IMF Executive Board Concludes 2018 Article IV Consultation with Germany
IMF News, July 4, 2018
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- Published: July 4, 2018
Overview
- Date of press release: July 4, 2018.
- The Executive Board of the International Monetary Fund concluded the Article IV consultation with Germany on June 29, 2018.
- Germany’s economic performance in 2017 was described as strong, underpinned by solid domestic demand and a rebound in exports in the second half of the year.
Economic performance and labor market (2017)
- Real GDP growth: 2.5 percent in 2017.
- Stabilization of refugee-related expenditures led to a slowdown in public consumption.
- Capacity utilization was already high and continued to rise.
- Labor market tightened further, putting incremental pressure on wages.
- Headline and core inflation reached 1.5 percent at the end of 2017.
- General government surplus reached 1.2 percent of GDP, the highest level since reunification.
- Fiscal stance remained broadly neutral.
- Current account surplus declined to 8 percent in 2017, from 8.5 percent in 2016, as both the trade and income balances deteriorated.
Financial system and housing market
- Total credit accelerated in 2017 as households and firms took advantage of the low interest rate environment, but remained broadly in line with nominal GDP growth.
- House prices accelerated further in dynamic urban areas due to continued urbanization, inelastic housing supply, and easy financing conditions.
- Banking sector: regulatory capital remained adequate, but profitability continued to be weak, reflecting structural factors, some crisis legacies, and the low interest rate environment; some banks remain under close supervisory scrutiny.
- Life insurance sector: restructuring occurred in response to the low interest rate environment; profitability remains an issue due to extensive reliance on guaranteed products.
Outlook and risks
- Near-term expansion expected to continue, but growth projected to slow markedly over the medium to long term due to unfavorable demographics and productivity trends.
- Short-term risks described as substantial:
- A significant rise in global protectionism.
- A hard Brexit.
- A reassessment of sovereign risk in the euro area leading to renewed financial stress.
- Such shocks could affect Germany’s exports and investment.
Executive Board Assessment — findings and policy recommendations
- Directors commended Germany’s strong performance and prospects for continued solid near-term growth driven by robust domestic demand amid a tight labor market and accelerating wages.
- Directors noted sizable external imbalances and important risks that cloud the outlook.
- Policy focus recommended: bolster potential growth given unfavorable demographic prospects.
- Specific recommendations and priorities:
- Further expand public investment in physical and human capital.
- Prioritize measures that incentivize labor supply and help improve the environment for private investment.
- Use fiscal space to further raise public investment (while alleviating bottlenecks at the municipal level).
- Expand childcare and after‑school programs.
- Reduce the labor tax wedge.
- Provide additional funding for primary education and life‑long learning.
- Balance spending to raise potential growth with maintaining strong buffers for potential economic risks and upcoming demographic challenges.
- Implement pension and labor market reforms that make it more attractive to extend working lives to lower the public pension bill, raise growth, and reduce the need to save.
- On productivity and entrepreneurship:
- Improve access to venture capital.
- Provide tax incentives for R&D to small‑ and medium‑size enterprises.
- Reduce administrative burdens.
- Ensure incentives, regulations, and funding availability are appropriate to complete Germany’s digital transformation.
- Accelerate competition‑enhancing reforms in parts of the services sector and network industries.
- On housing and macroprudential policy:
- Accelerating house prices in Germany’s most dynamic cities deserve close monitoring.
- Lack of granular city-level data prevents a full assessment; urgently address data gaps.
- Strengthen the macroprudential toolkit to guard against pockets of financial vulnerability.
- On financial sector resilience:
- Profitability in the bank and life insurance sectors remains low; accelerate restructuring efforts to durably strengthen resilience and reduce risks.
- Continue supervisory attention to progress in implementing restructuring plans and reducing interest rate risk in banking and insurance.
Selected Economic Indicators, 2016–19 (projections)
- Output
- Real GDP growth (%): 2016: 1.9; 2017: 2.5; 2018: 2.2; 2019: 2.1
- Total domestic demand growth (%): 2016: 2.4
- Output gap (% of potential GDP): 2016: 0.2; 2017: 0.9; 2018: 1.3; 2019: 1.6
- Employment
- Unemployment rate (%, ILO): 2016: 4.2; 2017: 3.7; 2018: 3.6; 2019: 3.5
- Employment growth (%): 2016: 1.1; 2017: 0.6; 2018: 0.4
- Prices
- Inflation (%): 2016: 1.7; 2017: 1.8
- General government finances
- Fiscal balance (% of GDP): 2016: 1.0; 2017: 1.2; 2018: 1.4
- Revenue (% of GDP): 2016: 45.0; 2017: 45.1; 2018: 45.3; 2019: 45.2
- Expenditure (% of GDP): 2016: 44.0; 2017: 43.9; 2018: 43.8
- Public debt (% of GDP): 2016: 68.2; 2017: 64.1; 2018: 60.0; 2019: 56.1
- Money and credit
- Broad money (M3) (end of year, % change) 1/: 2016: 5.7; 2017: 4.3
- Credit to private sector (% change): 2016: 10-year government bond yield (%)
- Balance of payments
- Current account balance (% of GDP): 2016: 8.5; 2017: 8.0; 2018: 8.3; 2019: 8.1
- Trade balance (% of GDP): 2016: 7.9; 2017: 7.6; 2018: 7.3
- Exports of goods (% of GDP): 2016: 37.9; 2017: 38.9; 2018: 39.4; 2019: 40.0
- Exports volume (% change): 2016: 2.3; 2017: 5.0; 2018: 4.9
- Imports of goods (% of GDP): 2016: 29.4; 2017: 30.8; 2018: 31.3; 2019: 32.0
- Imports volume (% change): 2016: 3.8; 2017: 5.9; 2018: 5.2
- FDI balance (% of GDP): 2016: 1.5
- Reserves minus gold (billions of US$): 59.6; 59.4
- External Debt (% of GDP): 148.0; 140.5
- Exchange rate
- Real effective rate (2005=100) 2/: 2016: 92.4; 2017: 93.6
- Nominal effective rate (2005=100) 3/: 2016: 98.6; 2017: 100.1
Press Release No. 18/276 — IMF Communications Department, MEDIA RELATIONS
