IMF Executive Board concludes 2021 Article IV consultation with Germany

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Washington, DC: On July 14, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Germany.

Germany has weathered the first wave of the COVID-19 pandemic relatively well. The economy contracted 4.8% in 2020, outperforming most of its European peers. But new waves of infections – marked by more transmissible virus variants – and the associated lockdown measures, compounded by supply-side shortages, led to a further contraction in economic activity early in the year. year. Mass vaccinations have been slow to start but have accelerated. In 2020, Germany recorded its first budget deficit in eight years, reflecting unprecedented political support to fight the pandemic. The current account surplus narrowed slightly compared to 2019, as the contraction in the goods trade balance was largely offset by a commensurate decline in the services deficit and lower oil prices.

Fiscal and financial policies remain accommodative, and most support measures for households and businesses have been extended until 2021, thanks to the continued activation of the escape clause from the debt brake rule. The expansion of partial unemployment benefits (Kurzarbeit) has played a crucial role in preserving employment and supporting domestic demand. After a brief spike at the start of the pandemic, credit growth slowed until the end of 2020. German banks have so far weathered the COVID-19 shock relatively well, as the number of insolvencies d businesses and households remained weak, thanks to budget support. insolvency measures and moratoriums. However, the gradual withdrawal of political support could lead to increased loan write-downs and provisioning needs, and large segments of the banking sector are still struggling with still low profitability.

Staff expect growth to strengthen as immunization becomes widely available and the economy reopens. However, the outlook remains very uncertain, with further waves of infection and mobility restrictions being the main source of risk. In the medium term, the structural changes introduced by the pandemic could exacerbate the long-standing challenges of an aging population, infrastructure gaps, digitization and the green energy transition.

Board assessment[2]

Directors praised the German authorities for their decisive political actions, made possible by Germany’s vast fiscal space, as well as their global efforts, through the COVAX initiative, to tackle the COVID-19 pandemic. They noted that a robust recovery is expected in the second half of 2021 as mass vaccinations strengthen, although large uncertainties remain. In this context, Directors stressed that supportive policies should continue and that, as the recovery strengthens, the focus should be on addressing long-standing structural issues.

Directors stressed that fiscal policy should remain favorable until there is clear evidence of a sustained recovery, while encouraging frontloading of public investment. To facilitate the reallocation of resources after the crisis, they stressed that a carefully calibrated budget support withdrawal should be accompanied by well-targeted measures. Directors noted the merits of Germany’s part-time work program (Kurzarbeit) for containing the impact on unemployment and supporting aggregate demand, but stressed the importance of additional measures targeted at hard-hit groups. pandemic and not covered by Kurzarbeit, to avoid widening inequalities. and deeper scars in the labor market. Looking ahead, administrators called on Germany to use its fiscal space to increase public investment to boost potential growth, facilitate structural transformation and help address large external imbalances in the country. Germany.

Directors supported the authorities’ structural reform agenda to boost potential growth and support a green and digital transformation. They welcomed Germany’s strong commitment to tackle climate change and further strengthen the multi-pronged climate action plan. A well-defined schedule of carbon prices over a longer time horizon would improve efficiency. Directors also noted that the pandemic has heightened the urgency of the long-standing need for digital transformation and greater innovation. They encouraged the government to accelerate the expansion of broadband networks, increase support for R&D, further promote venture capital and improve the business environment.

Directors stressed the need to preserve financial stability during the nascent recovery. Given the risk of increasing bankruptcies as support measures are phased out, they recommended maintaining targeted support to the liquidity and solvency of viable businesses. Directors also stressed the need for banks to improve their cost structures to cope with the chronic low profitability of the German banking sector. They welcomed the authorities’ efforts to address data gaps and underscored the need to closely monitor the build-up of financial vulnerabilities in real estate markets. Directors were eagerly awaiting the recommendations of the current PASF 2022.

Germany: Main Economic Indicators, 2019-22

Projections

2019

2020

2021

2022

Production

(uncorrected)

Real GDP Growth (%)

0.6

-4.8

3.6

4.1

Growth in total domestic demand (%)

1.2

-4.1

3.1

4.6

Output gap (% of potential GDP)

0.4

-2.9

-2.1

-0.3

Employment

Unemployment rate (%, ILO)

3.2

4.2

4.1

3.7

Employment growth (%)

1.2

0.3

0.4

0.5

Prices

Inflation (%, title)

1.4

0.4

2.6

1.2

Inflation (%, kernel)

1.4

0.9

2.1

1.5

General government finances 1 /

Budget balance (% of GDP)

1.5

-4.2

-7.2

-1.8

Revenue (% of GDP)

46.7

46.8

46.2

46.3

Expenditure (% of GDP)

45.2

51.1

53.2

47.9

Public debt (% of GDP)

59.7

69.7

73.0

70.9

Money and credit

Broad money (M3) (end of year, change in%) 2 /

4.6

8.2

Credit to the private sector (% change)

5.4

4.9

10-year government bond yield (%)

-0.2

-0.5

Balance of payments

Current account balance (% of GDP)

7.5

7.0

7.4

7.3

Trade balance (% of GDP)

5.7

5.7

6.0

5.9

Exports of goods (% of GDP)

37.8

35.7

37.9

37.5

Volume (% change)

0.6

-9.0

11.6

5.4

Imports of goods (% of GDP)

31.5

30.0

31.5

31.1

Volume (% change)

2.5

-5.4

10.1

6.5

FDI balance (% of GDP)

2.2

0.0

0.9

1.0

Reserves minus gold (billions of US $)

59.2

64.0

External debt (% of GDP)

145.1

165.2

Exchange rate

RRSP (% change)

-1.6

1.3

NEER (% change)

-1.0

2.4

Real effective rate (2005 = 100) 3 /

95.4

96.7

Nominal effective rate (2005 = 100) 4 /

101.4

103.8

Sources: Deutsche Bundesbank, Eurostat, Federal Statistical Office, Haver Analytics and IMF staff calculations.

1 / Data on budget balances and their components are as of February 24, 2021.

2 / Reflects Germany’s contribution to M3 in the euro zone.

3 / Real effective exchange rate, based on CPI, all countries.

4 / Nominal effective exchange rate, all countries.


[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of employees visits the country, collects economic and financial information and discusses with those responsible for the development and economic policies of the country. Back at headquarters, the staff prepare a report which forms the basis for the Board of Directors’ discussion.

[2]At the end of the discussion, the Chief Executive Officer, in his capacity as Chairman of the Board, summarizes the views of the Executive Directors, and this summary is sent to the authorities of the country. An explanation of all the qualifiers used in the summaries can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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