Germany: Staff Concluding Statement of the 2016 Article IV Mission
IMF News, May 9, 2016
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Bibliographic details
- Published: May 9, 2016
Mission purpose and context
- Concluding Statement describing preliminary findings of IMF staff at the end of an official staff visit (mission) undertaken as part of regular Article IV consultations.
- The authorities consented to publication. Views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
- FSAP conducted over the period November 2015-March 2016 informed mission findings.
- Date of statement: May 9, 2016.
Key policy messages (summary)
- Accelerate structural reforms to boost growth potential by broadening labor market participation of refugees, women, and older workers, and spurring competition in the services sector.
- Step up public and private investment to meet infrastructure needs, while tackling administrative bottlenecks.
- Remove impediments to housing supply expansion to better relieve the pressure on the housing market.
- Develop the legal basis for real-estate-related macroprudential tools to better contain potential future excesses.
- Improve financial sector oversight and macroprudential policy analysis by enhancing data collection.
- Implement measures to strengthen the oversight role of banks’ supervisory boards by increasing their responsibilities and tightening member qualifications standards.
- Together with the European competent authorities, complete the new bank resolution and crisis management agenda, as Germany is home to globally systemic institutions.
Growth outlook and risks
- Growth in 2016 expected to remain moderate as strong domestic demand offsets weak foreign demand.
- Drivers supporting domestic demand:
- A sizable fiscal expansion.
- Further ECB monetary stimulus.
- Continued effect of lower energy prices.
- Strong labor market boosting real disposable income.
- Credit growth above trend supporting consumption.
- Residential investment responding to surging housing demand.
- Inflation dynamics:
- Core and headline inflation expected to get close to 2 percent only in the medium-term as labor cost increases slowly pass through to prices.
- Upside and downside risk factors:
- Upside: large monetary and fiscal stimulus could lead to growth surprises.
- Downside: further slowdown in external demand; erosion of confidence in the European project in parts of Europe; rekindling of stress in euro area sovereign bond markets.
External position and current account
- The current account surplus is projected to stay near record levels in 2016.
- Even if net exports’ growth contribution turns negative, favorable terms of trade effects will prevent a rapid fall in the surplus.
- Persistent surplus reflects high savings and limited domestic investment, partly due to modest medium-term growth prospects and risks.
- Net international investment position projected to reach almost 90 percent of GDP by 2020 owing to a persistently sizable surplus over the medium-term.
Fiscal policy and public debt
- A sizable expansion in government spending in 2016 will be partly financed by revenue gains from a buoyant labor market and growing domestic demand.
- New spending priorities: social transfers, asylum-seeker and refugee assistance, and, to a smaller extent, public investment; some income tax relief also implemented.
- Fiscal stimulus expected to amount to close to 1 percent of GDP.
- If revenues overperform, additional resources should be used to promote further investment.
- Medium-run projections:
- Budget balance expected to return to a surplus partially due to declining interest payments.
- Public debt ratio expected to fall below 60 percent of GDP by 2020.
- Structural fiscal balance expected to remain above the Stability and Growth Pact’s Medium Term Objective of -0.5 percent of GDP.
Investment, infrastructure, and administrative capacity
- Public investment was low for many years, particularly at the municipal level, degrading planning and execution capacity.
- Administrative and regulatory bottlenecks are holding back a more vigorous investment effort.
- Recommended actions:
- Rapidly remove planning and execution bottlenecks.
- Reform and expand the Partnerschaften Deutschland agency (planned).
- Create a federal transportation agency financed through user fees for federal roads maintenance and upgrading.
- Stimulate private investment in fast broadband infrastructure and foster venture capital and e-procurement.
Labor market, demographics, and pensions
- Projected decline in the labor force due to aging after 2020 necessitates measures to boost labor supply in the medium term.
- Recommended labor supply measures:
- Integrate current wave of refugees into the labor market.
- Broaden opportunities for full-time employment of women.
- Extend working lives of older workers.
- Refugee integration measures:
- Remove remaining restrictions to employment and training for asylum-seekers and persons with a temporary suspension of deportation.
