Germany: Staff Report for the 2007 Article IV Consultation Supplementary Information
Author: International Monetary Fund
Publication Date:
27 Feb 2008
eISBN:
9781451810547
Language:
English
Keywords:
ISCR; CR; government; deficit; Bundesbank; labor productivity growth; staff recommendation; a number of bank; bank rescue; public sector bank; mid-sized bank; private bank; State-owned banks; Global
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The German economy has made major strides, helped by wide-ranging reforms. Greater transparency and stronger incentives for prudent action will support crisis prevention and management. The immediate priorities are preserving the integrity of the financial system and maintaining economic confidence. Policy on banking sector restructuring should be mindful of, and consistent with, the forces of international financial integration. Stepping up productivity is the key to sustaining growth. Further efforts are needed to bolster and reinforce commendable gains in fiscal outcomes.

Abstract

The German economy has made major strides, helped by wide-ranging reforms. Greater transparency and stronger incentives for prudent action will support crisis prevention and management. The immediate priorities are preserving the integrity of the financial system and maintaining economic confidence. Policy on banking sector restructuring should be mindful of, and consistent with, the forces of international financial integration. Stepping up productivity is the key to sustaining growth. Further efforts are needed to bolster and reinforce commendable gains in fiscal outcomes.

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

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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.
Figure 1.

Germany: Financial Indicators

Citation: IMF Staff Country Reports 2008, 080; 10.5089/9781451810547.002.A002

Source: Thomson Financial/DataStream.
Figure 2.
Figure 2.

Germany: Sentiment, Orders, and Production

Citation: IMF Staff Country Reports 2008, 080; 10.5089/9781451810547.002.A002

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.

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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.

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Cover IMF Staff Country Reports
Germany: 2007 Article IV Consultation: Staff Report; Staff Supplement; Public Information Notice; and Statement by the Executive Director for Germany
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 080
Publisher:
International Monetary Fund
ISBN:
9781451810547
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9781451810547.002

Germany: Financial Indicators

Germany: Sentiment, Orders, and Production