Germany: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, May 28, 2024
Source details
- Canonical URL
- Germany: Staff Concluding Statement of the 2024 Article IV Mission
Other formats
Bibliographic details
- Published: May 28, 2024
Mission summary and recent developments
- Mission dates and team: May 15 ‒28, 2024; led by Kevin Fletcher; comprising Harri Kemp, Mustafa Saiyid, and Galen Sher.
- Context: The German economy began a gradual consumption-led recovery in 2024 as inflation eases following shocks from the pandemic and the Russian gas shutoff.
- Key recent developments:
- Wholesale gas prices returned to more normal levels as conservation and new energy supplies were secured.
- Rapid disinflation occurred alongside monetary tightening.
- Real wages are now growing and the economy expanded in the first quarter of 2024.
Economic outlook and risks
- Near-term outlook:
- Inflation is expected to continue falling in 2024 on subdued demand and lower energy and food import prices.
- Core inflation projected to slow but remain above headline inflation due to services prices sensitive to robust wage growth.
- Real GDP is expected to grow by around 0.2 percent in 2024, driven by higher private consumption and supported by external demand.
- Private investment expected to recover in 2025 with moderate monetary policy easing during 2024-25.
- GDP growth projected to accelerate to between 1-1½ percent during 2025-26.
- Medium-term outlook:
- Rapid population aging: annual growth rate of Germany’s working-age population expected to fall by around 0.7 percentage points—more than any other G7 country.
- Projected medium-term annual economic growth: around 0.7 percent.
- Aging will slow revenue growth and raise spending on pensions and healthcare.
- Risks (broadly balanced):
- Upside: faster-than-expected recovery in consumption and investment if uncertainty falls.
- Downside: accelerating geoeconomic fragmentation, worsening global conflicts, intensifying stress in global commercial real estate (CRE) markets, and uncertainty about price stickiness affecting disinflation pace.
- Medium-term growth sensitivity to immigration flow deviations from baseline.
Fiscal policy findings and recommendations
- 2024 fiscal stance:
- Expected tightening in 2024 to comply with the debt brake.
- Cyclically adjusted primary balance expected to contract by over 1 percentage point of GDP, driven by phasing-out of energy-price support measures.
- Lower pre-subsidy energy prices will buffer the net effect on activity; debt brake specified in cyclically adjusted terms allows some countercyclical flexibility.
- Recommendation: use the allowed countercyclical flexibility to the fullest in 2024, including ensuring full implementation of the public investment budget.
- Medium-term pressures and adjustment options:
- Rising spending pressures from aging and defense needs; substantial additional public investment required in transport, energy, communications, and other infrastructure.
- Recommendation: consider moderately easing the debt brake—an annual net borrowing limit could be eased by about 1 percentage point of GDP while keeping the debt-to-GDP ratio on a downward path.
- EU fiscal framework: early indications suggest preferring the more gradual, 7-year adjustment period over the default 4-year period to create fiscal room for public investment.
- Revenue and spending reforms to create fiscal room:
- Explore eliminating environmentally harmful subsidies and tax expenditures.
- Increase efficiency of public healthcare spending.
- Raise taxes on real estate and on goods and services (Germany’s revenue from such sources is below the advanced-economy average).
- Close loopholes in inheritance taxes.
- Social security reforms: index retirement ages to life expectancy; index pensions-in-payment to inflation rather than wages; increase incentives to extend working lives.
- Note: contribution rates in pension, healthcare, and long-term care insurance systems are expected to increase as reserves are used up and spending growth outpaces revenue growth; benefits might also fall without reforms.
Financial sector policies
- System strength and metrics:
- Common equity tier 1 capital ratio for banks (aggregate): 17.0 percent in 2023Q4.
- Liquidity coverage ratios: 157 percent for significant institutions and 185 percent for less-significant institutions.
- Median solvency capital ratio for the overall insurance sector: 330 percent.
- Risks and near-term concerns:
- Bank profitability expected to ease as deposit funding costs rise, reducing net interest margins.
- Credit losses rising from historically low levels, especially in CRE due to monetary tightening and structural demand changes for urban offices and retail space.
- Near-term policy recommendations:
- Closely monitor CRE-related risks; ensure recorded valuations of real-estate assets remain current.
- Encourage conservatism in capital distributions and continue review/testing of financial safety arrangements.
- Support maintaining borrowers’ ability to service loans (e.g., maturity extensions for solvent borrowers), while requiring appropriate classifications of modified loans and sufficient provisions.
- Consider facilitating conversion of CRE properties (e.g., easing zoning restrictions for conversion to residential units).
- Preserve macroprudential buffers, close data collection gaps on lending standards for CRE loans.
- Pass legislation to add income-related borrower-based measures for residential mortgages to the macroprudential toolkit.
- Medium-term policy options:
- Consider a positive countercyclical capital buffer in normal times to create a releasable buffer during downturns.
- A single deposit insurance scheme with a public backstop would strengthen system safeguards in case of liquidity risks.
- Improve banking sector profitability via digitalization and automation, branch rationalization, and consolidation of small banks, including on a cross-border basis through progress toward a common Banking Union in Europe.
Structural reforms to boost growth and productivity
- Innovation and financing:
- Recent reforms welcomed: expansion of the tax credit for research and development in the Growth Opportunities Act; Future Financing Act reforms (relaxed IPO requirements, allowing dual-class shares); establishment of the German Growth Fund (Wachstumfonds Deutschland).
- Red tape and digitalization:
- Recommendation: deepen efforts to cut red tape and promote digitalization; swift implementation of e-government plans including the Online Access Act 2.0.
- Data points: 5G now covers 93 percent of households; fiber optic networks cover less than one-third of homes.
- World Bank Enterprise Surveys indicate longer times to obtain business operating licenses in Germany than in other advanced economies; Germany lags other EU countries in offering online government services to businesses and pre-filling online forms.
- European integration:
- Recommendation: deepen the European single market and Capital Markets Union—simplify cross-border services provision, recognize qualifications across member states, harmonize accounting, tax, and insolvency rules to leverage economies of scale and expand financing opportunities for businesses and startups.
- Labor supply and participation:
- Current situation: there are 2 million fewer women in the labor force than men; women are more than four times as likely as men to work part-time.
- Recommendations:
- Ease constraints on women’s working hours by expanding access to full-day child- and eldercare and improving reliability.
- Reduce high effective marginal tax rates for some part-time and low-income workers to improve incentives to extend working hours.
- Causes include reduced public benefit payments when income increases and the mini-job threshold (currently €538/month) that affects second-earners.
- Continue efforts to enhance worker skills and facilitate labor market integration of migrants.
- Climate mitigation:
- Authorities’ projections indicate Germany is on track to meet its 2030 emissions reduction target (but not its 2045 target) with currently implemented policies, conditional on an acceleration in renewable power deployment.
- Assumption: renewable power deployment must accelerate from 7 percent annual growth during the past decade to 11 percent growth over 2024-30.
- Recommendations to help meet targets: streamline approval processes for solar and onshore wind; increase subsidies for solar power; boost municipal planning capacity; limit extensions of deadlines; digitalize approval processes with single points of contact; accelerate decarbonization in buildings and transport.
Mission team thanks the authorities and counterparts for their hospitality and constructive dialogue.