Germany: Staff Report for the 2017 Article IV Consultation
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International Monetary Fund. European Dept.
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Publication Date:
07 Jul 2017
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9781484307908
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ISCR; CR; staff assessment candid; core inflation; surplus; debt ratio; Bundesbank; public debt debt ratio; labor market; venture capital; headline inflation; nominal wage; Global
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2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany

Context: The Economy in a Positive Momentum

1. Domestic factors continue to lift growth. Real GDP growth reached 1.8 percent last year, driven by another strong increase in private consumption, supported by low energy prices, and an acceleration in public consumption and construction investment. Employment creation remains strong, fueled by immigration from other European countries and increasing participation rates, especially among older cohorts. The unemployment rate has continued falling, and is at a post-reunification low of 3.9 percent since November 2016.1 Exports and business investment were subdued in 2016, in the context of a clouded global outlook and trade slowdown, and despite a still weak euro and improving economic conditions in the euro area (Figure 1).

Figure 1.
Figure 1.

Germany: Growth Developments

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Destatis, Haver Analytics, IFO Institute, INS, IMF World Economic Outlook, Markit, and IMF staff calculations.1/ National Accounts Concepts.

2. Inflation rebounded along with energy prices, but core inflation has remained flat and wage pressures subdued. Headline inflation averaged 0.5 percent in 2016 and rose rapidly at the beginning of 2017, temporarily peaking at 2.2 percent in February on the back of commodity and food price increases. Core inflation, however, has remained flat at 1.1 percent, notwithstanding a positive and increasing output gap. Despite the tightening labor market (Figure 2) and the introduction of a national minimum wage in 2015, nominal wage growth has remained moderate (2.3 percent in 2016), possibly reflecting reduced inflation expectations, as well as the continuing threat of offshoring of production.2 In the first regular review after two years of implementation, the minimum wage was raised by 4 percent in January 2017.

Figure 2.
Figure 2.

Germany: Prices and Labor Market

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bundesbank, Federal Statistical Office, Federal Statistical Office’s 13th Coordinated Population Projection, Eurostat, Haver Analytics, and IMF staff calculations.

3. External imbalances remain high, while the current account surplus decreased marginally relative to GDP. Germany’s current account surplus was the world’s largest in 2016, although its ratio to GDP edged down from 8.6 to 8.3 percent (Figure 3). The trade surplus in goods rose in line with GDP—with strong deceleration of both exports and imports—while the services and income balances ratios deteriorated. The surplus vis-à-vis the rest of the euro area was marginally higher due to a further decline in the deficit with the Netherlands. The sectoral composition of the savings-investment balance was virtually unchanged, with both corporate and government net savings at record high levels. The yearly average CPI-based real effective exchange rate (REER), the ULC-based REER, as well as the nominal effective exchange rate were all broadly unchanged relative to 2015. In the first quarter of 2017 the REER remained broadly stable, whereas the current account widened slightly with an acceleration of both exports and imports.

Figure 3.
Figure 3.

Germany: Balance of Payments

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bundesbank, DOTS, GDS, Haver Analytics, IMF World Economic Outlook, and IMF staff calculations.1/ Countries included in the calculations are Australia, Austria, Belgium, Canada, Colombia, Denmark, Estonia, Finland, France, Greece, Hong Kong SAR, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Suriname, Sweden, Switzerland, T aiwan Province of China, United Kingdom, and United States.Note: EA5= Euro area economies (Greece, Ireland, Italy, Portugal, Spain) with high borrowing spreads during the 2010–11 sovereign debt crisis.

4. Germany’s Net International Investment Position (NIIP) approached 52 percent of GDP at end-2016. Gross assets reached 251 percent of GDP. The net direct investment position stood close to 17 percent of GDP, while the stock of portfolio investments jumped from 4 to 9 percent of GDP, accounting for the full increase in the NIIP. Claims of German banks on non-residents continued to fall from their pre-crisis peak, declining from 63 to 61 percent of GDP in 2016. With the implementation of quantitative easing by the ECB, Germany’s exposure to the Eurosystem has been widening since early 2015, and currently stands at 27 percent of GDP. Foreign assets remain well diversified by instrument. In the aggregate, the implicit return on foreign assets has been trending down over the last 5 years, but exceeded that of liabilities by an average of 0.5 percentage points.

5. Fiscal policy was again neutral in 2016, as the government posted its third consecutive yearly surplus. The general government balance climbed to 0.8 percent of GDP—almost a full percentage point higher than planned—, while the structural balance stood at 0.7 percent (Figure 4). The favorable labor market performance and buoyant corporate tax receipts explain the bulk of the 0.5 percentage points increase in the revenue-to-GDP ratio. Together with the decline in the interest bill, this increase more than compensated the 0.5 percent of GDP rise in primary spending (4 percent in real terms, and broadly in line with initial plans). The additional spending was mostly to provide for the large number of asylum seekers who arrived in 2015–16, with associated higher intermediate consumption and social benefits. Pension and health care outlays retained an upward trend, while public investment growth—broadly in line with GDP growth—was lower than anticipated.

Figure 4.
Figure 4.

Germany: Fiscal Developments and Outlook

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bloomberg Finance L.P., Federal Statistical Office, Ministry of Finance, and IMF staff calculations and projections.

6. Credit growth picked up further pace in 2016 as credit to non-financial corporates accelerated. With the ECB’s quantitative easing program still under way, interest rates remain at or near record lows (Figure 5). Negative yields on government securities extend to 7-year maturities and those on bank debt securities to 3-year maturities, while one-year term bank deposits only yield ¼ of a percentage point. Against this backdrop, banks have been increasingly competing for returns and expanding maturity transformation. Bank lending surveys indicate that loan covenants and collateral requirements have been loosened, while interest margins have been further compressed, enticing firms to lock in record low interest rates for long maturities (exceeding 5 years). Thus, loans to non-financial corporates (NFC), lackluster until 2015, have been accelerating significantly in 2016. But credit growth is not a reliable indicator of real activity in Germany, as firms largely rely on own funds to finance investment, so this acceleration may not necessarily signal a strengthening of the economic momentum.

Figure 5.
Figure 5.

Germany: Credit Conditions and Asset Prices

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bundesbank, ECB, Haver Analytics, and IMF staff calculations.

7. Mortgage credit growth has stabilized against the backdrop of rising house prices. House prices accelerated further in 2016, reflecting continued migration to urban centers, an inelastic housing supply, and easy financial conditions as banks and other financial institutions compete for mortgage business in a low interest rate environment (Figure 6). Housing completions and residential building permits have increased further over the past year, but new residential construction has remained below estimates of the amount required to balance the market, suggesting that the backlog is still building up.

Figure 6.
Figure 6.

Germany: Recent Developments in the German Banking Sector

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bloomberg Finance L.P., ECB, IFS, S&P Global Market Intelligence, and IMF staff calculations.1/ Leverage ratio is defined as common equity net of intangibles as a percent of total assets net of intangibles.

Outlook, External Assessment, and Risks

8. The cyclical upswing is expected to persist in the near term, albeit with slightly lower growth. Rising employment levels, better job quality, some fiscal expansion (see below), and continued monetary accommodation will support domestic demand, but the normalization of commodity prices should curb consumption growth. Exports growth, on the other hand, is expected to gradually recover from the 2016 slowdown, bringing about a pickup in business investment and imports. In all, real GDP is expected to grow by 1.8 percent in 2017 and 1.6 percent in 2018, increasing the positive output gap slightly.

9. Core inflation and nominal wage growth are expected to gradually pick up. After peaking in 2017, headline inflation should recede somewhat in 2018 (to 1.7 percent) as the effect of higher commodity prices wanes. With unemployment at its natural rate, job vacancies high and rising, and continuing shortages of skilled workers, real wages are expected to accelerate steadily. Higher wages, the stabilization of import prices, and an acceleration in residential rents should help to gradually push up core inflation, to exceed 2 percent beyond 2019. In the medium term, in a context of growth slightly above potential and still accommodative monetary policy, annual wage growth is expected to reach slightly above 3 percent.

10. Current fiscal plans for 2017 envisage a moderate expansion, while leaving a comfortable buffer above deficit floors set by the fiscal rules. Based on the 2017–20 financial plan, staff forecasts that the government should again register a surplus (0.4 percent of GDP) this year and meet the political commitment of no new net borrowing (black zero) throughout the current legislature. The structural balance is, however, expected to fall by 0.6 percent of GDP. The stimulus is underpinned by income tax relief worth 0.2 percent of GDP—in the form of a higher basic tax allowance, more generous child-related tax credits, and a correction of the bracket creep—as well as higher social benefits, including pensions, and some increase in public investment. Refugee-related expenditures are expected to remain at about ½ percent of GDP throughout the forecast horizon. Over the medium term, interest payments will continue to fall, and revenues are expected to remain buoyant Consequentially, the fiscal buffer in relation to the Stability and Growth Pact’s (SGP) medium-term objective (MTO) and national debt brake is set to rise from ½ percent of GDP in 2017–18 to 1¼ percent of GDP in 2022 (see text table and Table 2). Fiscal plans may, however, be revised after the federal elections in September 2017.

