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IMF Country Report No. 19/213

GERMANY

2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR GERMANY

July 2019

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2019 Article IV consultation with Germany, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its July 8, 2019 consideration of the staff report that concluded the Article IV consultation with Germany.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 8, 2019, following discussions that ended on May 17, 2019, with the officials of Germany on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 20, 2019.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for Germany.

The document listed below have been or will be separately released.

  • Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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PO Box 92780 • Washington, D.C. 20090

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2019 International Monetary Fund

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GERMANY

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

June 20, 2019

Key Issues

Germany’s economic performance has been strong for the past decade, but external factors and structural challenges are now weighing on growth. The export-dependent economy has been hit by the recent slowdown in global demand, while medium-term growth is expected to fall due to low productivity growth and adverse demographics. External imbalances remain large, partly reflecting rising top income inequality, macro-financial vulnerabilities are rising, and the financial sector continues to suffer from weak profitability. Still, fundamentals are sound, with public and private balance sheets remaining healthy, and the unemployment rate at record lows. Inflation is subdued, but wage growth is continuing to pick up, reflecting the strength of the labor market and increasingly binding capacity constraints.

Key Policy Recommendations

  • Continue to use the space within the fiscal rules to bolster long-term growth and help rebalance the economy. Priorities include incentivizing labor supply (reduce the tax wedge on low-income households and secondary earners, provide more childcare, improve education and lifelong learning) and innovation (through R&D tax credits and high-speed digital networks), and continuing to invest in public infrastructure.

  • Encourage strong wage growth, as warranted by the tight labor market, to help realign competitiveness in the absence of an independent currency and to support household purchasing power.

  • Speed up structural reforms to promote innovation and productivity growth by cutting administrative red tape (e-government), reducing policy uncertainty around the energy transition, and supporting the expansion of venture capital.

  • Continue to press the banking sector to accelerate restructuring plans to bolster profitability and reduce risks.

  • Expand the macroprudential toolkit and urgently address data gaps to allow for a fuller assessment of financial stability risks.

Approved By

Enrica Detragiache (EUR) and Tamim Bayoumi (SPR)

Discussions took place in Berlin, Bonn, Frankfurt, Munich, and Nuremberg during May 7–17. The staff team comprised Ms. Detragiache (head), Mses. Chen, Dao, Mineshima, Mr. Natal (all EUR), Ms. Perry, Messrs. Klemm and Hebous (all FAD) and Ms. Fernando (LEG) attended selected meetings. Ms. Ordonez-Baric and Mr. Musayev (all EUR) assisted from headquarters. The preparation of the staff report was led by Ms. Kozack. Mr. Thompson joined part of the mission. Messrs. Meyer and Buetzer (OED) participated in the discussions. The mission met with State Secretary of the Federal Ministry of Finance Schmidt, Bundesbank President Weidmann, officials from the Federal Chancellor’s office, the Finance, Economic Affairs, Interior, Labor, and Environment Ministries, the Bundesbank, the ECB (SSM), BaFin, the Federal Office for Migration and Refugees, representatives from the automotive industry, social partners, banks, think tanks, and academics.

Contents

  • CONTEXT

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Addressing External Imbalances by Restoring Household Purchasing Power

  • B. Fiscal Policy to Boost Potential Growth and Support Rebalancing

  • C. Boosting Productivity Growth and Private Investment

  • D. Shoring up Financial-Sector Profitability while Preventing Buildup of Financial Risks

  • E. Tackling the Supply-Side of Corruption

  • STAFF APPRAISAL

  • BOXES

  • 1. Corporate Saving, Top Income and Wealth Inequality, and External Imbalances

  • 2. The Impact of Potential US Auto Tariffs on Germany

  • FIGURES

  • 1. Evolution of Unemployment and Stagnation of Lower Incomes

  • 2. Bank Credit to the Nonfinancial Sector

  • 3. Evolution and Distribution of Real Income

  • 4. Fiscal Positions at Länder Level

  • 5. Labor Productivity Growth

  • 6. Supply-Side Constraints

  • 7. Residential and Commercial Real Estate Indicators

  • 8. German Banks’ Risk Provisioning and Tier 1 Capital Ratio

  • 9. Change in LTV for New Mortgage Loans

  • 10. Growth Developments

  • 11. Prices and Labor Market

  • 12. Balance of Payments

  • 13. Fiscal Developments and Outlook

  • 14. Credit Conditions and Asset Prices

  • 15. Recent Developments in the German Banking Sector

  • 16. Housing Market Developments

  • 17. Product Market Competition, Innovation, and Digitalization

  • TABLES

  • 1. Selected Economic Indicators, 2016–20

  • 2. General Government Operations, 2016–24

  • 3. Medium Term Projections, 2016–24

  • 4. Balance of Payments, 2016–24

  • 5. International Investment Position, 2010–18

  • 6. Core Financial Soundness Indicators for Banks, 2013–18

  • 7. Additional Financial Soundness Indicators, 2013–18

  • ANNEXES

  • I. External Sector Assessment

  • II. Risk Assessment Matrix

  • III. Public Debt Sustainability Analysis

  • IV. Authorities’ Response to Past IMF Policy Recommendations

  • V. Authorities’ Response to FSAP 2016 Recommendations

  • VI. Regional Fiscal Differences and Implications for Public Investment

  • VII. Business Investment in Germany

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GERMANY

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

June 20, 2019

Prepared By

European Department

Contents

  • FUND RELATIONS

  • STATISTICAL ISSUES

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Press Release No. 19/270

FOR IMMEDIATE RELEASE

July 9, 2019

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