{
  "title": "Germany: Staff Concluding Statement of the 2024 Article IV Mission",
  "publication": "IMF News, May 28, 2024",
  "sourceUrl": "https://www.imf.org/en/news/articles/2024/05/28/germany-2024-cs",
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  "summary": "Germany: Staff Concluding Statement of the 2024 Article IV Mission",
  "publishDate": "2024-05-28",
  "sections": [
    {
      "heading": "Mission summary and recent developments",
      "content": "- Mission dates and team: May 15 ‒28, 2024; led by Kevin Fletcher; comprising Harri Kemp, Mustafa Saiyid, and Galen Sher.\n- 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.\n- Key recent developments:\n  - Wholesale gas prices returned to more normal levels as conservation and new energy supplies were secured.\n  - Rapid disinflation occurred alongside monetary tightening.\n  - Real wages are now growing and the economy expanded in the first quarter of 2024."
    },
    {
      "heading": "Economic outlook and risks",
      "content": "- Near-term outlook:\n  - Inflation is expected to continue falling in 2024 on subdued demand and lower energy and food import prices.\n  - Core inflation projected to slow but remain above headline inflation due to services prices sensitive to robust wage growth.\n  - Real GDP is expected to grow by around 0.2 percent in 2024, driven by higher private consumption and supported by external demand.\n  - Private investment expected to recover in 2025 with moderate monetary policy easing during 2024-25.\n  - GDP growth projected to accelerate to between 1-1½ percent during 2025-26.\n- Medium-term outlook:\n  - 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.\n  - Projected medium-term annual economic growth: around 0.7 percent.\n  - Aging will slow revenue growth and raise spending on pensions and healthcare.\n- Risks (broadly balanced):\n  - Upside: faster-than-expected recovery in consumption and investment if uncertainty falls.\n  - Downside: accelerating geoeconomic fragmentation, worsening global conflicts, intensifying stress in global commercial real estate (CRE) markets, and uncertainty about price stickiness affecting disinflation pace.\n  - Medium-term growth sensitivity to immigration flow deviations from baseline."
    },
    {
      "heading": "Fiscal policy findings and recommendations",
      "content": "- 2024 fiscal stance:\n  - Expected tightening in 2024 to comply with the debt brake.\n  - Cyclically adjusted primary balance expected to contract by over 1 percentage point of GDP, driven by phasing-out of energy-price support measures.\n  - Lower pre-subsidy energy prices will buffer the net effect on activity; debt brake specified in cyclically adjusted terms allows some countercyclical flexibility.\n  - Recommendation: use the allowed countercyclical flexibility to the fullest in 2024, including ensuring full implementation of the public investment budget.\n- Medium-term pressures and adjustment options:\n  - Rising spending pressures from aging and defense needs; substantial additional public investment required in transport, energy, communications, and other infrastructure.\n  - 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.\n  - 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.\n- Revenue and spending reforms to create fiscal room:\n  - Explore eliminating environmentally harmful subsidies and tax expenditures.\n  - Increase efficiency of public healthcare spending.\n  - Raise taxes on real estate and on goods and services (Germany’s revenue from such sources is below the advanced-economy average).\n  - Close loopholes in inheritance taxes.\n  - Social security reforms: index retirement ages to life expectancy; index pensions-in-payment to inflation rather than wages; increase incentives to extend working lives.\n  - 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."
    },
    {
      "heading": "Financial sector policies",
      "content": "- System strength and metrics:\n  - Common equity tier 1 capital ratio for banks (aggregate): 17.0 percent in 2023Q4.\n  - Liquidity coverage ratios: 157 percent for significant institutions and 185 percent for less-significant institutions.\n  - Median solvency capital ratio for the overall insurance sector: 330 percent.\n- Risks and near-term concerns:\n  - Bank profitability expected to ease as deposit funding costs rise, reducing net interest margins.\n  - Credit losses rising from historically low levels, especially in CRE due to monetary tightening and structural demand changes for urban offices and retail space.\n- Near-term policy recommendations:\n  - Closely monitor CRE-related risks; ensure recorded valuations of real-estate assets remain current.\n  - Encourage conservatism in capital distributions and continue review/testing of financial safety arrangements.\n  - Support maintaining borrowers’ ability to service loans (e.g., maturity extensions for solvent borrowers), while requiring appropriate classifications of modified loans and sufficient provisions.\n  - Consider facilitating conversion of CRE properties (e.g., easing zoning restrictions for conversion to residential units).\n  - Preserve macroprudential buffers, close data collection gaps on lending standards for CRE loans.\n  - Pass legislation to add income-related borrower-based measures for residential mortgages to the macroprudential toolkit.\n- Medium-term policy options:\n  - Consider a positive countercyclical capital buffer in normal times to create a releasable buffer during downturns.\n  - A single deposit insurance scheme with a public backstop would strengthen system safeguards in case of liquidity risks.\n  - 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."
    },
    {
      "heading": "Structural reforms to boost growth and productivity",
      "content": "- Innovation and financing:\n  - 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).\n- Red tape and digitalization:\n  - Recommendation: deepen efforts to cut red tape and promote digitalization; swift implementation of e-government plans including the Online Access Act 2.0.\n  - Data points: 5G now covers 93 percent of households; fiber optic networks cover less than one-third of homes.\n  - 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.\n- European integration:\n  - 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.\n- Labor supply and participation:\n  - 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.\n  - Recommendations:\n    - Ease constraints on women’s working hours by expanding access to full-day child- and eldercare and improving reliability.\n    - Reduce high effective marginal tax rates for some part-time and low-income workers to improve incentives to extend working hours.\n      - Causes include reduced public benefit payments when income increases and the mini-job threshold (currently €538/month) that affects second-earners.\n    - Continue efforts to enhance worker skills and facilitate labor market integration of migrants.\n- Climate mitigation:\n  - 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.\n  - Assumption: renewable power deployment must accelerate from 7 percent annual growth during the past decade to 11 percent growth over 2024-30.\n  - 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.\n\nMission team thanks the authorities and counterparts for their hospitality and constructive dialogue.\n\n---\n\n\n References\n\n- Germany and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2024/05/28/germany-2024-cs"
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    "Published: May 28, 2024",
    "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:",
    "Near-term outlook:",
    "Medium-term outlook:",
    "Risks (broadly balanced):",
    "2024 fiscal stance:",
    "Medium-term pressures and adjustment options:",
    "Revenue and spending reforms to create fiscal room:",
    "System strength and metrics:",
    "Risks and near-term concerns:",
    "Near-term policy recommendations:",
    "Medium-term policy options:",
    "Innovation and financing:",
    "Red tape and digitalization:",
    "European integration:",
    "Labor supply and participation:",
    "Climate mitigation:",
    "[Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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