Germany: General Government Operations 1/

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Sources: Ministry of Finance, Bundesbank, Federal Statistical Office, and IMF staff estimates and projections.

Based on the European System of Accounts (ESA).

Based on the authorities’ Spring 2017 projections. Potential ouptut estimates by the German authorities and European Commisiton are larger than those of IMF staff, implying a larger structural balance for the same overall balance outlook and therefore higher implicit fiscal space.

The SGP’s MTO is currently set at −0.5 percent of GDP until 2019. It is assumed that it will remain at such level in 2020–22.

Compliance with the debt brake rule is assessed based on public accounting—different from ESA—but financial transactions are excluded from revenues and expenditures so as to ensure that the structural balance measure is as close as possible that of the Maastricht definition (based on ESA).

From 2020 onwards, state governments will be bound by a zero structural deficit ceiling, accoding to the national debt brake. Local governments and social security funds are subject to stringent borrowing constraints, but may run occasional deficits. The debt brake rule therefore does not impose a precise floor to the general government structural balance, but implies that it should remain close or above −0.35 percent of GDP over time.

Calculated as the difference between the projected structural balance and the SGP’s MTO. For 2022 the interval is defined by the differences to the debt brake floor (see footnote 5) and to the MTO.

Source: Ministry of Finance, Bundesbank, Federal Statistical Office, and IMF staff estimates and projections.
Table 1.

Germany: Selected Economic Indicators, 2014–18

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Sources: Deutsche Bundesbank, Federal Statistical Office, IMF staff estimates and projections.

Seasonally and working day adjusted (SWDA).

Contribution to GDP growth.

ILO definition, unless otherwise indicated.

National Accounts Concepts

Deflated by national accounts deflator for private consumption; not SWDA.

Net lending/borrowing.

Excluding supplementary trade items.

Data refer to end of December.

Data reflect Germany’s contribution to M3 of the euro area.

Nominal effective exchange rate, all countries.

Real effective exchange rate, CPI based, all countries.

Table 2.

Germany: General Government Operations, 2014–22

(Percent of GDP)

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Sources: Bundesbank, Federal Statistical Office, Ministry of Finance, and IMF staff estimates and projections.
Table 3.

Germany: Medium Term Projections, 2014–22

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Sources: Federal Statistical Office, Bundesbank, and IMF staff estimates.
Table 4.

Germany: Balance of Payments, 2014–22

(Percent of GDP)

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Sources: Bundesbank, Federal Statistical Office, IMF Statistics Department, and IMF staff estimates. Note: Based on Balance of Payments Manual 6.
Table 5.

Germany: International Investment Position, 2008–16

(Percent of GDP)

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Sources: IMF Statistics Department and IMF staff calculations. Note: Based on Balance of Payments Manual 6.
Table 6.

Germany: Core Financial Soundness Indicators for Banks, 2011–16

(Percent)

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Source: Deutsche Bundesbank. The authorities provide annual data only and disseminate them once a year.
Table 7.

Germany: Additional Financial Soundness Indicators, 2011–16

(Percent, unless otherwise indicated)

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Source: Deutsche Bundesbank. The authorities provide annual data only and disseminate them once a year.

Spread between highest and lowest three month money market rates as reported by Frankfurt banks (basis points).

Spread in basis points.

Profits after tax devided by equity.

Indicator compiled according to definitions of the Compilation Guide on FSIs.

Total debt to corporate gross value added.

Return defined as net operating income less taxes, where net operating income and taxes are compiled according to the FSI Compilation Guide.

Invested capital estimated as balance sheet total less other accounts payable (AF.7 according to ESA 1995).

Excluding principal payments.

Resident enterprises that filed for bankruptcy.

Residential property price index (yearly average, 2011 = 100); source: Bundesbank calculations based on price data provided by bulwiengesa AG for 127 towns and cities, weighted by transactions.

Commercial property price index (office and retail property, yearly average, 2010 = 100), source: capital growth data provided by bulwiengesa AG for 127 townsand cities; separate indices are calculated for office property and retail property.

11. The external position in 2016 remained substantially stronger than implied by medium-term fundamentals and desirable policy settings, and policy action by Germany is needed to accelerate external rebalancing. The cyclically adjusted current account surplus reached 8.5 percent of GDP, broadly unchanged from 2015. A gap of 3–6 percent of GDP persists with respect to the level consistent with economic fundamentals and desirable policy settings (the “norm”), which is assessed at 2½–5½ of GDP (Annex I). As in 2015, overall policy gaps contribute 1½ percent of GDP to this gap, with the domestic contribution at about ½ percent of GDP (originating mostly from the stronger-than-desirable fiscal position). The wide interval reflects the high sensitivity of the norm to uncertain demographic factors. As in 2015, the REER is assessed to be undervalued by 10–20 percent in 2016. Going forward, staff projects a gradual rebalancing of the external position. Private investment is expected to strengthen, as the output gap remains positive through the medium term and the recovery consolidates. The rebound in energy prices should lead to a reversal of the oil and gas balance gains of 2015–16. Finally, more buoyant wage growth will both support consumption and imports and help realign external competitiveness. Nevertheless, the current account surplus is expected to remain large, at 7.5 percent of GDP in 2022—still 2 percent of GDP above the upper bound of the norm’s confidence interval. Accordingly, there is a need for policies to accelerate the rebalancing process (Box 1).

12. Short-term risks to the macroeconomic outlook are broadly balanced, while longer-term risks are tilted to the downside. Due to its very open and interconnected economy, Germany is particularly susceptible to a general rise in anti-globalization sentiment. Risks related to the coherence of the European Union (EU) construction and the rebalancing within the monetary union are of key importance to Germany. The main risks are as follows (see also Annex II):

  • A global retreat from economic integration, which may be prompted by anti-globalization sentiment in Europe or the U.S., would hurt Germany’s exporting industries and deter domestic investment. Regarding Brexit, although its prospect has not yet produced visible macroeconomic effects, difficulties in negotiating the final exit agreement could increase uncertainty and hold back investment.

  • On the upside, the political appeal of anti-globalization forces may continue to fade, or their impact on policies could be limited, lifting business confidence and reducing uncertainty both in Europe and globally. This would lead to a consolidation of the current cyclical recovery, with a stronger-than-expected pick-up in consumption and private investment.

  • Anti-euro sentiment, stalled structural reforms, and banking sector and fiscal legacy problems in parts of Europe may reignite sovereign bond market tensions in the euro area and lead to sharp corrections in asset markets. These could, in turn, trigger financial turbulence in Germany and potentially important second round adverse outward spillovers because of the systemic and interconnected nature of Germany’s largest financial institutions. The new and untested framework for bank recovery and resolution may complicate the policy response.

  • In the euro area, a weaker-than-expected response of prices and wages to the recovery could lead to a prolonged period of exceptionally low interest rates, with associated risks for financial stability. This risk could materialize even if price and wage growth faltered in Germany only, given that Germany accounts for 28 percent of the euro area.

  • A continued rise in house prices in Germany, supported by expansionary monetary conditions, may lift investment and consumption more rapidly than anticipated. Stronger cyclical growth could also follow from a somewhat looser fiscal policy in the new legislature.

Authorities’ Views

13. The authorities broadly agreed with staff’s views on the positive macroeconomic outlook, and emphasized the dominant role of domestic demand in driving future developments. They saw the strength of the labor market as continuing to prop up consumption, while low interest rates provided support to the housing market and the construction sector. Exports were expected to accelerate moderately in the next two years, but the contribution of net trade to growth would remain negative. Core inflation was forecast to pick up and approach 1.7 percent by 2018, in line with staff’s projections. The authorities expected wage dynamics to remain more moderate as the pick-up of inflation over the forecast horizon would be reflected only partly in future wage bargaining rounds. The authorities also broadly shared staff’s assessment of the risks to the outlook, but saw the long-term balance of risks as slightly less negative since some of the long-term risks highlighted by staff (such as low productivity growth in the long-term; see Annex II) were already part of their baseline.

14. As in earlier consultations, the authorities stressed that the current account surplus reflected private sector decisions and not of domestic policy-related distortions. In their macroeconomic model simulations, the surplus would decline substantially once temporary factors, namely favorable commodity prices and a favorable exchange rate, ceased to play a role. They also stressed that long-run demographic developments justified the need for high household savings and fiscal discipline, while acknowledging that the reasons behind high and increasing net savings by the non-financial corporate sector remained unclear, though recently the favorable exchange rate was seen as playing a role. Furthermore, they stressed that Germany’s current account surplus with the rest of the euro area, which they viewed as the most relevant indicator for the functioning of the currency union, has halved since the global financial crisis (GFC). As in the past, the Bundesbank saw the undervaluation of the REER at around 6 percent based on various indicators of price competitiveness and relative productivity of the German economy—much smaller than in staff’s assessment.

