Germany: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, May 20, 2021
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- Published: May 20, 2021
Mission overview and headline findings
- An IMF mission, led by Mr. Shekhar Aiyar, conducted virtual discussions on the 2021 Article IV Consultation during May 7 ‒19, issuing this statement at the end of the visit.
- Germany’s economy contracted by just under 5 percent in 2020, outperforming most European peers.
- A new wave of infections and associated lockdowns caused economic activity to plunge again in Q1 2021.
- Vaccination pace is picking up, but the recovery path remains uncertain and beset with risks.
- Authorities have maintained appropriately accommodative fiscal and financial policies, and most measures supporting households and firms have been extended through 2021.
- Objectives: reduce labor market scarring, protect vulnerable sections of the population, ensure viable firms remain in business, expand public investment, facilitate structural transformation, and decarbonize the economy to help reduce large external imbalances.
Economic outlook
- Growth is expected to gather strength as vaccinations become widely available and lockdowns are phased out.
- Forward-looking indicators suggest a continued pick-up in exports and an improved outlook for services sector activity.
- Output is forecast to return to its pre-crisis level in early-2022.
- Risks and scenarios:
- Downside: If the vaccine rollout fails to outpace new infections—including mutant variants—lockdowns may need to be prolonged or reimposed, delaying the recovery and amplifying economic scarring.
- Upside: Domestic demand could rebound more swiftly due to pent-up savings, and exports may grow more strongly driven by a sharper rebound and further policy support in key trading partners.
- Medium-term risk: Failure to adapt to a post-COVID economy (transformed ways of working and consuming), lagging digitalization, and slow green energy transition could weigh on potential growth.
Fiscal policy
- Fiscal stance:
- Fiscal policy is projected to remain appropriately expansionary in 2021, with the escape clause to the debt-brake rule staying activated.
- In 2020, Germany recorded its first fiscal deficit in eight years, reflecting unprecedented policy support to combat the COVID-19 pandemic.
- Measures implemented in 2020 and extended/added in 2021:
- Ramped-up public health spending, grants to firms, subsidies for the expanded short-time work scheme (“Kurzarbeit”), transfers to subnational governments, and additional future-oriented public investment.
- Increased corporate tax loss carry-back.
- Another round of one-off child benefits.
- Extension of the VAT cut on restaurant services.
- Increases in the apprenticeship subsidy.
- Assessment: These extraordinary support measures comprise an excellent use of Germany’s accumulated fiscal space.
- Policy guidance:
- Pace of withdrawing policy support should be carefully calibrated to pandemic containment and the shape of the recovery; preferable to err on the side of doing too much to minimize scarring.
- Continue support for households and firms until clear evidence of sustained recovery; frontload public investment where possible.
- Implement additional measures if the recovery falters.
- Public debt remains sustainable; concerns about temporarily higher debt stock should not hinder vigorous policy action.
- As recovery firms up, withdraw emergency support carefully while accompanying with targeted measures to facilitate post-crisis resource re-allocation.
- Use fiscal space to lift potential growth and facilitate structural transformation: boost physical and human capital investment; incentivize innovation; bolster labor supply; increase disposable income for low-income households.
- Progress on these goals would also aid external rebalancing.
Labor market policy
- Role of Kurzarbeit:
- Kurzarbeit parameters were adjusted to ease access and make benefits more generous; the expanded Kurzarbeit helped contain unemployment impact and support aggregate demand.
- Parameters are scheduled to be normalized in a stepwise fashion over the course of 2021—an appropriate strategy under the baseline growth projection.
- Government should be ready to extend the expanded Kurzarbeit program beyond 2021 if downside risks materialize to limit job destruction and support domestic demand.
- As recovery takes hold, normalization will be important to not inhibit labor reallocation to growing firms and industries.
- Support for vulnerable workers:
- Marginal workers and the self-employed, who are not eligible for Kurzarbeit, are bearing the brunt of job and income losses and need continued policy support.
