Press Release No.

IMF Executive Board Concludes the 2017 Article IV Consultation with Germany

July 7, 2017

On June 28, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Germany.

Germany’s growth momentum has remained solid, underpinned by robust domestic demand. In 2016, strong employment growth continued to support private consumption, while public consumption and investment in construction accelerated further. Following a soft patch for most of the year, exports and investments in equipment have rebounded in the most recent quarters. Despite high and rising capacity utilization, record low unemployment and high job vacancy rates, wage growth has remained stable and core inflation steady and low at around 1 percent. The large current account surplus declined slightly, from 8.6 percent of GDP in 2015 to 8.3 percent in 2016, due to the deterioration of the income and services balance. The fiscal policy stance was neutral, as the general government posted its third consecutive yearly surplus.

Housing prices have kept trending up especially in urban areas, against the backdrop of rising immigration, continuing urbanization, an inelastic housing supply, and easy financing conditions. Loans to non-financial corporations have accelerated as firms take advantage of low interest rates. In the banking sector, while regulatory capital is adequate, profitability continues to be weak, reflecting structural factors, some crisis legacies, and the low interest rate environment. Low interest rates, if prolonged, would also negatively affect life insurers given their extensive reliance on guaranteed products.

The cyclical upswing is expected to persist in the near term. Rising employment, some fiscal expansion and continued monetary accommodation will support domestic demand, but higher energy costs should curb consumption growth. Exports growth is expected to gradually recover from the 2016 slowdown, bringing about a pickup in business investment and imports. In all, real GDP is expected to grow by 1.8 percent in 2017 and 1.6 percent in 2018, increasing the already positive output gap and pushing up core inflation. Over the medium term, population aging and slow progress on structural reforms is expected to weigh on growth. 

Executive Board Assessment[2]

Executive Directors commended the authorities for fostering Germany’s stable macroeconomic performance, being an engine of growth in the euro area. Directors welcomed the economy’s prospects for sustained growth in the near term, amid robust domestic demand—underpinned by rising employment, and accommodative monetary policy—and strengthening global conditions. They noted that risks to the outlook are broadly balanced in the short term, but predominantly negative in the longer term, as anti‑globalization policies worldwide could harm growth prospects, while insufficient reform progress inside the euro area could rekindle stress.

Directors agreed that Germany’s policies should focus on bolstering potential growth while accelerating external rebalancing, including within the euro area, to help address the large current account surplus. To this end, Directors recommended using leeway available within the fiscal rules to further expand public investment in infrastructure, widen the provision of childcare services, foster refugee integration, and reduce the tax burden on labor. In this regard, they welcomed the authorities’ indication that further measures are under active consideration. Directors commended efforts to overcome administrative barriers to the expansion of public investment. Noting continued fiscal overperformance in recent years, Directors suggested that the authorities continue to reexamine their projection methodology with a view to improve fiscal planning.

Considering the rapidly aging population, Directors stressed that reforms to raise the effective retirement age would increase potential growth, reduce the need to save for retirement—and hence reduce the current account surplus—and strengthen the fiscal position.

Directors emphasized that a sustained rise in wage and price inflation in Germany, consistent with the tight labor market, would help lift euro area inflation, facilitate the normalization of monetary policy, and promote the realignment of competitiveness within the monetary union. In this regard, most Directors considered that, at the current juncture, the authorities could usefully emphasize the importance of robust wage and price growth in their public communication, while respecting the autonomy of social partners in wage setting, although a number of Directors questioned the efficacy and merits of such a move.

Directors renewed calls for accelerating competition‑enhancing reforms in parts of the services sector to strengthen productivity growth. They also welcomed the broad measures underway to speed up digitalization and enhance venture capital investment.

Directors observed that Germany’s strong employment gains and well‑developed redistributive system have kept disposable income inequality stable, but that relative poverty risk has been rising. In this regard, the effectiveness of recent social cohesion policies needed to be kept under review. Directors also noted that anti‑poverty measures should seek to preserve the achievements of past labor market reforms.

Despite rapidly rising prices, Directors judged that housing remained affordable in the aggregate, but growing regional differences and some hot spots deserved close monitoring. Policies to ease supply restrictions in areas under pressure were also warranted. They welcomed new legislation introducing additional macroprudential instruments for the real estate market, and encouraged a further strengthening of the authorities’ toolkit. Directors recommended enhancing the supervisory database on real estate credit.

Directors noted that profitability in the bank and life insurance sectors was low, and the sectors needed to continue their restructuring efforts to durably strengthen their resilience. In light of the low interest rate environment, Directors also welcomed recent supervisory attention to interest rate risk.