IMF Executive Board Concludes 2020 Article IV Consultation with Germany

January 19, 2021

Washington, DC: On January 13, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Germany.

Germany entered the COVID-19 crisis with favorable economic conditions, supported by strong domestic demand on the back of record low unemployment and robust wage growth. Consecutive fiscal surpluses had brought public debt down to under 60 percent of GDP. The current account surplus had narrowed slightly to 7.1 percent in 2019, and private balance sheets were strong, although large segments of the banking sector were struggling with persistently low profitability.

The COVID-19 pandemic caused an unprecedented economic contraction of 11.5 percent in the first half of 2020, due to domestic containment measures and a sharp, synchronized global slowdown. Nonetheless, thanks to a successful initial public health response and strong macroeconomic policy support, the economy has proved more resilient than in many peers. The multi-pronged fiscal measures amount to more than 10 percent of GDP over 2020-2021, and together with the expansion of public guarantees, make up one of the largest fiscal packages in Europe . The expansion of short-time work benefits (“Kurzarbeit”) played a vital role in preserving jobs and supporting household income. Prompt action by the European and German authorities has also sustained the flow of credit, and together with various borrower support measures and tax deferrals, has provided much needed liquidity to affected firms. The pandemic exerted renewed downward pressure on inflation, which slowed sharply since the onset of the crisis, entering negative territory in the summer on the back of falling energy prices, a VAT cut, and slowing aggregate demand. The current account surplus has been narrowing further through 2020, reflecting a large but likely temporary fall in the goods trade balance.

Staff envisage a choppy economic recovery, unevenly distributed across sectors, and with quarterly swings conditioned by volatile infection dynamics through early 2021. The recovery should firm up once there is wide distribution of effective vaccines, but output is not expected to return to its pre-crisis level until 2022. The baseline projection is subject to unusually large uncertainty, with risks tilted to the downside as resurgent infection waves may trigger renewed or prolonged lockdowns and deepen economic scarring. The country’s export dependence and financial openness also make it vulnerable to shocks to external demand. Over the medium term, longstanding challenges related to population aging, infrastructure gaps and an impending green energy transition will be compounded by structural changes ushered in by the pandemic.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the German authorities for effectively handling the COVID-19 crisis and containing its economic impact. Directors noted the continuing challenge of re-opening the economy while keeping the virus in check amid recurring infection waves, and the downside risks to the economic outlook.

Directors considered managing the health crisis while putting the economy on a sustained recovery path as the near-term priority. They welcomed the large policy support package enacted in 2020 and the intention to maintain considerable fiscal support in 2021, including the suspension of the debt brake rule. Directors encouraged the authorities to stand ready to deploy additional measures should the recovery falter, given ample fiscal space.

Directors agreed that the short-time work program (Kurzarbeit) should remain the main pillar of labor market support during the economic recovery. However, to prevent widening inequality and deeper labor market scarring, they stressed the importance of additional measures targeted at groups hard-hit by the pandemic or not covered by Kurzarbeit, particularly women, youth, and elderly workers. Directors also recommended shifting policies toward facilitating resource reallocation once the recovery gains momentum, including by stepping up skills training and targeted incentives for job creation.

Looking beyond the crisis, Directors highlighted the need to “build better for the future” by supporting the structural transformation toward a smarter, greener economy. Increased public investment is crucial to raise Germany’s potential growth, while also helping address the still large external imbalances. In this context, Directors recommended prioritizing investment in infrastructure, climate mitigation, digitalization, and human capital.

Directors welcomed the multi-pronged financial policies deployed to cushion the impact of the pandemic on bank capital and lending capacity. They saw merit in maintaining support for viable firms and capital relief for banks until the recovery proves sustainable. They agreed that capital buffers should be rebuilt gradually to allow banks to support new lending, with restrictions on dividend payouts remaining in place during the recapitalization process. Directors stressed the importance of accelerating restructuring efforts to address the longstanding issue of weak bank profitability. They encouraged continued progress in improving real estate-related data collection and expanding the macroprudential toolkit.

Directors welcomed the action plan announced by the authorities to enhance audit regulation and accounting enforcement. They also acknowledged positive measures taken to further strengthen the AML/CFT system and looked forward to the forthcoming FATF assessment.


Germany: Selected Economic Indicators, 2018–21

Projections

2018

2019

2020

2021

Output

(unadjusted)

Real GDP growth (%)

1.3

0.6

-5.4

3.5

Total domestic demand growth (%)

1.8

1.2

-3.8

3.0

Output gap (% of potential GDP)

1.2

0.4

-3.1

-2.0

Employment

Unemployment rate (%, ILO)

3.4

3.2

4.2

4.3

Employment growth (%)

0.6

1.2

0.2

0.2

Prices

Inflation (%, headline)

1.9

1.4

0.4

1.2

Inflation (%, core)

1.6

1.4

0.9

1.2

General government finances

Fiscal balance (% of GDP)

1.8

1.5

-6.3

-3.4

Revenue (% of GDP)

46.3

46.7

46.5

46.0

Expenditure (% of GDP)

44.5

45.2

52.9

49.5

Public debt (% of GDP)

61.6

59.5

71.1

70.9

Money and credit

Broad money (M3) (end of year, % change) 1/

4.5

4.6

Credit to private sector (% change)

4.9

5.4

10-year government bond yield (%)

0.4

-0.2

Balance of payments

Current account balance (% of GDP)

7.4

7.1

6.6

7.0

Trade balance (% of GDP)

6.2

5.8

5.4

5.9

Exports of goods (% of GDP)

38.5

37.9

35.2

36.4

Volume (% change)

2.3

0.6

-9.9

9.4

Imports of goods (% of GDP)

31.8

31.5

29.9

30.2

Volume (% change)

4.5

2.5

-5.1

7.2

FDI balance (% of GDP)

0.1

1.6

1.0

0.9

Reserves minus gold (billions of US$)

59.2

59.2

External Debt (% of GDP)

145.0

144.2

Exchange rate

REER (% change)

2.3

-1.7

NEER (% change)

2.9

-1.0

Real effective rate (2005=100) 2/

97.0

95.4

Nominal effective rate (2005=100) 3/

102.5

101.4

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

1/ Reflects Germany's contribution to M3 of the euro area.

2/ Real effective exchange rate, CPI based, all countries.

3/ Nominal effective exchange rate, all countries.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www.imf.org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .

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