Policy Discussions

As the recovery firms, Germany should aim for a better mix of mutually reinforcing structural and fiscal policies to strengthen growth potential while promoting external rebalancing.

A. The Need for Wages and Prices to Accelerate

15. Before the global financial crisis (GFC), inflation in Germany was on average below that in the rest of the euro area (REA), consistent with the configuration of relative cyclical positions. From the inception of the euro and until the GFC, output gaps and inflation expectations in the REA were higher than in Germany (Figure 7). In addition, various indirect tax increases together with protracted rises in food and energy prices contributed to keep inflation beyond the positive trend in core prices. In more recent years, these patterns have changed. While inflation in Germany has been higher than the average, inflation in the monetary union has fallen well below the ECB price stability target, pulled down by large output gaps in several countries and sharp declines in energy prices. The recent recovery in energy and food prices has pushed up headline inflation in the euro area (as in Germany), but core inflation has yet to increase, suggesting that monetary policy will need to remain expansionary for some time.

Figure 7.
Figure 7.

Inflation Dynamics in Germany and the Rest of the Euro Area (REA)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Consensus forecasts, Eurostat, World Economic Outlook, Haver Analytics, and IMF staff calculations and projections.

16. A sustained rise in wage and price inflation in Germany is needed to lift inflation in the euro area and help open the way to the normalization of monetary policy. In the staff’s medium-term forecast, headline inflation is expected to rise and slightly exceed 2 percent by 2019 in Germany. Underpinning this forecast, is the expectation that core inflation and wage growth will rise beyond levels experienced in the years following the launch of the euro—a natural consequence of Germany’s relatively favorable cyclical position in a recovering monetary union. Model simulations suggest that a failure of German wage and price inflation to pick up could have adverse implications for growth and rebalancing in the monetary union.3 Lower inflation and inflation expectations in Germany than in the baseline would translate into higher real interest rates and lower wage dynamics and depreciate the REER. This would have detrimental effects on domestic demand in the short term and weigh negatively on Germany’s main trading partners. External imbalances would rise and both GDP and inflation would be lower in the euro area, delaying the normalization of monetary policy.

17. The authorities could usefully emphasize in their public communication the importance of robust wage and price growth in the current conjuncture. Through consistent communications efforts, the authorities could play an important role in lifting inflation expectations and wage growth. This would help speed-up the normalization of the ECB’s monetary policy, thereby reducing the risk that interest rates would have to stay “low for long” and associated financial stability concerns (see Section E below). Policies that promote sustainable and higher long-term growth in Germany while stimulating aggregate demand in the short run would also go in this direction.

Authorities’ Views

18. The authorities agreed that faster wage and price growth in Germany would be part of the normal market process in a country with a closed output gap and a tight labor market, but stressed that wage setting is left to social partners. The authorities assured staff that, despite the German public’s preference for low inflation, there was broad understanding and acceptance of the framework of the monetary union and its implications. They also shared the view that higher wage and price growth resulting from the favorable economic developments in Germany would help rebalancing within the euro area, but they pointed out that wage bargaining was a decentralized process over which the government had no direct influence. The authorities also highlighted that substantial immigration (from EU and non-EU countries) may impact wage developments.

B. Fiscal Policy: Supporting Growth and Rebalancing while Safeguarding Sustainability

19. Fiscal consolidation has created substantial fiscal space. Fiscal policy in Germany has prioritized consolidation, including by saving budgetary overperformance, successfully strengthening Germany’s fiscal position and creating the budgetary room to address unexpected developments, such as the need to provide for the refugees. With the general government balance outperforming Germany’s MTO since 2012, the public debt ratio fell back to pre-crisis levels in 2016, and is set to cross below the 60 percent of GDP SGP benchmark in 2020. Net debt fell to 48 percent of GDP in 2015. Consolidation was aided by a decline in interest expenditures relative to GDP of 1 percentage point between 2010 and 2016, reflecting the low interest rate environment and the country’s safe haven status, as well as the declining stock of public debt. But the primary surplus stayed at a relatively high level, hovering around 2 percent of GDP over the past five years. In fact, fiscal plans proved overly conservative through the whole post-crisis period, mostly because tax revenue consistently exceeded official estimates. The German government is expected to retain ample access to financing through the foreseeable future, even in the event of a large fiscal stimulus (see also Annex III).

uA01fig01

Over-performance: Actual Fiscal Balance less Stability Program Projections

(Pecent of GDP)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

* The change in national accounts system from ESA1995 to ESA2010 does not have a relevant impact on the balance outturn (see 2015 Stability Program update). However, it does not allow a precise decomposition of the net-lending forecast error in 2014.Sources: Stability Program projections, Destastis, and IMF staff calculations.

20. Going forward, a looser fiscal position would allow for further investment in Germany’s growth potential, while also supporting external adjustment. Under baseline projections, there is sufficient headroom within Germany’s fiscal rules to finance growth-friendly policies through the medium term, and this room should be fully used (½ percent of GDP in the short run, rising steadily to 1¼ p.p. by 2022—see text table above). To this end, revenue and expenditure measures can be complementary. On the spending side, despite progress in recent years (see Annex IV), more infrastructure investment, high-quality child care and aftercare programs, and training and integration efforts for the refugees would increase potential output. On the tax side, the burden on labor, which has been rising over time including through a bracket creep effect, could be permanently reduced with a view to support labor supply particularly among secondary earners and low-to-medium income households. If the government used fully the fiscal leeway under the rules, public debt would still decline over time under a wide range of realistic macroeconomic and fiscal shocks, even without accounting for any favorable effect of fiscal measures on long-term output.

uA01fig02

Germany: General Government Debt Dynamics Under Stochastic Macroeconomic Scenarios 1/

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF staff estimations.1/ The fan charts show predictive densities of the government debt ratio to GDP for alternative assumptions regarding the structural balance path, calculated using the IMF’s general equilibrium Global Integrated Monetary and Fiscal Model, and considering a range of shocks which match the historical volatility of Germany’s GDP cycles.

21. The government’s agenda to improve public investment management at the local level is welcome and should be bolstered, including by rebuilding staffing capacity. Investment needs are concentrated at the municipal level. Thus, the federal government recently doubled the size of the Municipal Investment Promotion Fund (MIP) created in 2015, to a total of EUR 7 billion (0.2 percent of GDP), adding to other, non-earmarked, extensive financial relief to subnational governments—some EUR 19 billion between 2014 and 2018. But the MIP’s take-up has been disappointing so far (less than EUR ½ billion spent and less than EUR 2 billion in commitments by mid-2016), owing to administrative constraints, including a steady reduction in specialized personnel over the years. The scope for usage of the MIP was recently expanded to include school infrastructure, which should help raise take-up. Other measures may reduce public investment bottlenecks, but only in the medium term: (i) a recent fiscal equalization agreement between the states and the federal government foresees a transfer of investment competencies to the latter, and paves the way for the creation of an infrastructure entity responsible for the administration of highways; (ii) Germany’s former PPP agency (Partnerschaft Deutschland) has been reformed to improve its accessibility and extend its support to normal procurement. Furthermore, new measures have been introduced to expand high-speed broadband networks and provide schools with access to fast internet.

uA01fig03

Tax Revenue Forecast Bias, 2011–2016 1/

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

1/ Forecast errors are computed as the difference between actual values and the forecast as of November of the previous year (relevant for the bud get formulation). Social security contributions are not included, but are also sensitive to the growth of wages and salaries.Sources: Bundesbank, Federal Ministry of Finance, and IMF staff calculations.

22. To improve fiscal planning and avoid continued overperformance, a revision of revenue projection models should be undertaken. Conservatism in revenue projections has led to a tighter fiscal stance than that intended by the government. In part, the persistent bias derives from the under-estimation of employment growth, resulting in higher-than-expected outturns for the personal income tax (PIT). The PIT was the only main tax category to be consistently underestimated in 2011–16, and explains the largest share of average forecast errors in that period. Going forward, a revision of both the macroeconomic relationships underlying revenue projections as well as estimated tax elasticities is warranted to help make fiscal planning more accurate.

23. Pension reforms are a priority to ensure long-term fiscal sustainability, and would allow a relaxation of Germany’s fiscal targets in the medium-term. Rising aging costs are expected to burden the public accounts, with pension outlays in relation to GDP rising between 1.9 and 2.7 percentage points by 2050, and health and long-term care costs adding a further 1.3–2.1 percentage points.4 Without further reforms, the government will have to either raise the already-high taxes and/or social security contributions (staff estimates that a 2 percent increase in payroll tax/contribution rates is necessary to finance a 1 percent of GDP rise in aging costs), or generate substantial upfront fiscal savings to allow for a large increase in public debt once aging costs rise sharply. Pension reforms that make it attractive to extend working lives would bring the double dividend of directly reducing the pension bill—by an estimated 0.7 percent of GDP per additional year of effective retirement age, assuming unchanged individual pension benefits—while positively affecting growth. Reforms to encourage female labor supply and promote the integration of refugees into the labor market would also help shore up fiscal sustainability through their effect on employment, although with a lower quantitative impact.5 Once such reforms are in place, some relaxation of Germany’s fiscal rules could be considered in the future (see Annex V).

