## Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Germany

_IMF News, January 22, 2009_

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## Bibliographic details
- Published: January 22, 2009

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### Background: growth, financial stress, and fiscal outlook
- Real GDP:
  - 2008 projected growth: 1.3 percent.
  - 2009 projected contraction: 2½ percent.
  - 2010: slow recovery projected.
- Drivers of slowdown:
  - Deceleration in world demand and deteriorating confidence indicators.
  - Financial market stress spilling over into sentiment and the real economy.
  - Conservative consumer behavior expected to amplify export slowdown; investment decisions likely to be postponed.
- Financial sector vulnerabilities:
  - Failures in summer 2007 (IKB and Sachsen LB) required government intervention.
  - Post-Lehman Brothers (Fall 2008) pressures (e.g., Hypo Real Estate liquidity rollover needs).
  - Public commitment to protect household deposits initially stabilized confidence.
  - Mid-October 2008 comprehensive package to support market liquidity and bank capitalization as part of globally-coordinated efforts.
- Fiscal position:
  - Fiscal consolidation in recent years and 2007 income/employment growth supported a balanced budget in 2008.
  - Deficit expected to widen in 2009 and 2010 due to weakening economy and labor market and due to the authorities' stimulus package.
  - Authorities aim to introduce a deficit rule to constrain the structural fiscal balance to about zero.
  - More ambitious fiscal federalism reform postponed until 2019.
- Risk assessment:
  - Risks remain tilted to the downside.

### Executive Board assessment: overall judgment and recommended actions
- Overall view:
  - Germany under heightened pressure from global economic and financial turmoil due to high openness and integration with world economy.
  - Prospect of a sizeable, possibly extended, economic downturn given sharp drop in world trade and weak domestic demand.
  - Corporate and financial sector stresses risk becoming more intertwined.
  - Directors welcomed initiatives to strengthen the financial safety net and the economic stimulus; fundamentals of the German economy remain strong; sustained fiscal prudence praised.
- Financial sector measures and recommendations:
  - Positive appraisal of creation of the Financial Market Stabilization Fund (FMSF) as vital to shielding the financial sector.
  - Guarantees issued to help banks meet short-term funding needs; efforts to buttress capital positions welcomed.
  - Recommendation: further recapitalization may be desirable given low capital in several banks and expected asset quality deterioration.
  - Recommendation: agency administering the FMSF should use its authority more broadly to enhance financial sector soundness.
  - Specific call: proactive restructuring and downsizing of the Landesbanken, noted as a continuing drain on public finances and a threat to financial stability.
- Deposit insurance:
  - Call for strengthened deposit insurance due to risks from existing multiple protection schemes that rely on ex post burden-sharing.
  - Recommendation: establish a base layer of mandatory deposit insurance—ex ante funded by contributions from all banks—to provide unified terms of protection and reduce incentives to shift deposits among schemes.
  - Note: evolving European Union rules should provide guidance on coverage limits.
- Regulation and supervision:
  - Case for tighter bank regulatory and supervisory process strengthened by the crisis.
  - Recommendation: place greater reliance on timely supervisory assessments independent of banks' annual external audit cycle.
  - Recommendation: link prudential regulation and supervision to a system of macro-surveillance and stability analysis.
  - Observation: greater consolidation of regulatory and supervisory resources could yield significant benefits.
- Fiscal stimulus and medium-term policy:
  - Directors welcomed conjunctural fiscal stimulus packages in the past four months as timely and supportive of domestic demand and confidence.
  - Noted components: accelerated reduction in social security contributions and stepped-up spending on infrastructure—considered well-targeted for short-term stimulus and lasting benefits.
  - Views on size of stimulus: some Directors would have favored a more proactive stimulus given the deterioration in prospects; others supported balancing stimulus with fiscal prudence.
  - All Directors welcomed authorities' reiteration of commitment to medium-term fiscal sustainability in accordance with the Stability and Growth Pact.
- Other structural concerns:
  - Trends in healthcare costs and debt accumulation by the states noted as concerns.
  - Recommended measures: further rationalization of pharmaceutical expenditures; strengthened efficiency-enhancing competition to contain healthcare costs.
  - Fiscal federalism: potential benefits from more state tax autonomy and redesign of supplementary federal grants to improve states' incentives for fiscal discipline.
  - Recommendation: apply the proposed fiscal rule limiting the structural budget balance to close to zero also to the states.

