On August 1, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Germany.1
Germany’s economic rebound of 2010-2011 gave way to weakening momentum during the course of 2012. While exports to non-European trading partners began to recover by mid-2012, in line with improved prospects in the United States and emerging economies, exports to the rest of the euro area continued to decline as the recession in the region continued. Consumption grew robustly as German unemployment remained near post-reunification lows and wages rose well above inflation. Business investment however continued to closely track the decline in exports to the euro area, leading to a contraction in activity in the last quarter of 2012, before stabilizing in the first quarter of this year.
The outlook for the remainder of 2013 and next year is heavily dependent on a gradual recovery in the rest of the euro area and a sustained reduction in uncertainty. Consumption is expected to continue to expand robustly this year given favorable labor market conditions and wage agreements. Exports to the euro area are expected to recover only gradually. Uncertainty is expected to continue to have an amplifying impact on investment through the end of the year and assumed to diminish subsequently. Growth for 2013 as a whole is thus projected at around 0.3 percent, reflecting still below potential growth in the second half of the year. Growth in 2014 is projected to return to potential.
This baseline outlook is subject to a number of interrelated and mutually reinforcing downside risks. Given its high degree of trade openness, Germany is highly susceptible to a slowdown in external demand and/or elevated financial stress. At the regional level, euro area shocks could be transmitted via trade and financial channels. At the same time, the interaction between weaker economic activity and elevated financial stress in the euro area could be mutually reinforcing, owing to already strained balance sheets in a number of countries, and be further exacerbated by waning confidence or heightened uncertainty. A significantly weaker German outlook would in turn affect both regional and global growth prospects, primarily through the trade channel. Policy uncertainty regarding the roadmap and key elements of reforms to the euro area architecture, prospects for a recovery of activity in the euro area, and the still unsettled regulatory and supervisory landscape for the financial system, represent another factor which could magnify the effects of the intertwined shocks discussed above. In terms of risks of a more medium-term nature, an extended period of low growth could lead to hysteresis-type effects by lowering potential growth. Risks to domestic financial stability may surface owing to, for example, a shock to confidence by depositors and creditors in systemically important institutions, which by increasing risk aversion, could disproportionately suppress economic activity and trigger contagion more broadly.
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. 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://www.imf.org/external/np/sec/misc/qualifiers.htm.