- Recognize informally acquired skills; facilitate flexible vocational training with strong on-the-job components and intensive language teaching.
- Enhance active labor market policies (such as temporary wage subsidies).
- Consider minimum wage decisions in light of refugee integration challenges.
- Female labor supply:
- Almost half of employed women work only part time; closing this gap would boost labor supply and productivity.
- Use increased financial support for childcare to improve availability of high-quality full-time programs.
- Move toward health insurance contributions depending on number of adult household members covered, with targeted support for lower income households.
- Lower marginal tax wedges to incentivize greater labor supply.
- Pension reform recommendations:
- Index retirement age to life expectancy and make the choice to remain in the labor force actuarially neutral to promote longer working lives and reduce old-age poverty.
Competition and services sector
- Competition-enhancing reforms in the services sector needed due to low productivity growth and slow progress.
- Noted delays and issues:
- Infringement procedures by the European Commission regarding minimum compulsory tariffs of architects and engineers not followed by action yet.
- Act to Strengthen Competition in the Railway Sector under discussion for over three years; market share of new entrants in long-distance rail passenger segment remains below 1 percent.
- Postal services competition hindered by ultra-dominant position of the domestic incumbent.
Housing market and real estate
- Current price dynamics largely driven by fundamentals: demographic developments, rising incomes, higher construction costs, attractiveness of largest cities, and lower mortgage rates.
- Mortgage credit growth trending up, but moderate with largely unchanged credit standards.
- Concerns about a housing bubble considered premature.
- Policy recommendations:
- Collect granular and timely loan-to-loan data.
- Establish legal basis for macroprudential tools targeted at the real estate sector rapidly.
- Increase availability of publicly-owned building land; loosen height and zoning restrictions where pressures are highest.
- Monitor implementation speed and effectiveness of the government’s housing supply package and be ready to reinforce measures if needed.
- Improve real estate taxation efficiency by increasing property tax (through an update of property values) and reducing the real estate transfer tax rate to incentivize new construction.
Financial sector: banking, insurance, supervision, and resolution
- Banking sector adjustments needed for prolonged low interest rates and structural challenges:
- Low profitability reflects crisis legacy issues, compliance-related provisions, business model adjustments to post-crisis regulation and technological change, and structural inefficiencies.
- Restructuring at large banks needs to progress; cost-cutting remains slow.
- Fee-based activities picking up in smaller banks.
- Risk-based solvency measures show substantial capital buffers on aggregate; non-performing loans generally low and declining; some institutions remain highly leveraged.
- Life insurers:
- Prolonged low interest rates erode ability to meet guaranteed commitments.
- Supervisors should monitor the sector, demand action plans from firms in difficulty, and keep safety net arrangements under review.
- Many life insurers expected to rely on long transitional measures under Solvency II; authorities should coordinate a communication plan ahead of publication of new solvency measures in 2017.
- Supervisory and resolution agenda:
- Single Supervisory Mechanism and Single Resolution Mechanism have had a positive impact per FSAP analysis.
- Key priorities:
- Improve comprehensiveness and granularity of supervisory data.
- Communicate supervisory expectations to banks on supervisory boards’ roles, internal control and audit, related party exposures, and operational risk; develop guidelines and regulations to support enforceable measures.
- Rapidly complete resolution planning for large cross-border banks.
- Clarify coordination arrangements between European and domestic authorities to handle a systemic crisis.
- Correspondent banking:
- Large global banks withdrawing from correspondent relationships in a number of countries.
- Authorities should encourage German banks to better manage risks in these activities and strengthen dialogue and cooperation among national supervisors to harmonize regulatory frameworks and facilitate cross-border information sharing on customer due diligence.
Implementation and monitoring
- Urged rapid removal of investment and administrative bottlenecks.
- Recommended close cooperation across levels of government for housing supply measures and readiness to reinforce policies if desired effects do not materialize.
- Emphasized enhanced data collection and communication by supervisors to support macroprudential and supervisory actions.
- Resolution planning and crisis coordination arrangements should be prioritized and completed with European counterparts.
Source: Germany: Staff Concluding Statement of the 2016 Article IV Mission (May 9, 2016).