Journal Issue
Share
Article

Germany: Staff Report for the 2007 Article IV Consultation Supplementary Information

Author(s):
International Monetary Fund
Published Date:
February 2008
Share
  • ShareShare
Show Summary Details

This supplement provides an update on economic developments and prospects in Germany. With clearer evidence of weakening in the fourth quarter of 2007 and downward revision of global growth prospects, staff now forecasts German growth in 2008 at 1.5 percent, slightly below the projection in the staff report. The fiscal deficit is projected to rise correspondingly. Further write-downs have been reported at German banks and public sector financial commitments to capital injection have continued to increase. BaFin and the Bundesbank have reached a tentative agreement on coordinating supervision, but one that is not sufficiently far-reaching. The new information does not alter the thrust of the staff appraisal.

1. Staff projects a deceleration of GDP growth to 1½ percent in 2008 (Table 1). The growth projection for 2008 has been marked down from 1.7 to 1.5 percent, reflecting slower projected growth in the U.S. and Europe. Also, in line with view that the global environment will begin to improve in the later part of 2008, a modest upturn to 1.6 percent is projected for 2009.

Table 1.Germany: Basic Data
Total area357,041 square kilometers
Total population (2005)82.4 million
GDP per capita (2006)US$ 35, 439
20002001200220032004200520062007 1/2008 1/
(Percentage change)
Demand and supply
Private consumption2.41.9-0.80.10.2-0.11.0-0.31.2
Public consumption1.40.51.50.4-1.50.50.92.01.3
Gross fixed investment3.0-3.6-6.1-0.3-0.21.06.15.51.5
Construction-2.4-4.6-5.8-1.6-3.8-3.14.32.80.6
Machinery and equipment10.7-3.7-7.51.14.66.08.37.41.9
Final domestic demand2.30.4-1.40.1-0.20.32.01.41.3
Inventory accumulation 2/-0.1-0.9-0.60.50.00.1-0.1-0.30.1
Total domestic demand2.2-0.5-2.00.6-0.20.31.91.11.4
Exports of goods and
nonfactor services13.56.44.32.510.07.112.58.35.6
Imports of goods and
nonfactor services10.21.2-1.45.47.26.711.25.75.9
Foreign balance 2/1.01.72.0-0.81.30.51.11.50.2
GDP3.11.20.0-0.31.10.82.92.51.5
Output gap (In percent of potential GDP)1.81.3-0.2-1.7-2.0-2.4-1.00.0-0.1
(In millions of persons, unless otherwise indicated)
Employment and unemployment
Labor force41.942.142.242.342.742.643.243.343.3
Employment39.139.339.138.738.938.839.039.639.8
Unemployment 3/3.13.23.53.94.24.64.23.63.5
Unemployment rate (in percent) 4/6.96.97.78.89.210.69.88.48.1
(Percentage change)
Prices and incomes
GDP deflator-0.61.21.41.21.10.70.61.80.2
Consumer price index (harmonized)1.41.91.41.01.81.91.82.32.2
Average hourly earnings (total economy)2.82.72.01.70.31.01.1-0.20.6
Unit labor cost (industry)-1.70.51.5-1.3-3.1-2.5-2.8-1.5-0.5
Real disposable income 5/2.12.1-0.20.50.30.10.90.40.9
Personal saving ratio (in percent)9.29.49.910.310.410.510.511.110.8
(In billions of Euros, unless otherwise indicated)
Public finances 6/7/
General government
Expenditure9301,0051,0311,0491,0421,0531,0551,0661,085
(In percent of GDP)45.147.648.148.547.146.945.444.043.8
Revenue9579459539629589771,0171,0651,068
(In percent of GDP)46.444.744.444.543.343.543.844.043.1
Overall balance27-60-78-88-85-79-370-17
(In percent of GDP)1.3-2.8-3.7-4.0-3.8-3.5-1.60.0-0.7
Structural balance-25-54-62-69-62-55-270-21
(In percent of potential GDP)-1.2-2.5-2.9-3.2-2.8-2.4-1.20.0-0.9
Federal government
Overall balance28-27-36-40-51-58-30-16-26
(In percent of GDP)1.4-1.3-1.7-1.8-2.3-2.6-1.3-0.7-1.0
General government debt1,2111,2241,2781,3581,4301,4891,5331,5331,550
(In percent of GDP)58.757.959.662.864.766.366.063.362.6
Balance of payments
Trade balance 8/50.188.1124.2118.8139.1139.7143.4167.6152.0
Services balance-49.0-49.9-35.7-34.5-29.4-28.9-22.4-21.0-14.6
Net private transfers-9.3-10.5-11.8-10.0-11.1-10.9-12.1-14.0-12.9
Net official transfers-18.7-16.4-15.7-18.3-16.8-17.7-14.7-20.9-19.3
Current account-35.20.443.040.994.9103.1117.2135.0129.6
(In percent of GDP)-1.70.02.01.94.34.65.05.65.2
Foreign exchange reserves (e. o. p.) 9/53.449.540.532.533.833.728.627.7
Monetary data(Percentage change)
Money and quasi-money (M3) 10/11/-1.06.13.52.25.24.810.510.6
Credit to private sector 10/5.83.20.90.0-0.22.13.51.83.2
(Period average in percent)
Interest rates
Three-month interbank rate 12/4.44.33.32.32.12.13.74.84.4
Yield on ten-year government bonds 12/5.34.84.84.14.13.63.84.34.1
Exchange rates
Euro per US$ (annual average)12/1.081.121.060.880.800.800.800.690.68
Nominal effective rate (1990=100) 13/100.0101.5104.7112.6115.8114.7116.6119.7120.0
Real effective rate (1990=100) 14/100.099.3101.6106.0105.4100.197.599.2
Sources: Deutsche Bundesbank; Federal Statistical Office; IMF, World Economic Outlook; IMF, International Financial Statistics; and staff estimates and projections.

