Germany: Spend More At Home

IMF News, July 7, 2017

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The IMF’s assessment: the German economy is "performing well."
The IMF has raised its growth forecast for the year, reflecting expected benefits from the ongoing recovery in world trade.
Growth is creating a lot of jobs and the unemployment rate is "the lowest since reunification."

Key takeaway: Strong growth and very low unemployment, but some domestic weaknesses warrant attention.

The IMF recommends allowing prices and wages to go up in Germany to help lift overall inflation in the euro area.
Objective cited: the European Central Bank’s price stability objective of "close to 2 percent."
Current situation: "Euro area inflation is currently below the ECB’s target, and has been for a few years."
Rationale: Germany accounts for "28 percent of the euro area economy," so its inflation dynamics strongly affect euro area inflation.
Expected dynamic: because Germany has been growing robustly and has low unemployment, it would be "normal and almost inevitable for its inflation to go above 2 percent for some time."
Benefit noted: once inflation reaches the objective, "monetary policy can be normalized and interest rates will rise, which will please German savers."

The IMF notes the "fraction of the population at risk of poverty is rising" despite strong aggregate performance.
Affected groups include "older workers in certain parts of the country, single mothers, and other vulnerable people."
No single simple explanation identified; the IMF notes it "doesn't seem to be related to having more immigrants, for instance."
Recent German measures cited: increased allowances for housing, children, and help to return to the labor market for the long-term unemployed.
Recommendation: "monitor whether these new measures are effective."

Germany has "the world’s largest current account surplus."
The IMF expresses two concerns about a large and persistent surplus:
- Global imbalance channel: persistent surpluses imply persistent deficits elsewhere, which can lead deficit countries to accumulate excessive debt and require adjustment; surplus countries should adjust as well, especially within a currency union.
- Domestic investment channel: a large surplus can indicate that the country is "investing abroad instead of at home," possibly because the country "is not very attractive to investors," which can translate into lower long-run growth.
Policy recommendations to reduce the surplus and boost domestic growth:
- Increase public investment, noting that "investment has declined."
- Improve infrastructure; "Better infrastructure would encourage more private investment, too."
- Implement a pension reform "encouraging people to retire later in life" to reduce the need to save for retirement, encourage consumption, and limit aging effects on employment and growth.

The IMF commends Germany’s prudent fiscal policy: the government "kept its public deficits low—in fact, they had no deficit in the last three years—and reduced its public debt."
Debt trajectory: "by now debt is almost back to where it was before the crisis and is projected to continue falling in the coming years."
Given this fiscal position, the IMF sees "scope to use some resources for future growth, both on the spending and the tax side."
Recommended spending priorities:
- Public infrastructure.
- Integration of refugees, including "more targeted job training to the refugees" to ensure they can find work.
- Kindergartens and after-school programs to "encourage more women to join the workforce."
Tax policy recommendation: use some resources to "reduce the taxation of labor."
Expected outcomes: these measures "would increase economic growth, and would also help address the problem of an aging population."

Source: https://www.imf.org/en/news/articles/2017/07/05/na070717-germany-spend-more-at-home (IMF Country Focus, July 7, 2017).