Germany: Staff Concluding Statement of the 2018 Article IV Mission

IMF News, May 14, 2018

Source details

Canonical URL: Germany: Staff Concluding Statement of the 2018 Article IV Mission

Real GDP growth accelerated in 2017 as exports rebounded and investment picked up after a prolonged soft patch.
Short-term outlook: continued robust growth supported by solid consumption, rising investment, and dynamic exports.
Medium-term outlook: growth expected to revert toward long-term potential, constrained by unfavorable demographics and still-low productivity growth.
Inflation: headline and core inflation remain low but are expected to pick up, reflecting tight market conditions.
Risks: a rise in protectionism, geopolitical uncertainty, or a stalled reform agenda in the euro area may negatively affect export prospects, weigh on investment, and rekindle financial stress.

Unemployment rate has fallen to post-reunification lows; employment is rising.
Wage growth is picking up consistent with a tight labor market; recent negotiated agreements suggest somewhat higher wage increases than in past years.
Workforce shortages expected in construction, IT, and the care sectors, putting added pressure on wages and prices.
Continued higher wage growth would help reduce Germany’s large current account surplus and could support euro-area inflation and monetary policy normalization.

Current account surplus in 2017: 8 percent of GDP.
Drivers: positive net savings by households, non-financial corporations, and the general government.
Projection: based on current policies and higher projected demand in trading partners, the current account surplus is expected to remain high in the near term, before declining by ½ to 1 percent of GDP by 2023.
Policy implication: fostering domestic investment and reducing incentives for precautionary savings would contribute to external rebalancing.

General government surplus in 2017: 1.3 percent of GDP—its highest level since reunification.
Public investment increased by about 5 percent in nominal terms or 0.1 percentage point of GDP.
Municipal Investment Fund take-up has improved; Partnerschaft Deutschland (PD) is providing advisory services for an increasing number of investment projects, but capacity constraints at PD have emerged.
2018 fiscal stance: expected to be mildly expansionary reflecting already-budgeted increases in spending on health and families and a moderate increase in public investment.
Coalition agreement measures: marginal impact in 2018, moderate fiscal stimulus in following years.
Public debt projection: even taking into account coalition measures, the public debt ratio is estimated to decline to well below 50 percent of GDP by 2023.
Assessment: Germany will preserve substantial fiscal space within the European rules.

Demographics: labor force expected to begin shrinking in 2020 even after accounting for immigration.
Productivity: lackluster productivity growth, especially in the service sector; investment growth has been low.
Labor market structure: high labor tax wedge creates disincentives to work; about half of women work only part-time.
Vulnerability: a large share of German jobs is vulnerable to skill-based technological change.
Coalition agreement measures welcomed:
- Expansion of high-speed internet and 5G network to improve digital infrastructure.
- Phasing out of the solidarity tax surcharges for low- and middle-income households (moderate reduction in labor tax wedge).
- Investment in all-day childcare and all-day schooling to facilitate full-time work for women.
- Initiatives to continue and expand housing and training for refugees.
- Additional modest support and incentives for schools, vocational training, and R&D.
- Targeted social benefit increases (supplementary allowance to combat child poverty; additional support for the long-term unemployed).

Use fiscal space within rules to increase public investment in physical and human capital and foster labor supply.
Alleviate municipal-level bottlenecks (actively promote PD services where public investment has been delayed; address staffing shortages).
Further expand childcare and after-school programs to enable greater full-time female employment.
Further reduce the labor tax wedge to reduce disincentives to work.
Provide additional funding for primary education and life-long learning to enhance workforce skills.
Operationalize the Federal Transport Agency without delay to accelerate transport investment.
Implement digital infrastructure plans (including nationwide fiber optic expansion) without delay and ensure incentives, regulations, and funding support digital transformation.
Foster entrepreneurship and venture capital, improve access to venture capital at growth stages, simplify tax administration, and provide tax incentives for R&D to small- and medium-size enterprises.
Expand e-government services to reduce administrative burdens.
Reinvigorate competition-enhancing reforms in network industries and professional services to raise productivity growth and promote private investment.
Consider pension and labor market reforms to lengthen working lives, improve transparency of future pension payouts, and reduce household precautionary savings.

Aggregate house prices: remain in line with fundamentals, but appear overvalued in some major cities.
Drivers of house price increases: recent immigration, rising incomes, low interest rates, and supply constraints.
Government commitment: funds to increase social housing.
Further supply measures needed: reconsider zoning restrictions; reduce effective tax burden on new construction.
Data gaps: lack of granular data prevents full assessment of localized housing developments—this deficiency must be addressed.
Macroprudential toolkit: 2017 introduction of loan-to-value (LTV) and amortization requirements was welcome but should be complemented with income-based instruments.
Recommendation: consider early implementation of supervisory measures, including LTV caps or amortization requirements, in hot spots to preserve financial stability.

Banking sector: regulatory capital ratio has increased, but cost-to-income ratio and leverage remain high; high cost structure and low net interest margins weigh on profitability.
Restructuring: ongoing but must be accelerated through faster implementation of restructuring plans, development of fee-based income, and further consolidation.
Life insurance sector: low interest rates have dented solvency ratios; further progress needed to reduce reliance on guaranteed return products.
Supervisory focus: continue attention to interest rate risk and progress in implementing restructuring plans for banks and insurance companies.

The current favorable economic environment provides an opportunity for the new government to take more forceful policy actions to boost long-term growth and reduce the large current account surplus.
The mission thanks the authorities for their hospitality, cooperation and willingness to engage in extensive and frank policy discussions.

Germany: Staff Concluding Statement of the 2018 Article IV Mission — May 14, 2018.