IMF Executive Board Concludes 2018 Article IV Consultation with Germany
July 4, 2018
On June 29, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Germany.
Germany’s economic performance was strong in 2017, underpinned by solid domestic demand and a rebound in exports in the second half of the year. Despite a slowdown in public consumption due to the stabilization of refugee-related expenditures, real GDP grew by 2.5 percent. Already-high capacity utilization continued to rise and the labor market tightened further putting incremental pressure on wages. Reflecting this, headline and core inflation reached 1.5 percent at the end of 2017. The general government surplus reached 1.2 percent of GDP, the highest level since reunification, but the fiscal stance remained broadly neutral. The current account surplus declined to 8 percent in 2017, from 8.5 percent in 2016, as both the trade and income balances deteriorated.
The financial system was characterized by moderate credit growth and weak profitability. Total credit accelerated in 2017, as households and firms took advantage of the low interest rate environment, but it remained broadly in line with nominal GDP growth. Against the backdrop of continued urbanization, an inelastic housing supply, and easy financing conditions, house prices accelerated further in dynamic urban areas. In the banking sector, regulatory capital remained adequate, but profitability continued to be weak, reflecting structural factors, some crisis legacies, and the low interest rate environment. Some banks remain under close supervisory scrutiny. The low interest rate environment also forced some restructuring in the life insurance sector where profitability remains an issue due to the extensive reliance on guaranteed products.
The outlook is for the expansion to continue in the near term but slow markedly over the medium to long term, reflecting unfavorable demographics and productivity trends. Short-term risks are substantial, as a significant rise in global protectionism, a hard Brexit, or a reassessment of sovereign risk in the euro area, leading to renewed financial stress, could affect Germany’s exports and investment.
Executive Board Assessment [2]
The Executive Directors commended Germany’s strong economic performance and welcomed the prospects for continued solid growth in the near term, underpinned by robust domestic demand amid a tight labor market and accelerating wages. They noted, however, that external imbalances remain sizable and important risks are clouding the outlook. Rising protectionist trends, geopolitical uncertainty, or a reassessment of sovereign risk in the euro area could lead to bouts of financial turbulence, negatively affect export prospects, and weigh on investment.
Directors stressed that the positive near‑term economic outlook provides an opportunity for Germany to more forcefully address its long‑term challenges. Given unfavorable demographic prospects, they agreed that Germany’s policies should focus on bolstering potential growth. In this regard, Directors recommended further expanding public investment in physical and human capital, and prioritizing measures that incentivize labor supply and help improve the environment for private investment. Such measures would bolster productivity growth, further lift long‑term output, and reduce Germany’s large current account surplus.
In this context, Directors welcomed the new government’s initiatives to support long‑term growth. Many Directors urged using Germany’s fiscal space to further raise public investment (while alleviating bottlenecks at the municipal level), expand childcare and after‑school programs, reduce the labor tax wedge, and provide additional funding for primary education and life‑long learning. A number of Directors, however, emphasized a need to balance spending to raise potential growth with maintaining strong buffers for potential economic risks and upcoming demographic challenges. Directors also stressed that pension and labor market reforms that make it more attractive to extend working lives would lower the public pension bill, raise growth, and reduce the need to save.
Directors noted the slow labor productivity growth and a declining trend in entrepreneurship. They recommended further improving access to venture capital, providing tax incentives for R&D to small‑ and medium‑size enterprises, and reducing administrative burdens. They also urged the authorities to ensure that incentives, regulations, and funding availability are appropriate to complete Germany’s digital transformation. Directors also renewed calls for accelerating competition‑enhancing reforms in parts of the services sector and network industries.
Directors emphasized that accelerating house prices in Germany’s most dynamic cities deserve close monitoring. They noted that the lack of granular data at the city level prevents a full assessment of developments. In this context, they recommended strengthening the macroprudential toolkit and urgently addressing data gaps to guard against the risk that pockets of financial vulnerability might emerge.
Directors noted that profitability in the bank and life insurance sectors remains low and that restructuring efforts must be accelerated to durably strengthen resilience and reduce risks. They stressed the importance of continued supervisory attention to progress in implementing restructuring plans and reducing interest rate risk in banking and insurance.
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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