IMF Executive Board Concludes 2019 Article IV Consultation with Germany
IMF News, July 10, 2019
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- Published: July 10, 2019
Economic performance and recent developments
- After several years of real GDP growth averaging over 2 percent annually, Germany’s economy slowed sharply in the second half of 2018, reflecting a slowdown in global demand and temporary disruptions affecting the auto and chemical industries.
- Real GDP growth reduced to 1.5 percent in 2018.
- Unemployment hit a new record low, pushing wage growth up above 3 percent.
- Investment remained strong.
- Core inflation was 1.6 percent by the end of 2018.
- The general government recorded a fiscal surplus of 1.7 percent of GDP in 2018 — its fifth consecutive year of fiscal surplus and its largest in nearly 30 years.
- The current account surplus declined to 7.3 percent of GDP (down from 8.0 percent in 2017), reflecting a narrowing of the goods trade balance.
- Credit grew broadly in line with GDP in 2018, but new lending to nonfinancial corporations was increasingly channeled to relatively riskier firms while lending standards were eased.
- Prices of residential and commercial real estate continued to rise rapidly, especially in dynamic urban areas.
- The “low-for-long” interest rate environment is putting pressure on the financial sector’s profitability, adding to the challenge of high costs and slow progress with restructuring.
Outlook and risks
- Outlook assumes a gradual return of output to trend in 2019, but is subject to significant uncertainty.
- External vulnerability and downside scenarios:
- Rising global protectionism would hurt exports and investment.
- A more pronounced China slowdown would hurt exports and investment.
- A no-deal Brexit would hurt exports and investment.
- Tighter global financial conditions could trigger sharp corrections in already stretched valuations across asset classes.
- Medium-term headwinds: unfavorable demographics, low productivity growth, and the impending energy transition expected to weigh on growth.
Executive Board assessment — key messages
- Directors commended the German authorities for skillful economic management that underpinned growth, strengthened the fiscal position, and reduced unemployment to a historically low level.
- Directors noted the recent economic slowdown and downside risks that weigh on growth prospects.
- Long-term challenges highlighted: unfavorable demographics and weak productivity growth, as well as external risks from trade tensions and the Brexit process.
- Need to address external imbalances and ensure benefits of strong economic performance are broadly shared.
- External surplus partly reflects high corporate savings, widening top income inequality, and compressed household consumption.
- Forceful policy measures recommended to ensure broader sharing of gains.
- Continued faster wage growth and boosting disposable income through the tax and benefit system would be helpful.
Policy recommendations
- Fiscal policy and public investment:
- Directors welcomed the moderate fiscal expansion in 2019.
- While maintaining buffers for aging population and contingent liabilities, most Directors encouraged using available fiscal space to bolster potential growth and facilitate rebalancing.
- Recommended measures: investments in infrastructure; tax measures to raise disposable income for low-and middle-income households; incentives to promote labor force participation by female and elderly workers; tax credit for further research and development.
- Authorities’ readiness to consider additional fiscal stimulus in the event of a severe economic downturn was welcomed.
- Taxation and international cooperation:
- Directors commended the authorities’ commitment to promote fair and competitive corporate taxation and seek collaborative solutions to international tax issues.
- Structural reforms and productivity:
- Expedite structural reforms to promote innovation, investment, and competition, including in business services and regulated professions.
- Encourage upgrading digital infrastructure, implementing the e-government strategy, and improving access to venture capital.
- Energy and environment:
- Germany is on track to meet its renewable energy target.
- Directors welcomed consideration of a carbon tax and carbon pricing as part of the strategy for curbing greenhouse gas emissions.
- Financial sector and macroprudential policy:
- Progress in implementing FSAP recommendations was welcomed.
- Noted low profitability in both the bank and life insurance sectors, elevated macro-financial vulnerabilities, and rapidly rising real estate prices in dynamic cities.
- Need to monitor interest rate risk and accelerate restructuring efforts to durably enhance financial sector resilience.
- Welcomed activation of the counter-cyclical capital buffer and encouraged further steps to address data gaps for fuller financial stability assessment.
- Supported expanding the macroprudential toolkit, including tools for the commercial real estate market.
- Governance and anti-corruption:
- Directors appreciated Germany’s voluntary participation in the Fund’s enhanced governance framework on the supply and facilitation of corruption.
- Commended strong anti-bribery enforcement actions and commitment to continuing efforts.
Selected economic indicators and projections (2017–20)
- Output
- Real GDP growth (%) 1/: 2017: 2.2; 2018: 1.4; 2019: 0.7; 2020: 1.7
- Total domestic demand growth (%) 1/: 2017: 2.0; 2018: 1.9; 2019: 1.3
- Output gap (% of potential GDP): 2017: 0.8; 2018: 1.1; 2019: 0.6; 2020: 0.5
- Employment
- Unemployment rate (%, ILO): 2017: 3.8; 2018: 3.4; 2019: 3.2; 2020: 3.1
- Employment growth (%): 2017: 0.4
- Prices
- Inflation (%, headline): 2017: 1.8
- Inflation (%, core): 2017: 1.5
- General government finances
- Fiscal balance (% of GDP): 2017: 1.0
- Revenue (% of GDP): 2017: 45.0; 2018: 45.6
- Expenditure (% of GDP): 2017: 43.9; 2018: 44.6
- Public debt (% of GDP): 2017: 64.5; 2018: 60.9; 2019: 58.0; 2020: 55.0
- Money and credit
- Broad money (M3) (end of year, % change) 2/: 2017: 4.3; 2018: 4.5
- Credit to private sector (% change): 2017: 4.2; 2018: 4.9
- Balance of payments
- Current account balance (% of GDP): 2017: 8.0; 2018: 7.3; 2019: 7.1; 2020: 6.7
- Trade balance (% of GDP): 2017: 6.0; 2018: 5.9
- Exports of goods (% of GDP): 2017: 38.3; 2018: 38.2; 2019: 38.7; 2020: 38.9
- Exports volume (% change): 2017: 5.7; 2018: 2.3; 2019: 3.6
- Imports of goods (% of GDP): 2017: 30.6; 2018: 31.6; 2019: 32.2; 2020: 32.6
- Imports volume (% change): 2017: 3.7
- Reserves minus gold (billions of US$): 2017: 59.4; 2018: 59.2
- External Debt (% of GDP): 2017: 145.0; 2018: 143.2
- Exchange rate
- REER (% change): 2017: 1.2
- NEER (% change): 2017: 2.4
- Real effective rate (2005=100) 3/: 2017: 93.8; 2018: 95.7
- Nominal effective rate (2005=100) 4/: 2017: 100.1; 2018: 102.5
IMF Executive Board Concludes 2019 Article IV Consultation with Germany — Press Release No. 19/270
