IMF Executive Board Concludes the 2016 Article IV Consultation with Germany

IMF News, June 29, 2016

Source details

Canonical URL: IMF Executive Board Concludes the 2016 Article IV Consultation with Germany

Growth momentum has remained steady as strong domestic demand has offset weak foreign demand.
Private consumption growth supported by the persistently strong labor market and lower energy prices; public consumption and investment have also been buoyant.
GDP is projected to grow by 1.7 percent in 2016 and 1.5 percent in 2017.
Growth over the medium term expected to decline against the backdrop of a still uncertain global outlook, a population aging fast, and slow progress on structural reforms.
Forecast note: This forecast does not yet reflect the economic impact of the U.K. referendum decision in favor of leaving the European Union.

Core inflation has been low and stable around 1 percent.
A small positive output gap should open up, which, together with recent ECB policy actions, should very gradually push up core and headline inflation towards 2 percent.
The current account surplus widened significantly, reaching 8.5 percent of GDP in 2015, reflecting lower commodity prices and currency effects.
Balance of payments projections: current account balance at 8.2 percent of GDP in 2016 and 7.7 percent of GDP in 2017.

Unemployment rate: 5.0 percent in 2014; 4.6 percent in 2015; projected 4.3 percent in 2016 and 4.5 percent in 2017.
Employment growth: 0.9 percent in 2014; 0.8 percent in 2015; projected 0.6 percent in 2016.
Total domestic demand growth: 1.3 percent in 2014; 2.3 percent in 2015; projected 1.8 percent in 2016.
Directors called for measures to increase labor supply by promoting labor force participation of women, older workers, and immigrants.

Credit growth, long subdued, has picked up.
Housing prices have kept trending up amid a slow supply response to surging housing demand.
The banking sector faces multiple challenges translating into low profitability: negative interest rates erode retail banking profits; aggregate cost-to-income ratio is high in international comparison; technological changes and the new regulatory environment require business model adaptation.
Low interest rates, if protracted, would also weaken life insurers’ ability to meet guaranteed commitments.
Directors welcomed recent actions to ease supply constraints in the housing sector and supported reforming the real estate transaction tax, improving the macroprudential toolkit targeted at the real estate sector, and enhancing the supervisory database.
Continued close monitoring of house price developments and mortgage credit is warranted.

The fiscal stance was neutral in 2015.
General government finances: fiscal balance 0.3 percent of GDP (2014 data shown); revenue 44.6 percent of GDP (2014); expenditure 44.3 percent of GDP (2014).
Public debt: 74.7 percent of GDP (2014); 71.2 percent of GDP (2015); projected 68.5 percent of GDP (2016) and 66.2 percent of GDP (2017).
Directors broadly concurred that, to the extent fiscal resources are available within fiscal rules, they should be used to boost high quality public investment and finance growth enhancing reforms.
Directors welcomed authorities’ efforts to enhance the overall efficiency of public investment and plans to address administrative and regulatory constraints to investment.

Faster progress on structural reforms is essential for boosting medium term growth in a rapidly aging society.
Recommended reforms: reforming taxation, the pension system, and health insurance contributions; decisive steps to enhance competition and productivity in the services sector.
Directors commended the German government for shouldering the burden of absorbing a large inflow of refugees.

Directors observed the overall banking sector remains strong, resilient, and well capitalized.
Given prolonged low interest rates, high operating costs, and technological and regulatory changes, banks should accelerate efforts to adjust, improve risk management, and adapt business models.
Directors recommended authorities monitor the insurance sector closely, require action plans from troubled firms, and keep safety nets under review.
Directors welcomed progress in implementing the recommendations of the 2011 Financial Sector Assessment Program and considered completion of the new bank recovery and resolution framework a high priority.
Further efforts needed: improve coverage and granularity of supervisory data; complete resolution planning for large international banks; broaden crisis management coordination with European authorities.
Directors noted the globally systemic importance of large German banks and potential spillover effects of their withdrawal from correspondent relationships; encouraged better risk management, stronger cooperation with other national supervisors, and facilitation of cross border information sharing.

Press Release No. 16/312, IMF Executive Board Concludes the 2016 Article IV Consultation with Germany, June 29, 2016.