IMF Executive Board Concludes 2021 Article IV Consultation with Germany
IMF News, July 15, 2021
Source details
- Canonical URL
- IMF Executive Board Concludes 2021 Article IV Consultation with Germany
Other formats
Bibliographic details
- Published: July 15, 2021
Overview and recent developments
- On July 14, 2021, the IMF Executive Board concluded the Article IV consultation with Germany.
- The economy contracted by 4.8 percent in 2020.
- New waves of infections with more transmissible variants and associated lockdown measures, compounded by supply-side shortages, caused economic activity to contract again at the beginning of 2021.
- Mass vaccinations were slow to start but have strongly gathered pace.
- In 2020, Germany recorded its first fiscal deficit in eight years, reflecting unprecedented policy support to combat the pandemic.
- The current account surplus narrowed slightly relative to 2019, with the contraction in the goods trade balance largely offset by a commensurate decline in the services deficit and lower oil prices.
Fiscal, monetary, and financial policy stance
- Fiscal and financial policies remain appropriately accommodative.
- Most measures supporting households and firms have been extended through 2021, enabled by the continued activation of the escape clause to the debt brake rule.
- The expansion of short-time work benefits (Kurzarbeit) has played a crucial role in preserving jobs and supporting domestic demand.
- Following a brief spike at the onset of the pandemic, credit growth eased through the remainder of 2020.
- German banks have so far weathered the COVID-19 shock relatively well, aided by fiscal support measures and insolvency moratoria, with business and household insolvencies remaining subdued.
- Risks: gradual unwinding of policy support could lead to rises in loan impairments and provisioning requirements; large segments of the banking sector still struggle with persistently low profitability.
Outlook and risks
- Staff expect growth to gather strength as vaccination becomes widely available and the economy fully reopens.
- The outlook remains highly uncertain, with further infection waves and mobility restrictions comprising the chief source of risks.
- Over the medium term, structural changes ushered in by the pandemic could compound longstanding challenges related to population aging, infrastructure gaps, digitalization, and the green energy transition.
Executive Board Assessment and policy recommendations
- Directors commended the authorities for decisive policy actions enabled by Germany’s ample fiscal space and global efforts via the COVAX initiative.
- Directors noted that a robust recovery is expected in the second half of 2021 as mass vaccinations gather strength, although large uncertainties remain.
- Fiscal policy recommendations:
- Fiscal policy should remain supportive until there is clear evidence of a sustained recovery.
- Frontload public investment to facilitate post-crisis resource reallocation and lift potential growth.
- Carefully calibrate withdrawal of fiscal support and accompany it with well-targeted measures.
- Use fiscal space to scale up public investment to lift potential growth, facilitate structural transformation, and help address large external imbalances.
- Labor market and inclusion recommendations:
- Note merits of Kurzarbeit to contain unemployment and support aggregate demand.
- Implement additional measures targeted at groups hard hit by the pandemic and not covered by Kurzarbeit to prevent widening inequality and deeper labor market scarring.
- Structural reform and climate/digital transition:
- Support authorities’ structural reform agenda to boost potential growth and support a green and digital transformation.
- Welcome Germany’s strong commitment to fighting climate change and further enhancing the multi-pronged climate action plan.
- A well-specified schedule of carbon prices over a longer-term horizon would enhance efficiency.
- Accelerate the expansion of high-speed broadband networks, increase support for R&D, promote further venture capital, and improve the business environment.
- Financial stability and banking sector:
- Safeguard financial stability during the nascent recovery.
- In light of risk of rising bankruptcies as support measures are phased out, recommend continued targeted liquidity and solvency support for viable firms.
- Banks need to improve cost structures to address chronic low profitability.
- Monitor closely the buildup of financial vulnerabilities in real estate markets.
- Directors look forward to recommendations from the ongoing 2022 FSAP.
Selected economic indicators and projections (2019–22)
- Real GDP growth (%) — 2019: 0.6; 2020: -4.8; 2021: 3.6; 2022: 4.1
- Total domestic demand growth (%) — 2019: 1.2; 2020: -4.1; 2021: 3.1; 2022: 4.6
- Output gap (% of potential GDP) — 2019: 0.4; 2020: -2.9; 2021: -2.1; 2022: -0.3
- Unemployment rate (%, ILO) — 2019: 3.2; 2020: 4.2; 2021: 3.7
- Employment growth (%) — 2019: 0.3; 2020: 0.5
- Inflation (%, headline) — 2019: 1.4; 2020: 2.6
- Inflation (%, core) — 2019: 0.9; 2020: 2.1; 2021: 1.5
- Fiscal balance (% of GDP) — 2019: -4.2; 2020: -7.2; 2021: -1.8
- Revenue (% of GDP) — 2019: 46.7; 2020: 46.8; 2021: 46.2; 2022: 46.3
- Expenditure (% of GDP) — 2019: 45.2; 2020: 51.1; 2021: 53.2; 2022: 47.9
- Public debt (% of GDP) — 2019: 59.7; 2020: 69.7; 2021: 73.0; 2022: 70.9
- Broad money (M3) (end of year, % change) — 2019: 8.2
- Credit to private sector (% change) — 2019: 5.4; 2020: 4.9
- 10-year government bond yield (%) — 2019: -0.2; 2020: -0.5
- Current account balance (% of GDP) — 2019: 7.5; 2020: 7.0; 2021: 7.4; 2022: 7.3
- Trade balance (% of GDP) — 2019: 5.7; 2020: 6.0; 2021: 5.9
- Exports of goods (% of GDP) — 2019: 37.8; 2020: 35.7; 2021: 37.9; 2022: 37.5
- Exports of goods (Volume % change) — 2020: -9.0; 2021: 11.6
- Imports of goods (% of GDP) — 2019: 31.5; 2020: 30.0; 2021: 31.1
- Imports of goods (Volume % change) — 2020: 2.5; 2021: -5.4; 2022: 10.1
- FDI balance (% of GDP) — 2019: 2.2; 2020: 0.0; 2021: 1.0
- Reserves minus gold (billions of US$) — 2019: 59.2; 2020: 64.0
- External Debt (% of GDP) — 2019: 145.1; 2020: 165.2
- REER (% change) — 2019: -1.6; 2020: 1.3
- NEER (% change) — 2019: -1.0; 2020: 2.4
- Real effective rate (2005=100) — 2019: 95.4; 2020: 96.7
- Nominal effective rate (2005=100) — 2019: 101.4; 2020: 103.8
IMF Executive Board Concludes 2021 Article IV Consultation with Germany (Press Release No. 21/216).
