## Germany: Staff Concluding Statement of the 2016 Article IV Mission

_IMF News, May 9, 2016_

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**Canonical URL:** [Germany: Staff Concluding Statement of the 2016 Article IV Mission](https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs050916)

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## Bibliographic details
- Published: May 9, 2016

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### 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).*

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## References

- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs050916_