Germany: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, May 23, 2022
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- Published: May 23, 2022
Economic outlook and risk assessment
- Mission conducted during May 9 ‒23, 2022.
- Near-term impacts: fallout from the war in Ukraine and COVID-related disruptions are slowing the recovery; spike in energy prices has pushed inflation to multi-decade highs.
- Baseline growth projections:
- Growth is projected to slow to about 2 percent in 2022, from 2.9 percent in 2021.
- Growth is projected to pick up in 2023 to slightly above 2 percent if energy prices and supply bottlenecks subside, and COVID infections remain under control.
- Growth would then decline toward potential after 2024; output would remain below the pre-pandemic trend in the medium term.
- Inflation projections:
- Inflation is expected to stay elevated at about 6½ percent in 2022.
- Inflation is expected to moderate to about 3½ percent in 2023.
- Downside and tail risks:
- Greatest threat: persistent and complete shut-off of Russia’s gas exports, which would take at least two years to fully replace in Germany.
- Other risks: tighter sanctions or disruptions from the war; COVID-related restrictions intensifying global supply bottlenecks; persistently high inflation prompting faster-than-expected central bank tightening; delays in renewable energy deployment or digitalization; fragmentation of global value chains.
Fiscal policy stance and recommendations
- Near-term stance:
- Fiscal stance projected to be broadly neutral in 2022.
- Key pandemic supports are set to expire; new measures introduced to cushion war impacts.
- Government plan to return to the debt brake rule in 2023 can be attained by phasing out remaining pandemic support and energy relief measures as scheduled under baseline assumptions.
- Flexibility under downside scenarios:
- Allow automatic stabilizers to operate fully.
- Continue to flexibly provide targeted support if downside risks materialize.
- Consider activating the escape clause of the debt break rule for another year if necessary.
- Use of fiscal space:
- Continue to use available fiscal space to invest in resiliency: energy security, progress toward net zero emissions, life-long learning, digitalization, innovation, labor supply, and social protection.
- Warning: extensive use of extra-budgetary funds outside the core federal budget to create borrowing allowances may undermine fiscal framework credibility; structural increases in strategic spending should be integrated into the core budget over time.
Immediate priorities: cushioning the war’s spillovers and building resilience
- Objectives: secure gas supplies, cushion economic spillovers, prevent scarring (bankruptcies, layoffs), and deepen financial system threat assessment.
- Assessment of government measures:
- Government package includes one-off income support payments to vulnerable individuals (commended as cost-effective and preserving energy-conservation incentives).
- Broad-based relief (e.g., temporary cuts to fuel taxes) are fiscally costly and distort price signals.
- Energy resilience and demand reduction:
- Higher gas reserves are needed urgently; subsidies for firms’ energy expenditures outlined in early April should be phased out as planned, at the latest.
- Consider meaningful financial incentives to encourage voluntary gas-saving behavior; earlier and greater demand reduction reduces potential GDP impact in a shut-off event.
Energy security, diversification, and regional cooperation
- Actions taken: diversification of gas sources, securing additional liquefied natural gas (LNG) supplies, financing facilities to re-gasify LNG, activating first stage of national emergency plan for gas, laws requiring companies to fill gas storage before winter, and emergency powers over infrastructure and price adjustments.
- Policy recommendations:
- Increase transparency about gas shortfall scenarios and infrastructure bottlenecks to encourage investment and crisis planning.
- Strengthen cooperation with EU countries and via REPowerEU to secure supplies and ensure adequate infrastructure and legal frameworks for sharing gas in shortages.
- Build on solidarity agreements with Denmark and Austria; explore further agreements with neighboring countries, including for land-locked countries dependent on flows through Germany.
Gas shut-off scenario and contingency policies
- Estimated impact: most existing studies put the output loss at up to 6 percent of GDP over one to two years.
- Policy responses:
- Automatic stabilizers as first line of defense.
- Ensure solvency of energy companies to avoid financial constraints exacerbating shortages; plan to allow energy companies to pass on cost increases to end-users in an emergency should be complemented with targeted income support for vulnerable households.
- Firms’ demand for government liquidity support facilities would grow; further discretionary financial support to firms might be necessary.
- Authorities’ ongoing assessments of economic and financial implications are crucial for planning support.
- If rationing becomes necessary, consider macroeconomic implications alongside technical, legal, and social dimensions.
Investment priorities: green transition and public investment
- Imperative: fast-track green transition given uncertain fossil fuel supplies.
- Role of private vs public investment:
- Much green investment must be private; strong carbon pricing is key to mobilize it.
- Scaling up public green investment is vital for network externalities and to crowd in private investment (examples: electricity transmission upgrades, expansion of electric-vehicle charging stations).
- Policy actions to boost public investment:
- Simplify administration and enhance planning capacity, financing, and coordination across levels of government urgently.
- Use investment to help reduce Germany’s large external imbalances.
Labor supply, skills, and demographic challenges
- Issues:
- Labor force contracted during the pandemic; unless participation—especially for those 40 years and older—resumes or immigration recovers, Germany faces a diminishing labor force and growing dependency ratio.
- Recommendations:
- Expand high-quality childcare and strengthen incentives to work for secondary earners to promote female labor-force participation and working hours.
- Continue easing immigration rules to address skilled-worker shortages and complement with integration efforts.
- Reduce the labor tax for lower-skilled workers to boost disposable income and stimulate labor supply.
- Enhance training and up- or re-skilling to address skill mismatches, support the green transition, and adapt to digitalization.
Financial sector resilience and FSAP findings
- FSAP assessment: German banking sector generally resilient to shocks, but pockets of vulnerability exist.
- Stress test findings:
- Overall bank capital is generally sufficient to withstand a severe adverse scenario including a three-standard deviation shock to growth over two years.
- Banking system appears resilient to liquidity shocks.
- Stress tests identify shortfalls of capital and US dollar liquidity at some individual banks under the adverse scenario.
- Structurally low bank profitability remains a vulnerability.
- Policy recommendations:
- Continue close monitoring of prudential ratios for large, systemically important commercial banks.
- Establish additional bank-specific buffers for less capitalized banks as needed.
- Strengthen data collection at less systemically-important institutions on remaining maturity of retail deposits, wholesale funding, and interest-bearing assets to enable top-down stress tests of interest rate risk.
- Review and consolidate the fragmented deposit insurance system into a single scheme with a government liquidity backstop to facilitate greater risk pooling and diversification.
Housing market and macroprudential policy
- Assessment:
- House prices estimated to be above fundamental levels for Germany overall, with greater misalignments in larger cities.
- Mortgage origination strong; lending standards somewhat loose in certain segments.
- Actions taken:
- Authorities raised the counter-cyclical capital buffer and introduced a sectoral systemic risk buffer on loans secured by domestic residential real estate, with a phase-in period through end-January 2023.
- Authorities cautioned banks against taking excessive mortgage lending risk.
- Further recommendations:
- Precautionary use of borrower-based measures is warranted.
- Modify the law on borrower-based measures to remove activation obstacles; in the interim strengthen guidance on lending standards.
- Accelerate closure of data gaps and add income-based measures to the macroprudential toolkit.
IMF mission concluding statement issued May 23, 2022.