Authorities’ Views

24. The authorities underlined that the fiscal stance must consider that the output gap is closed and the public debt is still above the limit set by the fiscal rules. Therefore, in their view prudent fiscal policy should be oriented towards improving fiscal sustainability. They agreed on the need for further steps to reform pensions in the future, as well as the desirability of reducing the tax wedge on labor. The Ministry of Finance saw scope for further tax relief of ½ percent of GDP per year in the next legislature, mainly in income taxation. Concerning public investment, the authorities highlighted the recent acceleration in spending at the federal level and the financial support already extended to subnational governments. They also pointed to the proposed creation of a Federal Infrastructure Corporation for Highways and plans for further investment acceleration in the future. But capacity constraints were seen to limit the scope and desirability of a faster spending increase than currently envisaged. The authorities also raised the question of the comparability of public investment ratios across countries. Revenue overperformance in recent years was attributed to the underestimation of past employment growth, as well as one-off effects. While the authorities concur that increasing the effective retirement age is desirable, the Ministry of Finance does not see merit in discussing new fiscal targets as there are several challenges to long-run fiscal sustainability, including old age and health care costs, and as a government debt level of 60 percent of GDP is a ceiling and not a target. In this context, the authorities emphasized the possibility of negative spillovers to other euro area countries through higher borrowing costs should Germany’s fiscal policy lose credibility.

C. Income Distribution and Relative Poverty

25. As in other advanced economies, wage inequality has gradually risen in Germany, but this trend has stopped over the past few years.6 The wage distributions for full-time and part-time employees widened from the mid-1990s. Technological change, greater trade openness and offshoring opportunities, as well as diminished coverage by collective bargaining agreements likely played a role, as in other advanced countries. Following the Hartz labor market reforms in 2003–05, labor force participation has been rising and unemployment falling, resulting in large gains in employment. The surge in labor supply triggered by the reforms initially reinforced pre-existing downward pressures on low wages, but did not result in an increase in labor income inequality because of its powerful positive effect on employment. Accompanying trends toward higher female labor force participation and more participation by older workers likely had similar effects. Since 2010, both wage and labor earnings inequality have been broadly stable, as the labor market strengthened further and the level of the new statutory minimum wage (announced in late 2013, and introduced in January 2015) proved sufficiently prudent not to significantly harm employment while providing a higher floor to hourly wages.

26. Inequality of disposable income has been broadly flat over the past ten years, but relative poverty risk has crept up and deserves continued attention by policymakers (Figure 8). Against the background of stable market income inequality and a well-developed redistributive tax and transfer system, the Gini index of disposable income has barely moved in recent years, and, at around 0.29, is near the European median. However, weak disposable income growth in the left tail of the income distribution has resulted in a slow but sustained rise in the share of individuals at risk of poverty (to about 16 percent by end-2014) and in-work at risk of poverty.7 This rise seems to be broad-based across demographic groups. Increased immigration since 2010 appears to have played only a marginal role so far (the latest available data are for 2014). The federal government’s Fifth Poverty and Wealth Report describes measures taken by the current government to address inclusiveness in general and poverty in particular. Especially relevant among the latter are the new statutory minimum wage, a reform to reduce abuse in temporary employment, new or revamped training for the long-term unemployed or workers lacking formal vocational training, a higher tax allowance for single parents, as well as significant increases in some social transfers (such as housing benefits or supplementary child benefits) in 2016–17. While it is too early to assess the impact of these measures, if poverty risk does not recede going forward a review of the targeting and effectiveness of existing programs and benefits should be considered.

Figure 8.
Figure 8.

Germany: Inequality and Poverty

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Eurostat, SILC., SOEP and IMF staff calculations.

27. Anti-poverty policies should seek to preserve the strong gains in labor force participation and employment of the past decade. Data from the German Socio-Economic Panel, the extensive and detailed household survey from which income and wage inequality data are derived, also show that satisfaction with household income is at or near a post-reunification high for individuals below the second decile, despite the stagnation of real disposable incomes at the bottom of the distribution. This satisfaction measure is strongly negatively correlated with the unemployment rate. This suggests that anti-poverty measures should seek to preserve the benefits of labor market reforms on the employment rate. Policies to increase equality of opportunities and social mobility would also help address poverty concerns over the longer term, as argued in the latest report by the German Council of Economic Experts.

uA01fig04

Flow of New Asylum Seeker Applications

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: Federal Office for Migration and Refugees

28. Successfully integrating refugees in the labor market will be an important component of anti-poverty efforts. Following an exceptionally large inflow of asylum seekers during 2015–16—around 1.2 million, or 1½ percent of the country’s population—the number of new monthly applicants has dropped to near 2014 levels. By March 2017, about 0.5 million asylum seekers and refugees had completed the initial stages of the integration process and registered as jobseekers. However, at about 12 percent, their employment rate remains low. The Integration Law, which entered into force in August last year, introduced enhanced integration and language courses, specific language instruction targeted to vocational training, and provided increased legal security to refugees. The law also temporarily suspended the priority review—an obligation for employers to check whether another suitable applicant from Germany or the E.U. is available before hiring a refugee. In addition to these initiatives, creating new paths to vocational training more suitable for the refugees would further enhance labor market integration prospects.

Authorities’ Views

29. The authorities highlighted the measures taken during the current legislature to address poverty concerns. They agreed that the at-risk-of-poverty rate had increased between the end of the 1990s and 2005, saw the rise since then as much more limited, and thought that the trend looking forward was uncertain. Beyond the recent measures mentioned above, they also pointed at a 2016 law which contains numerous regulatory simplifications to improve the take-up of basic welfare benefits by eligible individuals. They also emphasized the importance for social cohesion of fighting against poverty and low incomes through labor market participation. On the refugees, the authorities agreed that their successful labor market integration is important to promote long-term growth and mitigate relative poverty risks. They noted that the pace of integration was picking up and viewed an employment rate of 50 percent five years after arrival as achievable.

D. Product Market Reforms and Innovation

30. Competition-enhancing reforms in professional services and network industries should be pursued more vigorously. Productivity growth in services has remained low. A recent cross-country study suggests that product market deregulation reforms in network industries, retail, and professional services have positive effects on investment, output, and employment and that their effect increases over time.8 Since the last consultation, a new law (implementing a EU directive) was put in place to boost the efficiency of the railways sector and strengthen the power of the regulator. It is likely to make freight transportation relatively more attractive but have little effect on the long-distance passenger segment, where competition is most limited. Corrective regulatory measures should be taken should the status quo persist. No competition-enhancing measures have been taken in postal services, and the incumbent’s dominant position is largely unchanged. In both areas, the regulator should make maximum use of its powers to avoid discrimination against smaller competitors and new entrants. The government’s 2016 National Action Plan on access to and practice of regulated professions, produced in the context of a pan-EU initiative, contains only a limited number of policy measures. Per a new indicator developed by the European Commission (EC), the level of restrictiveness was higher than the EU median for lawyers, engineers, architects, and accountants in 2016 (Figure 9). Infringement procedures by the EC are still ongoing regarding the minimum compulsory tariffs of architects and engineers. Staff continues to view professional services as overregulated; greater openness could be instilled in the areas of exclusive rights, compulsory chamber membership, and regulation on prices and fees.9

Figure 9.
Figure 9.

Germany: Product Market Competition, Innovation and Digitalization

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Akamai’s State of the Internet 2016Q4 Report, Conference Board, Destatis, European Commission and IMF staff calculations.

31. The government’s strategy to facilitate and manage economic transformation through digitalization is advancing, but Germany is still trailing peers in some areas. The authorities have placed a special focus on digitalization. Their “DIGITAL Economy 2016” monitoring report indicates that digitalization in the corporate sector is gaining momentum. However, surveys suggest that the network infrastructure and a shortage of skilled labor are obstacles to faster progress. In addition, recently published data indicate that the average stock of ICT capital per worker is low in international comparison, and that Germany ranks only twenty fifth in the world in terms of average download speeds (Figure 9). The federal government has earmarked EUR 4 billion to support the deployment of fast broadband in remote areas through 2020. A new initiative (“Gigabit Germany”) has been launched in cooperation with private companies, which could result in further financial incentives for the rollout of high-speed networks in regions where the private rate of return would be otherwise unattractive as private telecommunication companies significantly increase their fiber optic network investment until 2025. The Digital Networks Act, adopted last year, will reduce the cost of the rollout of optical fiber cables, while rules on competition and business regulatory frameworks are being updated to adapt them to the advances in digitalization. These new measures and financial commitments, which stimulate both the supply of and demand for digital services, are welcome, and the current momentum should be sustained.

