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IMF press release of July 9, 2019

IMF Executive Board concludes Article IV consultations with Germany in 2019

On July 8, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultations with Germany.

After several years with an average growth in real GDP above 2% p. a. the German economy weakened significantly in the second half of 2018, which was related to a decline in global demand and the negative effects of temporary disruptions on the automotive and chemical industries. Growth therefore fell to 1.5% in 2018. Nonetheless, unemployment fell to a new record low, pushing wage growth to over 3%, and investment remained strong. As in other industrialized nations, inflationary pressure remained subdued with core inflation of 1.6% at the end of 2018. The general government recorded a budget surplus for the fifth year in a row, the largest surplus in nearly 30 years at 1.7% of GDP, driven by above budget tax revenues and lower than budgeted spending. The current account surplus fell to 7.3% of GDP (from 8.0% in 2017), reflecting a deterioration in the goods trade balance. Lending growth was broadly in line with GDP growth in 2018, but new loans to non-financial corporations were increasingly being extended to relatively riskier companies, while credit guidelines were relaxed. The prices for residential and commercial real estate continued to rise rapidly, especially in dynamic urban areas. The environment of long-term low interest rates continues to weigh on the profitability of the financial sector, exacerbating the problem of high costs and slow progress in restructuring.

The economic outlook for Germany assumes that production will gradually return to trend this year, but this is subject to considerable uncertainty. The country's dependence on exports and its financial openness make it particularly vulnerable to external shocks. The increase in global protectionism, a pronounced economic slowdown in China or a no-deal Brexit would damage exports and investments, while a tighter global financial situation could trigger significant corrections to already exaggerated valuations in all asset classes. In the medium term, the unfavorable population development, low productivity growth and the impending energy transition are likely to put pressure on growth.

Evaluation by the Executive Board

The Executive Directors3 paid tribute to Germany's competent economic policy, which has supported growth, strengthened the budgetary position and reduced unemployment to an all-time low. Directors noted the recent economic slowdown as well as downside risks affecting growth prospects. They emphasized the long-term challenges posed by the unfavorable population development and weak productivity growth, as well as the external risks associated with trade tensions and Brexit. Addressing these challenges and external imbalances should be a future priority.

Directors noted that while external imbalances are beginning to resolve amid faster wage growth, Germany's high current account surplus is partly due to high corporate reserves, growing income inequality between top earners and other income groups, and subdued household consumption. The directors felt that strong policies were needed to reap the benefits of strong economic performance. Continued rapid wage growth and an increase in disposable income through the tax and benefit system would help.

Directors welcomed the moderate fiscal expansion this year. While recognizing the importance of maintaining adequate buffers in preparation for an aging population and potential contingent liabilities, most directors encouraged the government to continue to use the fiscal space available to bolster potential growth and facilitate the resolution of imbalances. To this end, they recommended investments in infrastructure, tax measures to increase the disposable income of households in the low and middle income bracket, incentives to strengthen the labor force participation of women and older workers, and tax breaks for further research and development. Directors welcomed the government's willingness to consider additional fiscal stimulus in the event of a major economic downturn. They also praised the government for its determination to promote fair and competitive corporate taxation and to seek joint solutions to international tax challenges.

Recalling weak labor productivity growth and supply-side constraints on labor and capital, Directors underlined the importance of accelerating structural reforms to foster innovation, investment and competition, including in business services and regulated professions. They spoke out in favor of modernizing Germany's digital infrastructure, implementing the e-government strategy and improving access to venture capital. Directors noted that Germany is on track to meet its renewable energy targets and welcomed the government's considerations on taxing and pricing carbon emissions as part of its strategy to curb climate-damaging emissions.

The Directors welcomed the progress made in implementing the Financial Sector Assessment Program Recommendations (FSAP). They noted the poor profitability of both the financial and life insurance sectors, heightened macro-financial vulnerabilities, and rapidly rising property prices in dynamic cities. Directors emphasized the need to monitor interest rate risks and to accelerate restructuring efforts in order to permanently improve the resilience of the financial sector. They welcomed the activation of the countercyclical capital buffer and advocated further action to close data gaps, which would allow a more comprehensive assessment of potential risks to financial stability. They also supported the expansion of macroprudential instruments, including instruments for the commercial real estate market.

Directors recognized Germany's voluntary participation in the IMF's expanded regulatory framework in the fight against corruption. They commended the government for its strong law enforcement efforts in the fight against corruption and welcomed its commitment to further efforts in this area.