### Germany: Selected economic indicators (exact figures)
- Real GDP (change in percent):
  - 2004: 1.2
  - 2005: 0.8
  - 2006: 3.0
  - 2007: 2.5
  - 2008: 1.3
- Net exports (contribution to GDP growth):
  - 2004: 1.4
  - 2005: 0.7
  - 2006: 1.0
  - 2007: -0.2
- Total domestic demand (change in percent):
  - 2004: -0.1
  - 2005: 0.0
  - 2006: 2.1
  - 2007: 1.1
  - 2008: 1.6
- Private consumption (change in percent):
  - 2004: 0.1
  - 2005: 0.2
  - 2006: -0.4
  - 2007: —
  - 2008: —
- Gross fixed investment (change in percent):
  - 2004: -0.3
  - 2005: 7.7
  - 2006: 4.3
  - 2007: 4.1
- Construction investment (change in percent):
  - 2004: -3.9
  - 2005: -3.0
  - 2006: 5.0
  - 2007: 1.8
  - 2008: 2.7
- Gross national saving (percent of GDP):
  - 2004: 21.8
  - 2005: 22.1
  - 2006: 23.7
  - 2007: 25.9
  - 2008: 25.0
- Gross domestic investment (percent of GDP):
  - 2004: 17.1
  - 2005: 16.9
  - 2006: 17.6
  - 2007: 18.3
  - 2008: 19.0
- Labor force (percent of population) 3/:
  - 2004: 43.0
  - 2005: 43.3
  - 2006: 43.2
  - 2007: 43.4
  - 2008: 43.4
- Employment 3/ (percent of population):
  - 2004: 38.8
  - 2005: 39.0
  - 2006: 39.7
  - 2007: 40.3
- Standardized unemployment rate (in percent):
  - 2004: 9.2
  - 2005: 10.6
  - 2006: 9.8
  - 2007: 8.4
  - 2008: 7.3
- Unit labor costs (industry; hourly data):
  - 2004: -3.1
  - 2005: -4.2
  - 2006: -4.0
  - 2007: -1.2
- GDP deflator:
  - 2004: 0.5
- Harmonized CPI index:
  - 2004: 1.9
  - 2005: 2.3
  - 2006: 2.8
- Public finance (in percent of GDP):
  - General government balance 4/:
    - 2004: -3.8
    - 2005: -3.3
    - 2006: -1.5
  - Structural government balance:
    - 2004: -2.6
    - 2005: -2.3
  - General government gross debt:
    - 2004: 64.7
    - 2005: 66.4
    - 2006: 66.0
    - 2007: 65.0
    - 2008: 68.7
- Money and credit (change in percent over 12 months):
  - Private sector credit 5/:
    - 2004: 2.2
    - 2005: 3.5
    - 2006: 3.2
    - 2007: 6.6
    - 2008: 6.6
  - M3 5/:
    - 2004: 5.2
    - 2005: 4.9
    - 2006: 11.1
- Interest rates (in percent):
  - Three-month money market rate 6/:
    - 2004: 3.7
    - 2005: 4.8
    - 2006: 3.4
  - Ten-year government bond yield 6/:
    - 2004: 3.6
    - 2005: 3.8
- Balance of payments (in billions of euros):
  - Exports 7/:
    - 2004: 850.3
    - 2005: 924.6
    - 2006: 1,056.3
    - 2007: 1,148.6
    - 2008: 1,206.6
  - Imports 7/:
    - 2004: 739.9
    - 2005: 805.1
    - 2006: 925.5
    - 2007: 975.6
    - 2008: 1,047.6
  - Trade balance (percent of GDP):
    - 2004: 6.3
    - 2005: 6.4
    - 2006: 7.8
    - 2007: 7.1
    - 2008: 7.1
  - Current account balance (in billions of euros):
    - 2004: 102.9
    - 2005: 116.6
    - 2006: 141.5
    - 2007: 184.2
    - 2008: 149.4
  - Current account (percent of GDP):
    - 2004: 4.7
    - 2005: 6.1
    - 2006: 7.6
    - 2007: 6.0
    - 2008: 6.0
- Exchange rate (period average):
  - Euro per U.S. dollar 6/:
    - 2004: 0.80
    - 2005: 0.73
    - 2006: 0.74
  - Nominal effective rate (1990=100) 6/:
    - 2004: 115.7
    - 2005: 114.7
    - 2006: 114.9
    - 2007: 119.7
    - 2008: 115.8
  - Real effective rate (1990=100) 8/:
    - 2004: 105.5
    - 2005: 102.2
    - 2006: 99.1
    - 2007: 97.9
    - 2008: 95.1

*Public Information Notice (PIN) No. 09/05, January 22, 2009.*

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- [Country Report (PDF)](/external/pubs/ft/scr/2009/cr0915.pdf){rel="external" type="application/pdf"}

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