IMF Executive Board Concludes Article IV Consultation with Germany
The ongoing upturn is benefiting from the euro depreciation and lower energy prices, and is underpinned by a healthy fiscal position and sound corporate and household balance sheets. Employment growth has been robust, supported by strong immigration, and the unemployment rate hit another post-reunification low at 4.7 percent. The oil price drop brought inflation temporarily close to zero, which has contributed to lift real wage growth to a twenty-year high. The current account surplus reached a new high in 2014, as the oil and gas trade deficit narrowed. Fiscal policy was mildly contractionary in 2014, and it is expected to turn moderately expansionary in 2015.
While credit conditions remain very favorable, credit growth has been tepid, reflecting low demand despite a more dynamic housing market. The ECB Comprehensive Assessment revealed only minor shortcomings in large banks’ loan classification or provisioning. The persistent low interest rate environment is putting pressure on banks’ profitability and life insurers’ solvency.
The current moderate growth momentum is expected to continue as robust real wages buoy private consumption and euro depreciation buttresses exports, opening the way for a recovery in machinery and equipment investment. All in all, GDP is expected to grow by 1.6 percent this year and 1.7 percent next year. The output gap should close this year and remain positive but small in the medium term. Together with a better anchoring of expectations because of the ECB quantitative easing this should gradually push up core and headline inflation. Growth in the medium term, however, is expected to remain constrained by the still weak international environment and fast approaching adverse demographic developments.
Executive Board Assessment2
Executive Directors commended the German authorities for their prudent economic management, which helped consolidate sound balance sheets, a healthy fiscal position, and a historically low unemployment rate. Together with lower energy prices, a weaker currency, and accommodative financial conditions, these achievements are supporting the ongoing economic upturn. Directors observed that medium–term growth prospects are subdued in the context of a still weak international environment and adverse demographic trends, while the current account surplus reached another historical high.
Directors emphasized that policies should aim at bolstering medium–term growth while generating much needed positive demand spillovers and reducing external imbalances. In this regard, Directors welcomed recent initiatives to step up public investment in infrastructure and supported the creation of new institutions to improve planning and coordination at the local level and facilitate public–private partnerships. Most Directors, however, saw scope for even more ambitious action to fully address estimated needs within the available fiscal space and contribute to global rebalancing, particularly in the euro area. Some other Directors emphasized the need to preserve fiscal buffers or were concerned about the impact of administrative capacity constraints on the quality of investment.
Directors encouraged further efforts to reduce barriers to competition in the services sector, particularly in the area of professional services, which would lead to higher productivity and lower prices for users. Directors welcomed progress on the ambitious program to phase out nuclear energy and transition to renewable energy sources, but noted that several challenges remain in containing costs for users, as well as securing conventional back-up capacity and grid expansion. Faster progress on addressing these challenges would support domestic private investment.
Directors observed that, despite record immigration, rapid population aging would have increasingly adverse effects on labor supply and potential growth after 2020. This calls for stronger policies to spur female labor force participation, including by stepping up the provision of high-quality child care services (especially after-school programs) and lowering high marginal tax rates on secondary earners.
Directors welcomed German banks’ continued strengthening of their capital position following the Single Supervisory Mechanism’s Comprehensive Assessment last year. This is particularly important in view of the multiple challenges facing parts of the banking system such as structurally low profitability, lingering crisis legacies, litigation costs, and the need to adjust business models to the post-crisis regulatory environment. Close cooperation and coordination among the supervisory institutions is key in this context.
Directors emphasized the need for continued close monitoring of the housing market and the life insurance sector, where persistently low interest rates may give rise to financial vulnerabilities. In this regard, they supported enhancing the macroprudential toolkit through instruments that curb loan demand and address potential future excesses in the housing sector. They also highlighted the need to make full use of the new early intervention powers granted to supervisors by the Life Insurance Reform Act passed last year so as to ensure that life insurance companies maintain sufficient capital buffers.
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