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Public Information Notice (PIN) No. 01/117
November 7, 2001
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2001 Article IV Consultation with Germany

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 24, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1


Germany's strongest post-reunification growth surge ended abruptly in the middle of 2000 and growth has not yet recovered. The slowdown was triggered by a deterioration in the terms of trade, notably because of higher oil prices, and has been exacerbated by a sharp uptick in food prices and the weakness in the global economy. IMF staff estimate growth in 2001 will drop to ¾ percent. Headline inflation has receded from its peak of 3½ percent in May 2001 to about 2 percent. Excluding food and energy prices, underlying inflation is estimated at 1½ percent.

The ending of the growth surge has cut short progress in reducing unemployment. In the context of low trend growth since reunification, the unemployment rate rose to over 9½ percent in late 1997 before falling back to 7¾ percent by end-2000 on the back of a revival in employment growth. However, net job creation ground to a halt when economic growth faltered and unemployment began to creep up again in the first half of 2001.

Tax reform is providing support to the economy. At the beginning of 2001, income and corporate tax rates were reduced significantly, contributing to a reduction in the tax burden equivalent to over 1 percent of GDP. While the impact on the budget deficit is being partly offset by tight public expenditure control, additional shortfalls in tax collection stemming from the economic slowdown are projected to push the general government deficit over 2 percent of GDP in 2001. Another major reform during the past year was the introduction of a fully-funded, private pillar to the pension system. The new pillar will, in the medium term, deflect some of the strains on the public pension system from population aging.

Executive Board Assessment

Executive Directors noted that Germany's third post-reunification growth spurt came to an abrupt end in the middle of last year. Notwithstanding the downturn, the authorities have made important progress in improving the structural foundations of the German economy during the past year. The pension and tax reforms, and the great strides achieved in liberalizing product markets, are expected to make a significant contribution to longer-term economic prospects. Directors urged the authorities to apply equal vigor to reforming labor markets.

Directors observed that the prospects for recovery are heavily dependent on a pickup in business confidence and global growth, and that the outlook has been further clouded by the uncertain effects of the terrorist attacks on the United States. While predicting the timing of the upturn in growth remains difficult, Directors considered that, barring further setbacks, a recovery should start in the first half of 2002. They noted, nonetheless, that confidence remains precarious and that the risk of continued global weakness injects a sizable element of caution into the forecast. On the positive side, Directors noted that underlying inflation is low and that headline inflation should continue to decline in the period ahead.

Directors were encouraged to see evidence of continued wage moderation, which will remain essential in creating favorable conditions for recovery and getting unemployment back on a declining track. They commended wage bargainers for putting job creation ahead of pay increases in recent years.

While acknowledging the constraints on macroeconomic policies to stimulate growth, Directors urged the authorities to continue to explore carefully the room for supporting an early recovery. Directors considered that recent interest rate cuts by the ECB should help support growth, and, while further action on monetary policy will be determined by euro area considerations, receding risks to price stability, including in Germany, are creating additional welcome room for further monetary policy easing.

Directors noted that Germany's fiscal policy options remain circumscribed by the need to eliminate the structural budget deficit and reduce the sizable public debt burden. They emphasized Germany's pivotal role in the Stability and Growth Pact, which gives added weight to the importance of maintaining policy credibility by adhering closely to the path of fiscal consolidation. Nonetheless, Directors did not view the likely overshooting of this year's fiscal deficit target as a cause for particular concern as it simply reflects the cyclical weakness in revenues.

For 2002, most Directors agreed that the automatic stabilizers should continue to operate. They noted that, even though this could result in another overshooting of the deficit target, Germany, by sticking to the medium-term expenditure path, would still reach medium-term deficit targets on schedule. A number of Directors proposed that, absent a quick rebound in business confidence, the authorities should consider bringing forward tax cuts that are already factored into medium-term fiscal plans. Other Directors, however, cautioned against using structural tax reforms for cyclical fine-tuning.

Looking ahead, Directors emphasized that expenditure restraint should remain the cornerstone of Germany's fiscal adjustment strategy. They viewed the government's cautious expenditure growth target as an appropriately ambitious response to projected demographic strains and the need to reduce the tax burden further. Directors recommended that all levels of government develop more regular reporting, monitoring, and assessment of fiscal projections in order to raise the profile of spending limits and to increase accountability. Some Directors suggested that the expenditure growth targets should assume greater prominence within the fiscal framework, noting that a shift of emphasis away from annual deficit targets could mitigate the need for undue tightening in a downturn and reduce the scope for slippage in the structural deficit during an upturn. Other Directors, however, observed that annual deficit targets play an important role in instilling discipline and reassuring market participants that consolidation is on track.

Directors noted that the abruptness of the latest downturn raises questions about the resilience of the economy. While acknowledging that external factors have played a key role in the current slowdown, Directors also observed that trend output growth has been low in Germany for some time, and a number of them referred in this connection to the continued challenge stemming from reunification. Moreover, Directors considered that the fragility of employment growth points to insufficient flexibility to cope with rapid change and to take advantage of new growth opportunities. Directors therefore strongly welcomed the important progress that the authorities have made in implementing structural reforms, which should enhance Germany's growth potential in coming years, and highlighted, in particular, the improved business environment that will result from tax reforms and liberalization of product markets. It will, nevertheless, be important to keep up the structural reform momentum in order to further improve economic performance and resilience.