2007 estimate, 2008 IMF staff projections.

Growth contribution.

National accounts definition

Eurostat definition.

Deflated by the national accounts deflator for private consumption.

Data for federal government are on an administrative basis. Data for the general government are on a national accounts basis. Debt data are end-of-year data for the general government in accordance with Maastricht definitions.

Government expenditure in 2000 includes, as a negative entry, the proceeds from the sales of mobile phone licenses of euro 50.8 billion (2.5 percent of GDP). The proceeds also affect the financial (but not structural) balances and the government debt.

Including supplementary trade items.

From 1999 onward data reflect Germany’s position in the euro area. Data for 2007 refer to December.

Data for 2008 refer to the change from January 2007 to January 2008.

Data reflect Germany’s contribution to M3 of the euro area; data not shown for 2002 because of a series break.

Data for 2008 refer to January.

Data for 2008 refer to January.

Based on relative normalized unit labor cost in manufacturing. Data for 2007 refer to December.

Sources: Deutsche Bundesbank; Federal Statistical Office; IMF, World Economic Outlook; IMF, International Financial Statistics; and staff estimates and projections.

2007 estimate, 2008 IMF staff projections.

Growth contribution.

National accounts definition

Eurostat definition.

Deflated by the national accounts deflator for private consumption.

Data for federal government are on an administrative basis. Data for the general government are on a national accounts basis. Debt data are end-of-year data for the general government in accordance with Maastricht definitions.

Government expenditure in 2000 includes, as a negative entry, the proceeds from the sales of mobile phone licenses of euro 50.8 billion (2.5 percent of GDP). The proceeds also affect the financial (but not structural) balances and the government debt.

Including supplementary trade items.

From 1999 onward data reflect Germany’s position in the euro area. Data for 2007 refer to December.

Data for 2008 refer to the change from January 2007 to January 2008.

Data reflect Germany’s contribution to M3 of the euro area; data not shown for 2002 because of a series break.

Data for 2008 refer to January.

Data for 2008 refer to January.

Based on relative normalized unit labor cost in manufacturing. Data for 2007 refer to December.

2. At this point, staff considers the risks to the forecast to be still tilted to the downside, albeit modestly. While the revised forecast incorporates much of the downside risk embedded in the previous baseline, the tensions in the international financial system remain elevated (Figure 1). While the spreads on the inter-bank lending rates have moderated since the large liquidity injection by the ECB, the stress has shifted to credit markets, reflected in the credit default spreads. In particular, there have been continued disclosures of write-downs and losses by banks (as reported below). While larger banks have also been affected, the core of the problem continues to persist with some mid-sized banks. Recent news does not indicate if these financial developments have had implications for real growth over and above the tightening credit standards reported in the staff report. The greater risk, as the preliminary fourth quarter estimates warn, is a loss of consumer confidence (Figure 2).

Figure 1.Germany: Financial Indicators

Source: Thomson Financial/DataStream.

Figure 2.Germany: Sentiment, Orders, and Production

Source: Bundesbank, IFO institute, and GfK.

3. The 2008 fiscal deficit is now expected to be slightly larger than originally projected. With the revised GDP projections and assuming that automatic stabilizers are allowed to operate, staff now projects the overall deficit of the general government to reach 0.7 percent of GDP in 2008. The staff report had projected a shift from a balanced budget for the general government last year to an overall deficit of 0.6 percent of GDP this year, largely reflecting reductions in the corporate tax rate and the contributions towards unemployment insurance.

4. Further write-downs have been reported at German banks, resulting in increased public financial support. Additional write-downs have been reported at a number of banks, including West LB, IKB, Bayerische LB, and Commerzbank. This has added to the call on public money to support the public sector banks and at IKB (which though technically a private bank has KfW, a state-owned financial institution, as its principal shareholder). With the new developments, the cumulative support, including by KfW, implies a significant governmental commitment (exceeding €11.75 billion, or about ½ percent of GDP, text table). Reportedly, the government is leading a further €1.5 billion package in a third effort to stabilize IKB. With write-downs possible, these commitments are set to increase. The continued reliance on public support for the ongoing bank rescues underscore staff’s call for greater transparency, a resolution mechanism that injects incentives for prudent action, and, looking ahead, a more systematic restructuring of the banking sector.

BankPublic Sector CommitmentPrivate and Public Banks & Banking AssociationsOther
Sachsen LB€2.75 billion€17.5 billion (liquidity support)
West LB€4 billion *€1 billion*
IKB€5 billion**€1.2 billion million cash infusion **Additional €1.5 billion needed to cover additional losses.

Contingent on future losses on pool of €23 billion of structured products.

Provisions taken by KfW against its risk exposure for a liquidity facility of €8.1 billion.

Contingent on future losses on pool of €23 billion of structured products.

Provisions taken by KfW against its risk exposure for a liquidity facility of €8.1 billion.

5. Pursuant to the instructions by the Ministry of Finance, BaFin and the Bundesbank have made some progress on their coordination efforts. Progress has been achieved on reducing duplication of supervisory visits by BaFin and the Bundesbank, in response to the perceived intrusiveness by banks of such visits. Yet, staff’s reading of available public information is that the core issue of increasing accountability has not been tackled. Supervisory accountability would be best achieved, as noted in the staff report, by combining supervision and enforcement actions in either BaFin or the Bundesbank; alternatively, clear protocols for coordination would need to ensure accountability.

Other Resources Citing This Publication