IMF Executive Board Concludes 2023 Article IV Consultation with Germany
IMF News, July 17, 2023
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- Published: July 17, 2023
Recent developments and near-term assessment
- The German economy demonstrated resilience after the shut-off of Russian gas supply last year; highly adverse scenarios of widespread energy scarcity were avoided due to strong efforts to conserve gas, secure energy supplies, and lack of severe winter weather.
- Despite resilience, adverse effects from the energy shock and tightening financial conditions have been sufficient to tilt the economy into recession in recent months.
- Inflation spiked as the energy price shock added to existing pandemic-related bottlenecks; inflation is now falling as these effects ease.
- The overall capital and liquidity positions of Germany’s banking and insurance systems remain at solid levels, but banking turmoil in other advanced economies earlier this year has heightened focus on potential financial stability risks associated with rising interest rates.
Outlook and projections
- The energy shock and tightening financial conditions are expected to keep annual GDP growth slightly negative in 2023.
- Growth is expected to regain momentum gradually in 2024–25 as the lagged effects of monetary tightening dissipate and the economy adjusts to the energy shock.
- Inflation is expected to continue falling amid softening energy prices and tightening fiscal policy, with core inflation declining more slowly than headline because of rising nominal wage pressures and lagged passthrough of lower global commodity prices to core inflation.
- Over the medium term, average GDP growth is expected to fall back below 1 percent due to accelerating headwinds from population aging, absent significant increases in productivity and/or labor supply growth.
Risks and uncertainty
- Uncertainty is unusually high, with substantial risks in both directions, which on balance are tilted downward for growth.
- Near-term risks:
- Core inflation could remain elevated longer than expected, requiring tighter monetary policy.
- Renewed turbulence in global markets could further tighten financial conditions, adversely affecting growth and real estate markets.
- An abrupt global slowdown would adversely affect activity, especially in the export sector.
- Upside risks:
- Stronger-than-expected recovery in external demand.
- Faster-than-expected decline in core inflation.
- Medium-term risks:
- Uncertainty regarding the pace of productivity and labor supply growth.
- Rising risks of global geoeconomic fragmentation.
- Uncertainty around the persistency of core inflation is especially high, as a rapid rise in core inflation to its current levels has not been observed in Germany or most other advanced economies for decades.
Executive Board assessment and policy recommendations
- Directors agreed with the thrust of the staff appraisal and commended the authorities’ strong policies that resulted in remarkable economic resilience despite spillovers from Russia’s war in Ukraine.
- Short-term priorities:
- Ensure disinflation and financial stability.
- Fiscal tightening in the near term is needed to support disinflation; Directors broadly welcomed plans to save expected underspending on energy price relief and any revenue overperformance.
- Allowing energy relief measures to expire as scheduled would be important.
- Maintain fiscal flexibility to let automatic stabilizers operate if downside risks materialize.
- Medium- and long-term priorities:
- Create more fiscal room to accommodate rising aging pressures and increase public investment to support potential growth and reduce external imbalances.
- Consider expenditure reforms and mobilizing additional revenue as reform options.
- Revising the debt‑brake rule could be considered following the EU fiscal rules review to lessen reliance on extrabudgetary spending.
- Address population aging, labor skill shortages, and low productivity to boost potential growth; promote digitalization, skilled immigration, and upskilling of workers.
- Enhance incentives to undertake R&D, expand funding for young and innovative firms, and lower market entry barriers.
- Financial sector and macroprudential measures:
- Identify vulnerable banks and subject them to intensive supervision; encourage a conservative approach to bank capital distributions.
- Continue closing data gaps in financial sector supervision.
- Consider moving to a single mandatory depositor protection scheme with a robust public liquidity backstop to strengthen safety nets and crisis management frameworks.
- Add income‑based measures to the macroprudential toolkit.
- Continue efforts to strengthen the AML/CFT framework and address recommendations in the 2022 FATF mutual evaluations.
- Climate and trade:
- Commended Germany’s role in the climate agenda and meeting emission targets in 2022; encouraged continued efforts to meet mitigation targets, improve targeting of subsidies supporting the green transition, and promote a consistent and fiscally affordable approach across EU countries.
- Welcomed Germany’s support for a multilateral, rules‑based trading system; encouraged identifying critical dependencies in supply and sale markets, assessing the impact of global economic fragmentation, and developing coping strategies.
Selected economic indicators, 2022–24 (projections)
- Output
- Real GDP growth (%): 2022: 1.8; 2023: -0.3; 2024: 1.3
- Total domestic demand growth (%): 2022: 3.3; 2023: -0.5; 2024: 1.5
- Output gap (% of potential GDP): 2022: 0.5; 2023: -0.9; 2024: (not provided)
- Employment
- Unemployment rate (%, ILO): 2022: 3.1
- Employment growth (%): 2022: 2.6; 2023: 0.4; 2024: -0.1
- Prices
- Inflation (%, headline, period avg.): 2022: 8.7; 2023: 5.8; 2024: (not provided)
- Inflation (%, core, period avg.): 2022: 5.0; 2023: 6.2; 2024: 3.0
- General Government Finances
- Fiscal balance (% of GDP): 2022: -2.7; 2023: -3.0; 2024: -1.5
- Revenue (% of GDP): 2022: 47.0; 2023: 46.5; 2024: (not provided)
- Expenditure (% of GDP): 2022: 49.8; 2023: 49.6; 2024: 48.0
- Public debt (% of GDP): 2022: 66.2; 2023: 66.4; 2024: 65.0
- Money and Credit
- Broad money (M3) (end of year, % change) 2/: 2022: 5.1; 2023: …
- Credit to private sector (% change): 2022: 6.6
- 10-year government bond yield (%): 2022: (not provided)
- Balance of Payments
- Current account balance (% of GDP): 2022: 4.2; 2023: 5.4; 2024: 5.7
- Trade balance (% of GDP): 2022: 2.1; 2023: 3.6
- Exports of goods (% of GDP): 2022: 40.1; 2023: 38.3
- Exports volume (% change): 2022: 1.9; 2023: 3.4
- Imports of goods (% of GDP): 2022: 37.2; 2023: 34.8; 2024: 34.6
- Imports volume (% change): 2022: 3.9
- Service trade balance (% of GDP): 2022: -0.8
- FDI balance (% of GDP): 2022: 3.2; 2023: 2.0; 2024: 2.7
- Reserves minus gold (billions of US$): 2022: 98.4
- External Debt (% of GDP): 2022: 156.1
- Exchange Rate
- REER (% change): 2022: -3.6
- NEER (% change): 2022: -2.3
- Real effective rate (2010=100) 3/: 2022: 93.6
- Nominal effective rate (2010=100) 4/: 2022: 102.4
Source: Press Release No. 23/264, IMF, July 17, 2023.