Via IMF (Den Internationale Valutafond)

On July 8, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation

[1]

with Germany.

After several years of real GDP growth averaging over 2 percent
annually, Germany’s economy slowed sharply in the second half of 2018,
reflecting a slowdown in global demand and temporary disruptions
affecting the auto and chemical industries. This reduced growth to 1.5
percent in 2018. Nonetheless, unemployment hit a new record low,
pushing wage growth up above 3 percent, and investment remained strong.
As in other advanced economies, inflation pressures remained subdued,
with core inflation at 1.6 percent by the end of 2018. The general
government recorded a fifth consecutive year of fiscal surplus which,
at 1.7 percent of GDP, was its largest in nearly 30 years, reflecting
revenue overperformance as well as underspending. The current account
surplus declined to 7.3 percent of GDP (down from 8.0 percent in 2017),
reflecting a narrowing of the goods trade balance. Credit grew broadly
in line with GDP in 2018, but new lending to nonfinancial corporations
was increasingly channeled to relatively riskier firms while lending
standards were eased. Prices of residential and commercial real estate
continued to rise rapidly, especially in dynamic urban areas. The
“low-for-long” interest rate environment is putting further pressure on
the financial sector’s profitability, adding to the challenge of high
costs and slow progress with restructuring.

Germany’s economic outlook assumes a gradual return of output to trend
this year, but it is subject to significant uncertainty. The country’s
export dependence and financial openness make it particularly
vulnerable to external shocks. Rising global protectionism, a more
pronounced China slowdown or a no-deal Brexit would hurt exports and
investment, while tighter global financial conditions could trigger
sharp corrections in already stretched valuations across asset classes.
In the medium-term, unfavorable demographics, low productivity growth,
and the impending energy transition are expected to weigh on growth.

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Executive Board Assessment

[2]

The Executive Directors commended the German authorities for their
skillful economic management, which has underpinned growth,
strengthened the fiscal position, and reduced unemployment to a
historically low level. Directors noted the recent economic slowdown
and downside risks that weigh on growth prospects. They highlighted
long-term challenges from unfavorable demographics and weak
productivity growth, as well as external risks surrounding trade
tensions and the Brexit process. Addressing these challenges and
external imbalances would be a priority going forward.

Directors observed that, while external imbalances are starting to
unwind amid faster wage growth, Germany’s large current account surplus
partly reflects high corporate savings, widening top income inequality,
and compressed household consumption. Directors thus saw a need for
forceful policy measures to ensure that the benefits of strong economic
performance are broadly shared. Continued faster wage growth and
boosting disposable income through the tax and benefit system would be
helpful in this regard.

Directors welcomed the moderate fiscal expansion this year. While
acknowledging the importance of maintaining adequate buffers to prepare
for aging population and potential contingent liabilities, most
Directors encouraged the authorities to continue to use the available
fiscal space to bolster potential growth and facilitate rebalancing. To
this end, they recommended investments in infrastructure, tax measures
to raise disposable income for low-and middle-income households,
incentives to promote labor force participation by female and elderly
workers, and tax credit for further research and development. Directors
welcomed the authorities’ readiness to consider additional fiscal
stimulus in the event of

a severe economic downturn. They also commended the authorities for
their commitment to promote fair and competitive corporate taxation and
seek collaborative solutions to international tax issues.

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Noting weak labor productivity growth and supply-side constraints in
both labor and capital, Directors stressed the importance of expediting
structural reforms to promote innovation, investment, and competition,
also in business services and regulated professions. They encouraged
upgrading Germany’s digital infrastructure, implementing the

e-government strategy, and improving access to venture capital.
Directors observed that Germany is on track to meet its renewable
energy target and welcomed the authorities’ consideration of a carbon
tax and carbon pricing as part of their strategy for curbing greenhouse
gas emissions.

Directors welcomed the progress in implementing the FSAP
recommendations. They noted low profitability in both the bank and life
insurance sectors, elevated macro-financial vulnerabilities, and
rapidly rising real estate prices in dynamic cities. Directors
underscored the need to monitor interest rate risk and accelerate
restructuring efforts to durably enhance financial sector resilience.
They welcomed the activation of the counter-cyclical capital buffer and
encouraged further steps to address data gaps that would enable a
fuller assessment of potential financial stability risks. They also
supported expanding the macroprudential toolkit, including tools for
the commercial real estate market.

Directors appreciated Germany’s voluntary participation in the Fund’s
enhanced governance framework on the supply and facilitation of
corruption. They commended the authorities for taking strong
anti-bribery enforcement actions and welcomed their commitment to
continuing efforts in this area.