Directors agreed that a consistent and coherent set of labor market reforms heads the list of remaining structural policy priorities. They encouraged the authorities to review regulations that deter hiring and to combine wage moderation with policies that foster greater wage differentiation across skills and regions. Directors welcomed the authorities' intention to strengthen incentives for the unemployed to find work, although some Directors questioned whether they would be successful without reform of unemployment benefits. Directors also suggested that the authorities give priority to assessing the effectiveness of active labor market policies, in particular the merits of tax-based incentives for employment at the low end of the wage scale.

Directors considered Germany's financial sector to be generally sound, but stressed that, against the backdrop of the global slowdown, financial sector supervision must remain particularly vigilant. They noted that the downturn in sectors such as telecommunications, real estate, and construction, as well as bank exposures to countries in recession and to emerging markets, warrant especially close attention. Directors encouraged the authorities to take steps to facilitate further restructuring in the banking sector and improve transparency in the financial sector. In this context, they welcomed the planned phasing out of guarantees to public banking institutions and looked forward to further steps to create an open and competitive market for financial services. Directors also welcomed the authorities' recent initiatives to strengthen efforts to fight money laundering and financing for terrorism, as well as their intention to participate in a Financial Sector Assessment Program.

Directors noted that the quality of German official statistics is generally good. However, in certain areas, such as the quarterly national accounts data where revisions are frequent, they encouraged further improvement.

Directors commended the authorities for their full support for the initiation of a new trade round, and a number of them welcomed their intention to press for the liberalization of agricultural policy within the EU. Directors urged the authorities to raise their level of official development assistance to the UN target of 0.7 percent of GDP.

Germany: Selected Economic Indicators

  1997 1998 1999 2000 1/ 2001 1/

Economic activity and prices Change in percent, unless otherwise noted
Real GDP 1.4 2.0 1.8 3.0 0.8
Net exports 2/ 0.9 -0.4 -0.7 1.1 0.8
Final domestic demand 0.6 2.4 2.6 2.0 0.0
Private consumption 0.6 1.8 3.1 1.5 1.8
Gross fixed investment 0.6 3.0 4.2 2.3 -3.2
Construction investment -1.5 -1.0 1.5 -2.5 -5.5
Gross national saving (percent of GDP) 21.4 21.5 20.9 21.2 20.0
Gross domestic investment (percent of GDP) 21.5 21.5 21.7 21.7 20.9
Labor force 3/ 0.8 0.5 0.5 0.8 0.1
Employment 3/ -0.2 1.1 1.2 1.6 0.1
Standardized unemployment rate (in percent) 9.9 9.3 8.6 7.9 7.9
Unit labor costs (whole economy) 3/ -0.7 0.2 0.6 -0.1 2.2
GDP deflator 0.7 1.1 0.5 -0.4 1.4
Harmonized CPI index 1.5 0.6 0.7 2.1 2.5
Public finance In percent of GDP
General government balance 3/ 4/ -2.7 -2.2 -1.6 1.2 -2.2
Structural government balance -1.6 -1.2 -0.7 -1.1 -1.4
General government gross debt 3/ 4/ 60.9 60.7 61.1 60.3 59.6
Money and credit          
Private sector credit 5/ 6.1 8.4 5.8 5.8 4.2
M3 5/ 6/ 5.0 8.4 8.3 -0.2 4.6
Interest rates In percent
Three-month money market rate 7/ 3.3 3.5 2.9 4.4 4.2
Ten-year government bond yield 7/ 5.7 4.6 4.5 5.3 4.8
Balance of payments In billions of DM, unless otherwise noted
Exports 8/ 1,034.2 1,106.4 1,159.2 1,348.8 1,440.7
Imports 8/ 983.8 1,052.2 1,125.7 1,334.4 1,407.7
Trade balance 109.1 121.0 113.9 101.8 123.5
Current account balance -4.7 -11.8 -32.9 -41.1 -31.6
Current account (percent of GDP) -0.1 -0.3 -0.9 -1.0 -0.8
Exchange rate          
Deutsche mark per U.S. dollar 9/ 1.79 1.67 1.95 2.10 2.13
Euro per US dollar 9/ 0.89 0.90 0.94 1.09 1.12
Nominal effective rate (1990=100) 10/ 103.8 104.1 102.0 97.8 97.7
Real effective rate (1990=100) 10/ 11/ 114.0 111.4 108.1 102.3 101.1

Sources: Deutsche Bundesbank; IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

1/ IMF staff projections, unless otherwise indicated.
2/ Contribution to GDP growth.
3/ National accounts basis (ESA95).
4/ For 2000 includes the proceeds from the sale of mobile phone licenses (UMTS) of DM 99.4 billion (2.5 percent of GDP). The proceeds are used to buy back public debt; the buy-back is phased over 2000 and 2001.
5/ Data for 2001 refer to July 2001.
6/ Data reflect Germany's contribution to M3 of the euro area.
7/ Data for 2001 refer to September 14, 2001.
8/ Includes supplementary trade items and services.
9/ Data for 2001 refer to September 21, 2001.
10/ Data for 2001 refer to September 14, 2001.
11/ Based on relative normalized unit labor cost in manufacturing.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 24, 2001 Executive Board discussion based on the staff report.


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