32. The government has been taking several measures to incentivize venture capital investment. At around 3 percent of GDP, Germany’s R&D spending in 2015 was high in European and global comparison, but venture capital investment remained relatively small (Figure 9). To promote innovation and foster venture capital investment, the government has implemented several initiatives under its “High-Tech Strategy,” including the provision of grants, equity financing instruments, and preferential tax treatment, covering both the initial (seed) and growth phases of venture investment.10 In late 2016, the government also modified the tax rules governing the loss carry-forward regime in case of change in company ownership, making the regime more friendly to young innovative firms. To boost the number of IPOs of young, fast-growing companies, a new segment of the stock exchange Deutsche Börse (so-called “Scale”) was launched in March 2017, replacing its predecessor “Entry Standard.” With stricter admission criteria and follow-up obligations, the cost of which will be partly covered by Deutsche Börse, Scale aims to ensure a high quality of listed firms and prevent the recurrence of past adverse experiences. This is a welcome step in improving exit prospects for venture capital investors. The government should assess the effectiveness of these measures periodically, especially in view of preventing the creation of a “small business trap.” At the same time, any administrative uncertainties, including the treatment of value- added tax on management fees for venture capital, should be addressed.

Authorities’ Views

33. The authorities emphasized the progress achieved in the implementation of their Digital Agenda and their promotion of venture capital investment. They acknowledged that available cross-country indicators on ICT and the digital economy showed that Germany was not a top performer, but argued that cross-country comparisons could be misleading as they may not all properly account for differences in product sophistication. They mentioned several recent policy initiatives and achievements, among which their promotion of digitalization and ICT competence in SMEs, the development of a modern regulatory framework for the digital world, and the launch of the digitalization of the energy transition. They recognized that reforms had been somewhat slow to materialize in some professional services deregulation, but also argued that the E.U. principle of mutual recognition should not be used to dilute valuable quality and consumer protection standards. They argued there were no de jure obstacles to greater competition in long-distance railways transportation, and saw the international evidence as ambiguous about potential benefits from the separation between the infrastructure company and the incumbent services operator. While agreeing on the importance of reviewing periodically the effectiveness of instruments to support innovation and venture capital, they highlighted that most government-supported equity funds were managed on commercial terms, implying that there was little risk of perpetuating nonprofitable start-up companies.

E. Housing and Financial Sector Policies

34. At the aggregate level, housing affordability remains good, and price developments moderate in international comparison, but growing regional differences warrant close monitoring. House prices have continued to accelerate but their level remains moderate, as do various indicators of mortgage affordability (price-to-rent, price-to-income). However, the picture is different when regional developments are considered. While house prices continue to fall in some rural areas, price growth has reached double-digits in large cities and university towns. In certain urban areas, overvaluation may amount to 30 percent according to the Bundesbank’s latest estimates. While there is no comprehensive data available on regional mortgage growth, there is some anecdotal evidence of looser underwriting standards in some areas.

uA01fig05

Housing Market Valuation Indices

(Index, 1991=100)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: Bulwiengesa, Bundesbank, Destatis, and IMF staff calculations.
uA01fig06

Real House Prices International Comparison

(Index, 1991Q1=100)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Sources: OECD and IMF staff calculations

35. Relaxing housing supply constraints would help mitigate price pressures. Last year the government adopted a package of measures to address supply shortages and improve affordability. The plan is progressing in coordination with local authorities and includes stepping up the sales of federally-owned land and properties below market price for affordable housing projects, more funds for social housing, and the promotion of building code harmonization. However, the authorities estimate that the supply of new housing units remained below demand in 2016. To significantly boost supply in the short term, these measures must be complemented by further encouragement for local authorities to relax zoning and height restrictions in areas under pressure. Lowering the effective transaction tax rate on new construction, as recommended by staff in the past, would also be helpful in this regard.

36. New legislation introducing macroprudential instruments for the real estate market was approved, but left the toolkit incomplete and important data gaps unaddressed. The new legislation broadens the macroprudential toolkit to include loan-to-value and amortization requirements, but does not include either debt-to-income or debt-service-to-income limits—instruments designed to limit borrower vulnerability to income and interest rate shocks, and ensure affordability. Most importantly, the new law does not include any provision for a granular, loan-by-loan database, a central tenet of past staff recommendation to ensure the effective implementation of macroprudential tools. At a minimum, a regular (at least annual) survey should be conducted in hotspots to collect information on individual loans, and assess household leverage, loan affordability and the concentration of banks’ exposure.

37. The German banking sector must accelerate its restructuring and shore up profitability. Banks are generally well capitalized in risk-weighted terms, but leverage ratios are low in international comparison, especially for large private banks. Profitability continues to be weak, reflecting high operating costs, competition from within and outside of the banking sector, and slow development in non-interest revenues. The low interest rate environment is compounding these problems, while poorly performing legacy portfolios of shipping loans are weighing on some banks and may lead to increased provisioning costs in coming years. Hence, restructuring is ongoing, but progress is slow. Fee-based income has also increased recently, including at savings banks, but further sectoral consolidation and cost-cutting are likely going forward. The number of banks and branches has declined by about 15 percent since the financial crisis, and this trend is set to continue as the cost-to-income ratio remains on an uptrend in recent years—partially reflecting higher regulatory costs. Following a second year of large losses, Germany’s G-SIB substantially increased capital in March–April 2017 and announced a new restructuring strategy. This is a welcome development, and has resulted in a decline in the bank’s CDS spreads. However, it is too early to assess whether the new strategy will be able to sustainably return the bank to profitability.

uA01fig07

Germany: Change in ROA Components 1/

(Percentage points, Post-crisis minus boom period)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Note: Boom(2005–07)and post-crisis (2013–15) periods are computed based on weighted averages of 19 German banks.1/ ROA – Return on assetsSources: Fitch and IMF staff calculations.

38. Interest rate risk remains elevated and the close supervisory attention to this risk is welcome. Low and flattening yield curves are gradually eroding margins as assets reprice over time and banks find it difficult to pass negative rates to depositors. Banks (especially cooperative and savings banks) have responded by increasing fee income but also by expanding maturity transformation. The latter exposes them to the risk of large valuation losses on the assets side and increased funding costs on the liability side should interest rates rise rapidly. The supervisory authorities are monitoring this risk closely via regular stress tests and scenario simulations (including ‘low for long’ scenarios). They have imposed Pillar II capital requirements on the most exposed banks, which should encourage better management of this risk.

39. Only limited progress has been made on the formalization of a coordination mechanism for addressing systemic crises.11 The 2016 Germany FSAP pointed out that a formal coordination framework among authorities that would be involved in crisis management (the ECB, the Systemic Risk Board, as well as the competent German authorities) had yet to be developed. The FSAP also recommended to reinforce contingency planning for the management of a systemic crisis, including testing these plans via real simulation exercises with all concerned parties, but so far no progress has been made on this front.

40. The persistent low interest rate environment is also weighing on life insurers’ (LI) profitability. As existing higher yielding investments mature, life insurers’ average return on investment has been gradually trending down, getting closer to the stickier average technical rate—a measure of promised return to policyholders. The gap between the two measures is now about 50 basis points, or 80 basis point lower than in 2008, and at an all-time low.12 Over the last couple of years, German LIs have shored up profitability without significantly increasing overall risk by increasing the maturity of their investment portfolio and holding foreign sovereign debt, including U.S. debt. The duration of the LI’s sector sovereign portfolio reached a peak of 13.7 years last year.13 But there are limits to this strategy. As high yielding, high quality investments become harder to find, further extension in the maturity of the assets portfolio runs the risk of locking in low long-term yields. If interest rates increase down the road, policyholders may decide to surrender their policies to pursue more attractive opportunities elsewhere.

41. Solvency buffers in LIs look comfortable, but this owes much to Solvency II (SII) transitional measures. At 286 percent (on aggregate) at the beginning of 2016, the solvency capital requirement ratio (SCR) for the German life insurance industry was well above the required (100 percent) minimum and among the highest in Europe.14 However, some caution is in order when interpreting this figure. First, SII capital buffers are very sensitive to small changes in interest rates, especially when interest rates are low and the duration mismatch is large.15 For instance, when long-term interest rates fell by 50 basis points in the first half of 2016, the aggregate SCR ratio declined by 76 percentage points to 210 percent, bringing it in line with the European average. Second, about 70 percent of German LIs are making use of SII transitional measures. Without these measures, about a third of reporting LI companies (26 insurers) would not have reported sufficient own funds in 2016:Q1. The associated capital shortfall would have been of EUR 12.3 billion, well above its 2015:Q4 level of EUR 3.5 billion (for 16 insurers). The 2016 FSAP and the more recent EIOPA stress tests showed that the German life insurance sector would be severely negatively affected in a “low for long” situation due to large negative duration gaps and the prevalence of guaranteed returns products. Therefore, LI companies must move away from guaranteed returns and towards unit-linked products. This is especially the case for small to medium firms unable to mitigate duration gaps and improve profitability through access to international investment portfolios and derivative products. In this context, supervisors should continue to closely monitor poorly capitalized companies and demand early action plans from firms in difficulty—emphasizing changes in business models when necessary.

