## IMF Executive Board Concludes 2020 Article IV Consultation with Germany

_IMF News, January 19, 2021_

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## Bibliographic details
- Published: January 19, 2021

---

### Economic context prior to the pandemic
- Favorable conditions entering the COVID-19 crisis: strong domestic demand, record low unemployment, robust wage growth.
- Consecutive fiscal surpluses had reduced public debt to under 60 percent of GDP.
- Current account surplus was 7.1 percent in 2019.
- Private balance sheets were strong, while large segments of the banking sector faced persistently low profitability.

### Impact of COVID-19 and policy response
- Economic contraction: unprecedented contraction of 11.5 percent in the first half of 2020 due to domestic containment measures and a synchronized global slowdown.
- Fiscal and support measures:
  - Multi-pronged fiscal measures amount to more than 10 percent of GDP over 2020-2021.
  - Expansion of public guarantees contributed to one of the largest fiscal packages in Europe.
  - Expansion of short-time work benefits (“Kurzarbeit”) preserved jobs and supported household income.
  - Prompt action by European and German authorities sustained credit flow via borrower support measures, tax deferrals, and liquidity provision to firms.
- Inflation and trade:
  - Inflation slowed sharply since the onset of the crisis, entering negative territory in the summer due to falling energy prices, a VAT cut, and slowing aggregate demand.
  - Current account surplus narrowed further through 2020, reflecting a large but likely temporary fall in the goods trade balance.

### Outlook and risks
- Recovery profile:
  - Staff envisage a choppy recovery, uneven across sectors, with quarterly swings conditioned by volatile infection dynamics through early 2021.
  - Recovery should firm up once there is wide distribution of effective vaccines; output not expected to return to pre-crisis level until 2022.
- Uncertainty and downside risks:
  - Baseline projection subject to unusually large uncertainty.
  - Risks tilted to the downside from resurgent infection waves that could trigger renewed or prolonged lockdowns and deepen economic scarring.
  - Export dependence and financial openness increase vulnerability to shocks to external demand.
- Medium-term challenges:
  - Population aging, infrastructure gaps, and an impending green energy transition will be compounded by pandemic-driven structural changes.

### Executive Board assessment and policy recommendations
- General assessment:
  - Directors commended authorities for effectively handling the COVID-19 crisis and containing its economic impact.
  - Directors noted the challenge of re-opening the economy while keeping the virus in check amid recurring infection waves and downside risks to the outlook.
- Near-term priorities:
  - Managing the health crisis while putting the economy on a sustained recovery path is the near-term priority.
  - Directors welcomed the large 2020 policy support package and the intention to maintain considerable fiscal support in 2021, including suspension of the debt brake rule.
  - Authorities encouraged to stand ready to deploy additional measures should the recovery falter, given ample fiscal space.
- Labor market and social measures:
  - Kurzarbeit should remain the main pillar of labor market support during recovery.
  - Importance of additional measures targeted at groups hard-hit or not covered by Kurzarbeit, particularly women, youth, and elderly workers, to prevent widening inequality and deeper labor market scarring.
  - Recommend shifting policies toward facilitating resource reallocation once recovery gains momentum, including stepping up skills training and targeted incentives for job creation.
- Structural and investment priorities:
  - Need to “build better for the future” by supporting structural transformation toward a smarter, greener economy.
  - Increased public investment crucial to raise potential growth and address large external imbalances.
  - Prioritize investment in infrastructure, climate mitigation, digitalization, and human capital.
- Financial sector policies:
  - Welcomed multi-pronged financial policies to cushion pandemic impact on bank capital and lending capacity.
  - Merit in maintaining support for viable firms and capital relief for banks until recovery proves sustainable.
  - Capital buffers should be rebuilt gradually to allow banks to support new lending; restrictions on dividend payouts should remain in place during recapitalization.
  - Stress on accelerating restructuring efforts to address weak bank profitability.
  - Encouraged progress in improving real estate-related data collection and expanding the macroprudential toolkit.
- Governance and oversight:
  - Welcomed authorities’ action plan to enhance audit regulation and accounting enforcement.
  - Acknowledged positive measures to strengthen the AML/CFT system and looked forward to the forthcoming FATF assessment.

