Five Takeaways from Germany's Economic Outlook

IMF News, July 10, 2019

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After several years of real GDP growth averaging over 2 percent annually, Germany’s economy slowed sharply in the second half of 2018.
Slowdown reflected a mixture of weak external demand and special circumstances affecting the auto and chemical industries.
Solid investment in construction and equipment is projected to gradually bring output back to trend by the end of this year, resulting in 0.7 percent growth in 2019 and 1.7 percent in 2020.
Looking ahead, structural challenges are weighing on Germany’s potential output:
- Labor force is expected to shrink as the population ages.
- Productivity growth remains low.
- Adaptation to technological change and digitalization is slow.
- The energy transition poses important uncertainties for business investment.

Rising saving by firms, together with fiscal consolidation after 2011, fueled the rise in Germany’s current account surplus.
Over much of the past two decades, as unemployment fell and exports surged, wage growth lagged behind and household purchasing power stagnated, particularly among the lower paid.
A rising share of national income took the form of profits retained by firms, whose ownership is highly concentrated among the wealthiest households.
Because wealthier households tend to save a larger share of their income, private saving increased and the current account surplus surged.

Germany has had many consecutive years of large fiscal surpluses, and the public debt ratio is on a declining path, leaving substantial fiscal space.
Recommended use of fiscal space:
- Fully support potential growth through public investment in physical and human capital.
- Provide further tax relief for low-income households to restore their purchasing power, alongside stronger wage growth.
Expected outcomes:
- These policies would boost potential growth and help reduce external imbalances.

With the working-age population set to decline and widespread labor shortages, reforms to raise productivity and domestic investment are key.
Priority reform areas:
- Upgrade coverage of nationwide high-speed internet.
- Roll out the e-Government platform.
- Support venture capital.
- Reduce uncertainties around the strategy for an ambitious energy transition program.

In the “low-for-long” interest rate environment, the German banking system needs to accelerate measures to shore up profitability, which has been persistently under pressure from high costs and slow progress with restructuring.
Recommended accompanying measures:
- Faster bank restructuring.
- Expanded macroprudential toolkit.
- Enhanced data availability to address rising macro-financial risks.

International Monetary Fund