Germany: Staff Report for the 2017 Article IV Consultation
Author: International Monetary Fund. European Dept.
Publication Date:
07 Jul 2017
eISBN:
9781484307908
ISBN:
9781484307908
Language:
English
Keywords:
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.