### Germany: Selected Economic Indicators, 2018–21 (Projections)
- Output (unadjusted)
  - Real GDP growth (%): 2018: 1.3; 2019: 0.6; 2020: -5.4; 2021: 3.5
  - Total domestic demand growth (%): 2018: 1.8; 2019: 1.2; 2020: -3.8; 2021: 3.0
  - Output gap (% of potential GDP): 2018: 0.4; 2019: -3.1; 2020: -2.0; 2021: (blank)
- Employment
  - Unemployment rate (%, ILO): 2018: 3.4; 2019: 3.2; 2020: 4.2; 2021: 4.3
  - Employment growth (%): 2018: 0.2; 2019: (blank); 2020: (blank); 2021: (blank)
- Prices
  - Inflation (%, headline): 2018: 1.9; 2019: 1.4; 2020: (blank); 2021: (blank)
  - Inflation (%, core): 2018: 1.6; 2019: 0.9; 2020: (blank); 2021: (blank)
- General government finances
  - Fiscal balance (% of GDP): 2018: 1.5; 2019: (blank); 2020: -6.3; 2021: -3.4
  - Revenue (% of GDP): 2018: 46.3; 2019: 46.7; 2020: 46.5; 2021: 46.0
  - Expenditure (% of GDP): 2018: 44.5; 2019: 45.2; 2020: 52.9; 2021: 49.5
  - Public debt (% of GDP): 2018: 61.6; 2019: 59.5; 2020: 71.1; 2021: 70.9
- Money and credit
  - Broad money (M3) (end of year, % change) 1/: 2018: 4.5; 2019: 4.6; 2020: (blank); 2021: (blank)
  - Credit to private sector (% change): 2018: 4.9; 2019: 5.4; 2020: (blank); 2021: (blank)
  - 10-year government bond yield (%): 2018: -0.2; 2019: (blank); 2020: (blank); 2021: (blank)
- Balance of payments
  - Current account balance (% of GDP): 2018: 7.4; 2019: 7.1; 2020: 6.6; 2021: 7.0
  - Trade balance (% of GDP): 2018: 6.2; 2019: 5.8; 2020: 5.9; 2021: (blank)
  - Exports of goods (% of GDP): 2018: 38.5; 2019: 37.9; 2020: 35.2; 2021: 36.4
  - Exports volume (% change): 2018: 2.3; 2019: (blank); 2020: -9.9; 2021: 9.4
  - Imports of goods (% of GDP): 2018: 31.8; 2019: 31.5; 2020: 29.9; 2021: 30.2
  - Imports volume (% change): 2018: 2.5; 2019: (blank); 2020: -5.1; 2021: 7.2
  - FDI balance (% of GDP): 2018: 0.1; 2019: (blank); 2020: 1.0; 2021: (blank)
  - Reserves minus gold (billions of US$): 2018: 59.2; 2019: (blank); 2020: (blank); 2021: (blank)
  - External Debt (% of GDP): 2018: 145.0; 2019: 144.2; 2020: (blank); 2021: (blank)
- Exchange rate
  - REER (% change): 2018: -1.7; 2019: (blank); 2020: (blank); 2021: (blank)
  - NEER (% change): 2018: 2.9; 2019: -1.0; 2020: (blank); 2021: (blank)
  - Real effective rate (2005=100) 2/: 2018: 97.0; 2019: 95.4; 2020: (blank); 2021: (blank)
  - Nominal effective rate (2005=100) 3/: 2018: 102.5; 2019: 101.4; 2020: (blank); 2021: (blank)

- Sources noted in the original release: Deutsche Bundesbank, Eurostat, Federal Statistical Office, Haver Analytics, and IMF staff calculations.
- Footnotes retained from original: 1/ Reflects Germany's contribution to M3 of the euro area. 2/ Real effective exchange rate, CPI based, all countries. 3/ Nominal effective exchange rate, all countries.

*IMF Press Release No. 21/13; January 19, 2021 — Executive Board summary transmitted to German authorities.*

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## References

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_Source: https://www.imf.org/en/news/articles/2021/01/15/pr2113-germany-imf-executive-board-concludes-2020-article-iv-consultation-with-germany_