits.
- Views on size of stimulus: some Directors would have favored a more proactive stimulus given the deterioration in prospects; others supported balancing stimulus with fiscal prudence.
- All Directors welcomed authorities' reiteration of commitment to medium-term fiscal sustainability in accordance with the Stability and Growth Pact.
- Other structural concerns:
- Trends in healthcare costs and debt accumulation by the states noted as concerns.
- Recommended measures: further rationalization of pharmaceutical expenditures; strengthened efficiency-enhancing competition to contain healthcare costs.
- Fiscal federalism: potential benefits from more state tax autonomy and redesign of supplementary federal grants to improve states' incentives for fiscal discipline.
- Recommendation: apply the proposed fiscal rule limiting the structural budget balance to close to zero also to the states.
Germany: Selected economic indicators (exact figures)
- Real GDP (change in percent):
- 2004: 1.2
- 2005: 0.8
- 2006: 3.0
- 2007: 2.5
- 2008: 1.3
- Net exports (contribution to GDP growth):
- 2004: 1.4
- 2005: 0.7
- 2006: 1.0
- 2007: -0.2
- Total domestic demand (change in percent):
- 2004: -0.1
- 2005: 0.0
- 2006: 2.1
- 2007: 1.1
- 2008: 1.6
- Private consumption (change in percent):
- 2004: 0.1
- 2005: 0.2
- 2006: -0.4
- 2007: —
- 2008: —
- Gross fixed investment (change in percent):
- 2004: -0.3
- 2005: 7.7
- 2006: 4.3
- 2007: 4.1
- Construction investment (change in percent):
- 2004: -3.9
- 2005: -3.0
- 2006: 5.0
- 2007: 1.8
- 2008: 2.7
- Gross national saving (percent of GDP):
- 2004: 21.8
- 2005: 22.1
- 2006: 23.7
- 2007: 25.9
- 2008: 25.0
- Gross domestic investment (percent of GDP):
- 2004: 17.1
- 2005: 16.9
- 2006: 17.6
- 2007: 18.3
- 2008: 19.0
- Labor force (percent of population) 3/:
- 2004: 43.0
- 2005: 43.3
- 2006: 43.2
- 2007: 43.4
- 2008: 43.4
- Employment 3/ (percent of population):
- 2004: 38.8
- 2005: 39.0
- 2006: 39.7
- 2007: 40.3
- Standardized unemployment rate (in percent):
- 2004: 9.2
- 2005: 10.6
- 2006: 9.8
- 2007: 8.4
- 2008: 7.3
- Unit labor costs (industry; hourly data):
- 2004: -3.1
- 2005: -4.2
- 2006: -4.0
- 2007: -1.2
- GDP deflator:
- 2004: 0.5
- Harmonized CPI index:
- 2004: 1.9
- 2005: 2.3
- 2006: 2.8
- Public finance (in percent of GDP):
- General government balance 4/:
- 2004: -3.8
- 2005: -3.3
- 2006: -1.5
- Structural government balance:
- 2004: -2.6
- 2005: -2.3
- General government gross debt:
- 2004: 64.7
- 2005: 66.4
- 2006: 66.0
- 2007: 65.0
- 2008: 68.7
- Money and credit (change in percent over 12 months):
- Private sector credit 5/:
- 2004: 2.2
- 2005: 3.5
- 2006: 3.2
- 2007: 6.6
- 2008: 6.6
- M3 5/:
- 2004: 5.2
- 2005: 4.9
- 2006: 11.1
- Interest rates (in percent):
- Three-month money market rate 6/:
- 2004: 3.7
- 2005: 4.8
- 2006: 3.4
- Ten-year government bond yield 6/:
- 2004: 3.6
- 2005: 3.8
- Balance of payments (in billions of euros):
- Exports 7/:
- 2004: 850.3
- 2005: 924.6
- 2006: 1,056.3
- 2007: 1,148.6
- 2008: 1,206.6
- Imports 7/:
- 2004: 739.9
- 2005: 805.1
- 2006: 925.5
- 2007: 975.6
- 2008: 1,047.6
- Trade balance (percent of GDP):
- 2004: 6.3
- 2005: 6.4
- 2006: 7.8
- 2007: 7.1
- 2008: 7.1
- Current account balance (in billions of euros):
- 2004: 102.9
- 2005: 116.6
- 2006: 141.5
- 2007: 184.2
- 2008: 149.4
- Current account (percent of GDP):
- 2004: 4.7
- 2005: 6.1
- 2006: 7.6
- 2007: 6.0
- 2008: 6.0
- Exchange rate (period average):
- Euro per U.S. dollar 6/:
- 2004: 0.80
- 2005: 0.73
- 2006: 0.74
- Nominal effective rate (1990=100) 6/:
- 2004: 115.7
- 2005: 114.7
- 2006: 114.9
- 2007: 119.7
- 2008: 115.8
- Real effective rate (1990=100) 8/:
- 2004: 105.5
- 2005: 102.2
- 2006: 99.1
- 2007: 97.9
- 2008: 95.1
Public Information Notice (PIN) No. 09/05, January 22, 2009.