IMF Executive Board Concludes 2024 Article IV Consultation with Germany
IMF News, July 18, 2024
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- Published: July 18, 2024
Macroeconomic overview and recent developments
- The German economy has begun to recover from the energy-price shock.
- High energy prices arising from the shut-off of Russian gas contributed to surging inflation during 2022–23 and weighed on economic activity.
- The impact of the shock was greatly mitigated by a strong policy response, including provision of income support while preserving incentives to conserve energy.
- Conservation efforts and steps to secure new energy supplies have helped return wholesale gas prices to more normal levels.
- Lower energy prices and monetary tightening have spurred rapid disinflation.
- Real wages are now growing, and the economy expanded in the first quarter of 2024.
Outlook and projections
- Gradual economic recovery is expected to continue in 2024.
- Wage growth now exceeding inflation is expected to drive private consumption during 2024.
- A return to growth is expected to reinforce confidence and, alongside a gradual easing of monetary policy, bolster consumption and investment in 2025.
- Inflation dynamics:
- Lower energy prices are expected to continue passing through to retail prices, leading to slower overall inflation.
- Core inflation is expected to remain somewhat above headline inflation due to robust wage growth.
- Medium-term constraints:
- Rapid population aging is expected to slow GDP growth to below 1 percent absent significant increases in productivity or much higher-than-expected immigration.
- Rapid population aging is also expected to significantly increase pension and healthcare costs.
Risks to the outlook
- Risks are broadly balanced.
- Upside risk:
- Positive economic news could spur a faster-than-expected recovery in consumption and investment.
- Key downside risks:
- Accelerating geoeconomic fragmentation.
- Worsening global conflicts.
- Intensifying stress in global commercial real estate (CRE) markets.
- Uncertainty about the pace of disinflation poses risks in both directions.
Executive Board assessment and policy guidance
- Directors commended the authorities for:
- Strong economic fundamentals.
- Strong policy response to the energy-price shock that greatly mitigated its impact.
- The gradual economic recovery and decline of inflation toward target levels.
- Structural reform priorities to strengthen potential growth:
- Boost investment, productivity, and labor supply.
- Continue efforts to cut red tape, promote digitalization and innovation, and deepen the European single market, including progressing towards a Capital Markets Union.
- Strengthen labor supply by enhancing integration of immigrants and further promoting women’s full-time labor market participation.
- Expand access to childcare and eldercare services and reduce the effective marginal tax rate on second earners.
- Fiscal policy guidance:
- Directors commended plans to fully use flexibility within fiscal rules to avoid an overly tight near-term fiscal stance.
- Emphasized further increases in public investment to upgrade infrastructure in transport, energy, communications, and other critical areas.
- Noted higher public investment would help external rebalancing, raise productivity and potential growth, and support green and digital transitions.
- To create further fiscal room given rising spending pressures related to aging and defense, Directors suggested:
- Pension reforms.
- Reducing environmentally harmful subsidies.
- Other revenue and expenditure measures.
- Improving public investment execution is needed.
- Most Directors concurred that a moderate easing of the debt brake could create additional fiscal room without endangering debt sustainability; some Directors noted the debt brake is constitutionally binding and changes need careful consideration.
Financial sector, AML/CFT, and resilience
- Directors noted Germany’s banking and insurance systems remain resilient, with strong capital and liquidity positions.
- Encouraged continued vigilance in monitoring and addressing elevated risks in banks’ commercial real estate exposures.
- Welcomed efforts to strengthen the AML/CFT framework, including:
- Establishing a new federal financial crime agency.
- Improving data quality in the beneficial ownership transparency registry.
- Encouraged continued progress in implementing the 2022 FSAP recommendations.
Climate, energy, and external policy
- Directors commended Germany for leadership in the climate agenda.
- Welcomed recent measures to streamline approval processes for solar and onshore wind projects.
- Underscored that additional efforts are needed to meet Germany’s ambitious climate targets, including in the deployment of renewable power.
- Commended Germany’s leadership in multilateral cooperation and strong support for free trade policies and the multilateral rules-based trading system.
Germany: Selected Economic Indicators, 2023–25 (projections)
- Output
- Real GDP growth (%): 2023: -0.2; 2024: 0.2; 2025: 1.3
- Total domestic demand growth (%): 2023: -1.1; 2024: 1.2
- Output gap (% of potential GDP): 2023: -0.3; 2024: -1.0; 2025: -0.7
- Employment
- Unemployment rate (%, ILO): 2023: 3.0; 2024: 3.3; 2025: 3.1
- Employment growth (%): 2023: 1.1; 2024: 0.0
- Prices
- Inflation (%, headline, period avg.): 2023: 6.0; 2024: 2.5; 2025: 2.2
- Inflation (%, core, period avg.): 2023: 6.3; 2024: 2.3
- General Government Finances
- Fiscal balance (% of GDP): 2023: -2.4; 2024: -1.7; 2025: -1.3
- Revenue (% of GDP): 2023: 46.2; 2024: 46.3; 2025: 46.8
- Expenditure (% of GDP): 2023: 48.6; 2024: 48.0; 2025: 48.1
- Cyclically adjusted balance (% of GDP): 2023: -2.3; 2024: -1.2; 2025: -0.9
- Public debt (% of GDP): 2023: 63.6; 2024: 63.8; 2025: 62.4
- Money and Credit
- Broad money (M3) (end of year, % change) 2: 2023: 0.4; 2024: …
- Credit to private sector (% change): 2023: -5.0
- 10-year government bond yield (%): 2023: 2.6
- Balance of Payments
- Current account balance (% of GDP): 2023: 4.3; 2024: 4.4; 2025: 4.2
- Trade balance (% of GDP): 2023: 38.0 (Exports of goods % of GDP); 2024: 36.9; 2025: 36.3
- Volume (% change) (exports of goods): 2023: 2.4; 2024: 3.2
- Imports of goods (% of GDP): 2023: 32.1; 2024: 31.0; 2025: 30.8
- Service trade balance (% of GDP): 2023: -1.5
- FDI balance (% of GDP): 2023: 1.4
- Reserves minus gold (billions of US$): 2023: 100.4
- External Debt (% of GDP): 2023: 148.1
- Exchange Rate
- REER (% change): 2023: 3.4
- NEER (% change): (value not separately provided)
- Real effective rate (2010=100) 3: 2023: 96.7
- Nominal effective rate (2010=100) 4: 2023: 105.9
Italic: IMF Communications Department, Press Release No. 24/280; Executive Board conclusions of the 2024 Article IV consultation with Germany.