Germany-2013 Article IV Consultation: Concluding Statement of the IMF Mission
June 3, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Amid strong domestic fundamentals, a recovery in activity in Germany is expected in the second half of 2013. A more robust rebound is being held back by continued weakness in business investment, mainly related to uncertainty surrounding prospects and policies for the euro area, despite the progress made so far. The slight loosening of the fiscal stance envisaged this year is appropriate, and fiscal over-performance should be avoided. Domestic financial sector reforms should be undertaken with a view to ensuring both full harmonization with European initiatives and clarity on the emerging financial landscape. Structural reforms to raise the German economy’s growth potential remain an important priority.
Uncertainty is holding back a pick-up in growth
1. Growth in 2013 is expected to be weak. Domestic fundamentals continue to remain strong and past reforms have paid off as seen in low unemployment. While consumption has been robust, business investment has been declining since late 2011. The uncertainty, mainly surrounding prospects for the euro area and the ongoing recession in the region, have led to declining German exports to the region as well as a sharp pull back in business investment. Amid still elevated euro area uncertainty, we now project GDP in Germany to expand at around 0.3 percent in 2013. A gradual pick-up in activity projected towards the end of the year is conditional on a further and tangible reduction in this uncertainty and a materialization of the expected gradual recovery in the rest of the euro area.
2. We see risks to the outlook as tilted to the downside. Should the alleviation of uncertainty and an expected gradual recovery in the rest of the euro area fail to materialize, growth can be expected to remain below its potential for longer, leading to a widening of the output gap which would eventually result in slack in the labor market. Another important source of risk is a rise in financial stress in the region, which could interact with already weak demand and uncertainty, to amplify the impact on the German economy through both trade and financial channels. These risks could be further compounded by weaker global growth prospects. A more medium-term risk is that of an extended period of low growth, which could result in a reduction of the economy’s growth potential.
The fiscal policy stance is appropriate under the baseline
3. The marginal loosening of the fiscal stance this year is appropriate. Germany has already achieved the deficit goals at the federal level under the national debt brake rule (Schuldenbremse) well ahead of schedule and the general government balance is in line with the commitments of the Fiscal Compact of the Economic and Monetary Union (EMU). For 2013, we project a mildly expansionary fiscal stance which we see as appropriate given the small output gap and the risks to the outlook. From 2014 onwards, we project only modest structural consolidation, which is broadly consistent with a neutral fiscal stance while ensuring that public debt remains on a firmly declining path.
4. Given the weak growth environment and significant risks to the outlook, it will be important to avoid overperforming on consolidation. Over the past three years, the fiscal balance has exceeded plans, reflecting in part unusual factors such as the greater-than-expected strength in labor markets and the low interest rate environment. With the labor market adjustments expected to have run their course, fiscal over-performance due to these factors is unlikely. Nevertheless, fiscal overperformance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment.
The financial system’s resilience has improved but the landscape remains unsettled
5. Banking system soundness has improved, but vulnerabilities remain. The level and quality of capital across the banking system has continued to improve, funding conditions remain favorable for most German banks, and the system’s reliance on wholesale funding is declining. Overall asset quality has remained broadly stable, although there are vulnerabilities related to exposures to specific sectors such as shipping, international commercial real estate, and certain foreign asset holdings. In line with recommendations from the IMF’s 2011 Financial Sector Assessment Program (FSAP) Update, domestic stress tests are being refined in anticipation of future stress tests at the European level. Despite financial stability improvements, credit growth remains moderate, owing to weak credit demand stemming from uncertain prospects for the euro area, and a still unsettled regulatory landscape. Finally, we welcome the macroprudential framework that has been put in place, and recommend not to tighten policies at this juncture.
6. The financial reform momentum should be sustained both domestically and at the regional level. At the domestic level, further augmenting capital buffers, improving profitability and efficiency, and adjusting business models ahead of new international and European regulatory requirements would help consolidate financial strength. The surveillance of large cross-border banks needs to be firmly anchored by strong domestic supervision and close coordination with key financial centers' supervisory authorities. A clear, harmonized, and coherent roadmap towards achieving domestic and European initiatives, including steps towards reversing the fragmentation of banking systems across Europe and creating an integrated pan-European banking system, would help alleviate a major question mark over the European financial system.
The role of Germany as an anchor of stability in Europe
7. Germany’s strong fundamentals provide an anchor of stability to the region. Germany’s safe haven status and strong balance sheets provide a buffer against external shocks for the region. Germany also plays a pivotal role in the development of policies and the evolving architecture of the EMU. Given the important role of euro area uncertainty and external demand for German growth, we welcome Germany’s continued leadership towards further integration within the EMU. Germany can also play an important role in clearly articulating the longer-term shared vision for closer economic and financial integration among EMU member countries, which would provide a crucial anchor to the expectations of households, firms, and the financial system.
Securing strong, stable, and balanced growth over the medium term
8. Efforts to support the economy’s growth potential need to be sustained. In the context of an aging population, recent efforts to augment the labor force through tax measures, the expansion of day care services, training programs, and encouraging the migration of high-skilled workers are welcome. Looking ahead, lowering the tax burden for low wage and secondary earners, increasing availability of full-time high-quality childcare, facilitating migration of medium-skilled workers, as well as identifying and addressing disincentives to having children could hold promise. Further efforts to accelerate the pan-European integration and harmonization of energy and transportation networks would also help raise productivity and growth. Additional reforms to improve the productivity of the services sector remain important. Finally, broadening the sources of financial intermediation beyond bank-based channels could promote investment and create new drivers of growth beyond the manufacturing sector.
9. Ensuring the long-term sustainability of public finances in the face of rising demographic pressures requires a multi-pronged strategy. In addition to immigration and family policies, the strategy requires efforts to improve the efficiency of public spending, including on healthcare. Reforms to improve efficiency could include the introduction of elements such as spending reviews to support top down budgeting as well as medium-term budget strategy reports.
10. We thank the authorities and other counterparts for their kind hospitality, candor and cooperation during our discussions.