Authorities’ Views

42. The authorities stressed that the banking and insurance sectors needed to accelerate the review and development of their business models, while many institutions had to shore up profitability and resilience. They highlighted the many challenges associated with the need for the financial system to adjust to the new regulatory framework, especially in the current low interest rate environment. However, they expressed confidence that the adjustment will be smooth thanks to comfortable capital buffers in both banking and life insurance sectors. The authorities were not overly concerned by the rapid increase in house prices in hotspots given moderate credit growth and consistently high credit standards. They agreed, however, that existing data gaps, particularly for mortgages, had to be remedied to enable effective macroprudential surveillance. They highlighted the role of demographics for the development of house prices and of substantial regional differences which cannot be seen in the aggregate. The authorities also expressed strong commitment to the new EU bank resolution framework and the concept of bail-in. They also shared staff’s concerns about the need to ensure operational readiness in a systemic crisis, but noted that coordination among national and European authorities still needs to be tested in real-time simulation exercises.

Staff Appraisal

43. The cyclical upswing is expected to continue in the near term. In 2017, growth should remain stable as foreign demand is expected to strengthen and consumption to soften as higher commodity prices will curb real income growth. In the medium term, continuing growth slightly above potential should result in a widening of the output gap and further tightening of labor market conditions. The risks to the outlook are balanced in the short term, but predominantly tilted to the downside in the longer run. Anti-globalization policies abroad could negatively affect long-term prospects for the very open German economy, while in the euro area insufficient progress in the reform agenda may rekindle stress.

44. The labor market continues to perform strongly. Following the Hartz reforms, labor force participation has been rising and unemployment falling, resulting in large gains in employment, also fed by immigration. The surge in labor supply triggered by the reforms initially reinforced pre-existing downward pressures on low wages, but did not result in an increase in labor income inequality because of its powerful positive effect on employment. In addition, both wage and labor earnings inequality have been broadly stable since 2010, as the labor market strengthened further and the level of the minimum wage proved sufficiently prudent not to significantly harm employment while providing a higher floor to hourly wages. However, average wage gains have been subdued, despite increasing signs of labor market tightness.

45. Looking forward, a sustained rise in wage and price inflation in Germany is needed to help lift inflation in the euro area and facilitate the normalization of monetary policy. Our baseline forecast envisages a gradual demand-driven rise in wage, core, and headline inflation, consistent with the tight labor market conditions. There is a risk, however, that, after a long period of moderation, wages will not respond sufficiently to these conditions. This would result in protracted low inflation in Germany and a slower-than-expected normalization of inflation and monetary conditions in the euro area. In this scenario, financial stability risks associated with ‘low for long’ interest rates would increase, and the rebalancing of competitiveness in the euro area would be delayed. To help ward off such risks, the authorities could usefully emphasize in their public communication the importance of robust wage and price growth in the current conjuncture, while respecting the autonomy of the social partners in wage setting.

46. External rebalancing would be facilitated by higher wage and price growth, but its pace would remain slow without policy action. Germany’s external position is substantially stronger than implied by medium-term fundamentals and desirable policy settings. The surplus is expected to narrow slowly over the medium term, as energy and other import prices recover, private investment strengthens, and wage growth supports both domestic demand and a realignment of external competitiveness. However, under current policies, the projected adjustment is limited. Policies that boost public and private investment and reduce the need for private saving (such as through promoting longer working lives) would accelerate the necessary external rebalancing process.

47. The fiscal position continues to strengthen. The prudent management of the fiscal accounts has led to a protracted reduction in the debt-to-GDP ratio after the crisis. In 2016, primary spending rose, including to provide for the refugees, but this was more than compensated by higher tax revenues from favorable labor market performance and buoyant corporate tax receipts, as well as a decline in the interest bill. Despite the moderate fiscal stimulus expected this year—with higher social spending, some income tax relief, and larger public investment—current fiscal plans still preserve a comfortable buffer above the European and national fiscal rules. Staff forecasts this buffer to rise over the coming years.

48. Fiscal space should be used to raise Germany’s growth potential by encouraging investment, promoting labor supply, and boosting productivity. Policies to relieve the tax burden and increase growth-enhancing spending can complement each other. On the revenue side, there is space to reduce Germany’s large and increasing tax burden on labor with a view to support labor supply. On the expenditure side, overcoming barriers to expanding investment in public infrastructure remains important. The financial relief already extended by the federal government to the regions and municipalities is useful, but it is necessary to rebuild staffing capacity (particularly at the local level) for the planning and administration of investment projects. The proposed Federal Infrastructure Corporation for Highways is welcome and should ensure a more stable and efficient framework for investment in transport infrastructure. In addition, as recommended in the past, policies to expand labor supply through an enhanced provision of childcare and after school programs, and to provide suitable vocational training to refugees, would be a good investment in Germany’s future, as are initiatives to foster digitalization and innovation.

49. To improve fiscal planning, a reexamination of revenue projection models should be undertaken. Tax revenue projections (especially for personal income taxes) have proven overly conservative over the post-crisis period, resulting in a tighter fiscal stance than originally intended. To some extent, this persistent bias is explained by an underestimation of employment growth in the official macroeconomic forecasts. A re-examination of both the macroeconomic relationships underlying revenue projections and estimated tax sensitivity to macroeconomic developments is warranted to enable better fiscal planning.

50. Pension reforms to prolong working lives would foster long-term fiscal sustainability while helping external rebalancing. If the fiscal room under the rules is fully used, and considering a wide range of realistic macroeconomic shocks, government debt would still decline rapidly with high probability. However, in the long term fiscal sustainability is challenged by rising aging costs. Further pension reforms that make it more attractive to extend working lives, as recommended in the past, would lower the pension bill and raise growth. By reducing the need for households to save, these reforms would also help lower external imbalances. The resulting sustainability gains would also facilitate some relaxation of fiscal targets in the medium and long term.

51. Despite a well-developed social safety net and strong employment gains in recent years, relative poverty risk warrants continued attention. Disposable income inequality (measured by the Gini coefficient) has remained broadly stable over the last decade and is near the European median. Nevertheless, there has been a slow secular rise of the at-risk-of-poverty rate. To address this problem, new social cohesion measures were put in place, but it is too early to assess their impact. If poverty risk does not recede, a review of the targeting and effectiveness of some social benefits should be considered. Anti-poverty policies should seek to preserve the achievements of past labor market reforms. Measures to enhance labor force participation of women with children and facilitate the labor market integration of refugees would go in this direction.

52. Competition-enhancing reforms in some network industries and professional services should be accelerated. Since the last consultation, a new law (implementing a EU directive) was put in place to boost the efficiency of the railways sector and strengthen the power of the regulator. The law is a step in the right direction, but will have little effect on the long-distance passenger segment, where competition is currently lacking. No new competition-enhancing measures have been taken in postal services, where the incumbent retains a dominant positon. In both areas, the regulator should make maximum use of its powers to avoid discrimination against smaller competitors and new entrants. The government’s 2016 National Action Plan on access to and practice of regulated professions, produced in the context of a European Union initiative, contains only a limited number of policy measures, and some professions remain overregulated.

53. Measures to speed up digitalization and stimulate venture capital investment are welcome. Germany is an innovation leader in Europe. Digitalization in the business sector is moving forward, though the network infrastructure and a shortage of skilled labor are holding back progress. The average stock of capital per worker in ICT is low in international comparison, and Germany ranks only twenty fifth in the world in average download speeds. The federal government is providing financial support to several initiatives to accelerate the deployment of fast broadband, is adapting regulatory frameworks to advances in digitalization, and is actively fostering venture capital investment. These initiatives and financial commitments are welcome, and the current momentum should be sustained.

54. Housing prices remain in line with fundamentals at the aggregate level although some hot spots are developing as prices continue to accelerate. To help balance supply and demand and maintain affordability, the government adopted a package of measures including stepped-up sales of federally-owned land and properties below market price for affordable housing projects, more funds for social housing, and the promotion of building code harmonization. To significantly boost supply in the short term, these measures must be complemented by further encouragement for local authorities to relax zoning and height restrictions.

55. New legislation introducing additional macroprudential instruments for the real estate market is a step in the right direction, but leaves the toolkit incomplete and important data gaps unaddressed. The new legislation will introduce loan-to-value ratios and amortization requirements, but will not include debt-to-income and debt-service-to-income ratios, which are important to limit borrower vulnerability to income and interest rate shocks. Most importantly, the new law does not grant supervisors the power to request access to loan-level data, a key pre-requisite for the effective implementation of these macroprudential instruments. To partially overcome data gaps, a regular (at least annual) survey could be conducted in the country’s hotspots to assess households’ leverage, loan affordability, and the concentration of bank exposure.

56. The German banking and life insurance sectors must accelerate their restructuring to shore up profitability and resilience. In the banking sector, while regulatory capital is generally comfortable, cost-to-income and leverage remain high, and restructuring efforts are ongoing. Low profitability reflects structural inefficiencies, persistent crisis legacy issues, provisions for compliance violations, and the need to adjust to the new regulatory environment. Lower and flatter yield curves are compounding these issues by gradually eroding margins, especially in smaller retail banks. In the life insurance sector, low interest rates hurt solvency ratios, and large duration gaps must be reduced through changes in investment strategy and less reliance on guaranteed return products. In this context, recent supervisory attention to interest risk both in banking and insurance is welcome.