- The expanded access to the basic income program should be maintained until the job market has recovered sustainably for these groups.
- The pandemic disproportionately affects low-income workers, exacerbating inequality.
- Policy option: consider reducing social security contributions on lower incomes to ameliorate income inequality, encourage labor participation, and support aggregate demand given higher propensity to consume of low-income households.
- Active labor market measures:
- Provide job search assistance and appropriate training programs to facilitate transition into post-pandemic jobs.
Policies for a green and digital transformation
- Climate policy and carbon pricing:
- Germany’s carbon emissions targets are set to become more stringent following the recent constitutional court ruling.
- Consider a more well-specified schedule of carbon prices over a longer time horizon to signal efficient allocation to clean technologies.
- Raise carbon pricing in sectors with relatively low cost of abatement, such as power and industry, to reduce aggregate emissions efficiently.
- Introduce feebates (revenue-neutral) to reward lower-than-average emissions and penalize higher-than-average emissions at sectoral level.
- Complement price-based measures with government investment in green infrastructure and technologies.
- Mitigation of distributional impacts: government has measures including reduction of the renewable energy surcharge and increases in subsidies for long-distance commuters and housing benefits; these could be complemented by additional measures targeted at lower-income earners.
- Digital transformation:
- Pandemic increases urgency for digital transformation: improved access to high-speed broadband and greater diffusion of ICT tools are important.
- To accelerate broadband provision: monitor competitive dynamics in internet and mobile markets and facilitate new entrants if warranted.
- Increase availability of devices for online learning and ICT training for teachers; introduce computers and programming earlier in the school curriculum to enhance students’ digital skills and engagement.
- Productivity and innovation:
- Declining productivity growth calls for additional support to promote innovation.
- Consider further raising cap for R&D tax incentives, complementing the recently introduced faster depreciation schedule for digital goods.
- Promote venture capital, reduce administrative red tape, and lower compliance costs to raise investment in promising technologies.
- Explore enhancing participation of institutional investors in venture capital markets and accelerate rollout of e-Government.
Financial policies and stability
- Near-term stability measures:
- Maintain a multi-pronged policy approach to safeguard financial stability during the nascent recovery.
- Bankruptcies and financial losses were relatively contained through early 2021 due to borrower support measures and insolvency moratoria; bankruptcies have started rising as some measures are phased out.
- Insolvency procedures should facilitate efficient restructuring or liquidation; the transposition of the EU Directive on Preventive Restructuring Frameworks into national law provides a mechanism to reduce disruptive insolvencies.
- Targeted liquidity and solvency support for viable firms (grants, loan guarantees, equity support) should remain available as long as the recovery remains fragile.
- Banking sector:
- German banks have weathered the COVID-19 shock relatively well; capital buffers appear sufficient to absorb a hit without triggering any regulatory capital shortfall in the baseline.
- The gradual unwinding of policy support could lead to larger loan impairments and provisioning requirements.
- Authorities should specify an appropriate timetable for banks that find their capital reduced as a result of the crisis to rebuild buffers.
- Banks need to improve cost structures (greater use of digital technologies and consolidation) and enhance non-interest revenues (e.g., fees and commissions).
- Support reforms to the financial architecture at the European level—including completion of the banking union—to spur cross-border financial flows and remove impediments to cross-border bank consolidation.
- Real estate and macroprudential policy:
- Commercial Real Estate (CRE) remains susceptible to lower demand following pandemic-induced behavioral changes, increasing vulnerability of German banks which are among Europe’s most exposed to CRE.
- Rapid increase in residential real estate prices in recent years warrants close monitoring, though risk is mitigated by relatively low household indebtedness.
- Authorities should complete as soon as possible the ongoing process of closing data gaps to allow full assessment of potential risks to financial stability.
- Consider expanding macroprudential toolkit for real estate lending, including income-based instruments such as debt-to-income or debt-service-to-income caps, while recognizing CRE heterogeneity in financing structures.
Germany: Staff Concluding Statement of the 2021 Article IV Mission (May 20, 2021).