57. It is recommended that the next Article IV consultation take place on the regular 12-month cycle.

How Can Germany’s Current Account Gap Be Closed?

While Germany’s external imbalance is expected to remain sizable in the medium-term, rebalancing is possible through a mixture of policy adjustment in Germany and abroad. In Germany, policy levers are available that would promote both internal economic objectives and faster external rebalancing. Specifically, fiscal space could be used to finance higher public investment in infrastructure, as well as initiatives that promote higher labor supply and innovation. These policies would reduce public sector savings as well as stimulate private sector investment, thereby reducing the CA surplus while also lifting potential growth. In addition, pension reforms to encourage longer working lives as life expectancy rises would reduce households’ need to save for retirement, thereby reducing private savings and the CA surplus. Finally, faster wage and price growth would also speed up the rebalancing process.

Using quantitative estimates from the EBA model, as well as staff analysis in past Germany Article IV consultations, the table below shows how the CA surplus could be brought down comfortably within the norm interval.

The adjustment under the baseline together with the elimination of policy gaps in trading partners would result in an estimated reduction of Germany’s surplus of some 1.7 percent of GDP.

In Germany, using the fiscal room available under the rules in the medium-term would have an estimated average effect on the CA surplus of −0.5 percent of GDP. This effect would be reinforced if such room was used primarily for initiatives that also stimulate private investment, such as investing in public infrastructure or pro-innovation policies, given larger external spillovers. In addition, policies that boost labor supply in the future would also strengthen private investment. For instance, additional spending on childcare and afterschool care that encourages women to work longer hours would lower the CA surplus by encouraging private investment even if it was budget neutral.1 Incentivizing female labor force participation through targeted tax relief would have similar effects, as would spending on stepped up vocational training to accelerate refugee job market integration. Finally, staff estimates suggest that pension reforms that achieve a one-year increase in the effective retirement age could reduce the surplus by almost ½ of a percentage point of GDP.2 These reforms would also raise future potential output by mitigating the effect of aging on labor supply and help reduce the fiscal cost of population aging.

While this type of quantification inevitably relies on uncertain model estimates, it nevertheless shows that there are paths to eliminate Germany’s external imbalance in the medium term through policies that also strengthen the country’s economic potential.

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1. See “Macroeconomic Effects of Labor Supply Policies”, Selected Issues, International Monetary Fund, 2016. 2. Ibid.

Annex I. External Sector Report

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Annex II. Risk Assessment Matrix

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Annex III. Public Debt Sustainability Analysis

Public debt is back at pre-crisis levels, and is expected to continue to fall in the medium term owing to projected high primary surpluses and a favorable interest rate-growth differential. The public debt-to-GDP ratio should cross the 60 percent mark by 2020. A negative growth shock represents the largest risk to the debt outlook. Also, the realization of contingent liabilities related to future bank recapitalization needs or worse-than-expected performance of winding-down institutions would push debt up by about 3 percent of GDP. In both cases, gross financing needs would temporarily rise but remain below 14 percent of GDP, and debt would swiftly return to a firm downward path after the shock.

A. Baseline Scenario

1. Macroeconomic assumptions. Real GDP growth is expected at about 1½ percent over the next three years, supported by rising employment, some fiscal stimulus and a still expansionary monetary policy. In the medium run, growth should converge to its potential level, estimated at 1.2 percent per year. Inflation—measured by the GDP deflator—should be 1.4 percent in 2017, and steadily rise thereafter towards 2 percent. Sovereign interest rates remain low and are currently negative up to a seven-year maturity. Thus, average interest rates are expected to continue falling, from 2 percent in 2016 to 1.2 percent in 2022.1

2. Germany’s high level of government debt calls for using the higher scrutiny framework. At 68.3 percent of GDP in end 2016, public gross debt is still above the indicative DSA threshold for high scrutiny of 60 percent of GDP. Debt increased significantly over 2009–10, reaching a peak of 82.5 percent of GDP, reflecting sizable fiscal stimulus, large financial sector support and euro zone crisis-related lending. Since the peak, it has declined gradually on the back of fiscal consolidation and a favorable interest rate-growth differential. Estimated gross financing needs are however already below 15 percent of GDP and should continue to fall through the forecast horizon.

3. Realism of baseline assumptions. The forecasts of macro-fiscal variables affecting debt dynamics have been on the conservative side. The median forecast error for real GDP growth during 2007–15 is −0.11 percent, suggesting that there is slight upward bias in the staff projections, but the forecast bias is in line with other surveillance countries. Similarly, the median forecast error for inflation (GDP deflator) is 0.54 percent, suggesting that the staff overestimated inflation in the past (particularly post-2009). The median forecast bias for the primary balance is relatively large, at 1.16 percent of GDP, among the most conservative for surveillance countries.

4. Cross-country experience suggests that the projected fiscal adjustment is feasible. Both the maximum 3-year adjustment in the cyclically-adjusted primary balance (CAPB) over the projection period (½ percent of GDP) and 3-year average cyclically adjusted primary balance are not ambitious in cross-country comparison. Germany was able to deliver larger fiscal consolidations in the past, notably in 2011 and 2012.

B. Shocks and Stress Tests through the Medium Term

5. Germany’s government debt should remain below 70 percent of GDP under plausible macro-fiscal shocks, while gross financing needs would remain below 14 percent of GDP. Under all considered macro-fiscal stress tests, both the debt-to-GDP ratio and gross financing needs either continue to fall or swiftly return to a downward path after the shock. Temporary shocks to real GDP growth, a combined macro-fiscal shock, or a contingent liability shock would nonetheless drive a temporary increase in debt and/or gross financing needs. Given the historical variability of growth, debt dynamics in Germany is most sensitive to growth shocks.

List of Shocks and Stress Tests2

  • Growth shock Under this scenario, real output growth rates are lower than in the baseline by one standard deviation over 2018–19, i.e. 2.7 percentage points. The assumed decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth) and the interest rate is assumed to increase 25 basis points for every 1 percent of GDP worsening of primary balance. Debt (gross financing needs) would peak at 70 (14) percent of GDP in this case, and converge to 61 (11) percent of GDP by 2022.

  • Primary balance shock. This scenario examines the effect of a dual shock of lower revenues and rise in interest rate, leading to a cumulative 1.4 percent deterioration in the primary balance over 2018–19 (one standard deviation shock to the primary balance). The shock would result in a modest deterioration of debt dynamics.

  • Interest rate shock. This scenario assumes a 400 basis points increase in debt servicing costs throughout the forecast horizon, mimicking the historical maximum interest rate experienced since 2006. The effect on public debt and gross financing needs would also be relatively modest.

  • Additional stress test: Combined macro-fiscal shock. This test combines shocks to growth, the interest rate, and the primary balance; while avoiding double-counting the effects of individual shocks. The impact on debt dynamics is slightly worse than that of a growth shock.

  • Additional stress test: Contingent fiscal shock. This scenario assumes a cumulative 3 percent of GDP (about 90 billion euros) additional support to the financial sector over 2018–19 comprising of additional re-capitalization needs in the banking system (55 billion euros), a call on half of capital shield guarantees (25 billion euros), and worse than expected performance of portfolios of winding-down institutions (10 billion euros). While a sizable shock, the impact on the debt ratio is relatively limited, and a convergence to 60 percent is still achieved in 2021. Gross financing needs would remain comfortably below 15 percent of GDP.

Figure A1.
Figure A1.

Germany: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure A2.
Figure A2.

Germany: Public DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Figure A3.
Figure A3.

Germany: Public DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF Staff.1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Germany, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervationsfrom 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis
Figure A4.
Figure A4.

Germany: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF staff.
Figure A5.
Figure A5.

Germany: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents.4/ Long-term bond spread over German bonds, an average over the last 3 months, 26-Feb-16 through 26-May-16.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Annex IV. Authorities’ Response to Past IMF Policy Recommendations

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Annex V. Long Term Fiscal Sustainability and Fiscal Targets

Aging-related costs will place a large burden on public finances in the longer term. Pension reforms are a priority to address such challenge, and would allow for the future relaxation of Germany’s fiscal targets.

1. Germany’s population is set to age faster than in other European economies, with a high associated fiscal burden. Despite strong immigration over the recent years, dependency ratios are projected to approach 45–50 percent by 2030 and continue to rise thereafter as fertility rates and net immigration are not enough to compensate improvements in longevity. Total age-sensitive expenditures are thus projected to climb up, by ½–3 percent of GDP by 2030 and by 3–6½ p.p. by 2060 (with main upward contributions from pension outlays, 2¼–3½ p.p., and health and long term care expenditures, 1–2¼ p.p.), and continue to increase sharply afterwards.1 Left unaddressed, such rise will place considerable pressure on debt dynamics, particularly after 2030. Recent official estimates2 show that if other expenditures and the revenue ratio stay constant, and depending on long term demographic and macroeconomic assumptions, debt would rise to 75–225 percent of GDP by 2060, with an associated fiscal adjustment need of 1¼–4 percent of GDP.3

2. Addressing the sustainability challenge in a durable and growth-friendly manner will require an increase in effective retirement ages, prolonging working lives. By design, Germany’s social security system is balanced over the medium term through a combination of reductions in replacement rates and increases in contribution rates. Given Germany’s population outlook, however, the necessary adjustment is such that it would considerably add to the already high tax burden on labor and push the pension replacement rate down to a level that would induce significant old-age poverty problems and demand a substantial rise in household saving rates. Both outcomes would be detrimental to growth. Instead, measures which encourage longer working lives, as advised by staff, would bring the double dividend of rebalancing the pension system while reducing the need to save and lifting long term output.4

3. With such policies in place, there would be room for some relaxation of fiscal targets in the future. In the absence of macro-fiscal shocks, a structural balance of −1.5 percent of GDP (1 p.p. below the current MTO) would still be consistent with a declining debt path, but macroeconomic uncertainty justifies a more conservative approach, with the adoption of a minimum fiscal target of −1 percent of GDP (the minimum floor foreseen by the European SGP). This conclusion is derived through model analysis, in which we simulate distributions of the public debt path for various (stylized) structural balance paths and considering a wide range of plausible demand, interest rates, and productivity shocks. The simulations suggest that public debt would continuously fall with very high likelihood when the government runs a permanent structural deficit of up to 1.5 percent of GDP. Furthermore, the overall deficit would be lower than the Maastricht ceiling of 3 percent of GDP under virtually all considered macroeconomic scenarios. However, the probability that debt remains structurally above the SGP debt ceiling of 60 percent of GDP would be non-trivial—higher than 25 (15) percent in the next 8 (12) years—, whereas such probability(ies) would drop to 5 (<1) percent when the structural deficit stays at 1 percent of GDP (Figure B1). Nevertheless, without reforms, retaining the deficit limits currently foreseen in the national debt brake rule—close to that of the current MTO—is appropriate, even if the financial buffer that can be accumulated in this way can only delay (not resolve) the long-term sustainability problem.5

Figure B1.
Figure B1.

Public Debt Dynamics and Fiscal Balance with Macroeconomic Uncertainty, for Alternative Fiscal Targets 1/ 2/

Citation: IMF Staff Country Reports 2017, 192; 10.5089/9781484307908.002.A001

Source: IMF staff calculations.1/ The fan charts show predictive densities of the government debt ratio to GDP for four different assumptions regarding the structural balance path, calculated using the IMF’s general equilibrium Global Integrated Monetary and Fiscal Model, and considering a range of shocks – demand/interest rate shocks are calibrated to match the historical volatility of the German output gap (about 1.5 percent), while productivity shocks are meant to allow for growth projection errors of up to ½-¾ percentage points. The overall balance chart shows the maximum and minimum simulated value of the balance ratio to GDP (without assigning a probability).2/ The simulations allow for a feedback effect from fiscal policy (macro-stabilization through automatic stabilizers or changes to the structural balance) to GDP and other macroeconomic variables. However, it is assumed that looser fiscal positions have no significant impact on potential output (the additional spending is unproductive). The obtained debt paths are therefore conservative, and would show a steeper decline if the additional fiscal room were used to implement growth enhancing policies (such as public investment or a permanent reduction in the tax burden).

4. Eventually, ensuring long-term fiscal sustainability will require a combination of reform efforts and retaining fiscal targets which are consistent with a declining public debt with high probability. Staff analysis suggests that a one-year increase in the effective retirement age (with no accompanying increase in the annual benefit accrual) would yield a 0.7 p.p. in pension savings.6 Thus, to fully close the estimated pension gap, the average retirement age would have to rise by 3 to 5 years up to 2060, beyond the already programed rise to age 67 by 2030, an objective which may be difficult to meet. Furthermore, although there may be scope for further reforming the health care system with a view to curbing the (inevitable) rise of health and long-term care spending, several reforms have already been implemented in the past, limiting the scope for easy savings going forward.

Annex VI. Authorities’ Response to FSAP 2016 Recommendations

Germany: FSAP Key Recommendations 1/

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Includes only recommendations to German authorities.
1

This unemployment figure is based on the European Labor Force Survey and differs from that based on the national definition (see Table 1).

2

Analysis of a rich cross-country dataset of large European non-financial firms’ financial statements over the 2006–2014 period shows that the return on assets of large German-owned manufacturing firms producing abroad has systematically exceeded that of German firms producing in Germany (see “The Profitability of German Firms: Location versus Ownership”, Selected Issues Paper, International Monetary Fund, 2017).

3

See “Wage and Inflation Dynamics in Germany and Implications for European Recovery and Rebalancing”, Selected Issues Paper, International Monetary Fund, 2017.

4

Fourth Report on the Sustainability of Public Finances, German Federal Ministry of Finance, 2016.

5

See “Macroeconomic Effects of Labor Supply Policies”, Selected Issues, International Monetary Fund, 2016.

6

See “Income Distribution and Labor Market Developments in Germany”, Selected Issues Paper, International Monetary Fund, 2017.

7

Individuals are defined to be at risk of poverty if their disposable income is below 60 percent of median disposable income.

8

Hijzen, A. and P. N. Gal. “The Short-Term Impact of Product Market Reforms: A Cross-Country Firm-Level Analysis”, IMF WP 16/116, International Monetary Fund, 2016.

9

See “Services Sector Performance and Product Market Regulation” in IMF Country Report No. 14/217.

10

In general, fostering young and innovate companies helps boost economic growth, but entrepreneurs frequently face financing barriers due to information asymmetries and the lack of collaterals, justifying public policy intervention in seed and early-stage financing (Wilson, K. E., "Policy Lessons from Financing Innovative Firms", OECD Science, Technology and Industry Policy Papers, No. 24, OECD Publishing, Paris, 2015).

11

See Annex VI on progress in the implementation of other FSAP key recommendations.

12

See Financial Stability Review, Deutsche Bundesbank, November 2016.

13

Marktausblick zur Lebenversicherung, 2016/17, Assekurata, June 2016.

14

EIOPA Insurance Stress Test Report, EIOPA, November 2016.

15

Domanski et al., “The Hunt for Duration: Not Waving but Drowning?”, BIS Working Paper, October 2015.

1

The interest rate on new borrowing is derived from forecasts of the real interest rate and inflation, and it does not necessarily match market-based interest rate forecasts. Using market-based forecasts would make little difference to the debt sustainability analysis.

2

Given that virtually all outstanding sovereign debt is denominated in euros, the standard scenario of a real exchange rate shock would not have a relevant effect on German government debt and is therefore not discussed.

1

Fourth Report on the Sustainability of Public Finances, German Federal Ministry of Finance, 2016.

2

Ibid.

3

The adjustment need is calculated as the necessary increase in the primary balance now to compensate for the prospective rise in aging-related costs up to 2060.

4

See “Macroeconomic Effects of Labor Supply Policies”, Selected Issues, International Monetary Fund, 2016.

5

The SGP’s 60 percent ceiling to the public debt ratio to GDP is taken as given in this analysis.

6

To achieve similar savings with an increase in payroll-related taxes or social security contributions (SSC), a 1.4 percentage point increase in the tax/SSC rate would be necessary.

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Cover IMF Staff Country Reports
Germany: 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Germany
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2017: Issue 192
Publisher:
International Monetary Fund
ISBN:
9781484307908
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781484307908.002
Figure 1.

Germany: Growth Developments
Figure 2.

Germany: Prices and Labor Market
Figure 3.

Germany: Balance of Payments
Figure 4.

Germany: Fiscal Developments and Outlook
Figure 5.

Germany: Credit Conditions and Asset Prices
Figure 6.

Germany: Recent Developments in the German Banking Sector
Figure 7.

Inflation Dynamics in Germany and the Rest of the Euro Area (REA)

Over-performance: Actual Fiscal Balance less Stability Program Projections

(Pecent of GDP)

Germany: General Government Debt Dynamics Under Stochastic Macroeconomic Scenarios 1/

Tax Revenue Forecast Bias, 2011–2016 1/
Figure 8.

Germany: Inequality and Poverty

Flow of New Asylum Seeker Applications
Figure 9.

Germany: Product Market Competition, Innovation and Digitalization

Housing Market Valuation Indices

(Index, 1991=100)

Real House Prices International Comparison

(Index, 1991Q1=100)

Germany: Change in ROA Components 1/

(Percentage points, Post-crisis minus boom period)
Figure A1.

Germany: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure A2.

Germany: Public DSA—Composition of Public Debt and Alternative Scenarios
Figure A3.

Germany: Public DSA—Realism of Baseline Assumptions
Figure A4.

Germany: Public DSA—Stress Tests
Figure A5.

Germany: Public DSA Risk Assessment
Figure B1.

Public Debt Dynamics and Fiscal Balance with Macroeconomic Uncertainty, for Alternative Fiscal Targets 1/ 2/