IMF Wraps 2024 Article IV Consultation With Germany

Washington, DC: On July 15, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Germany.

The German economy has begun to recover from the energy-price shock. High energy prices arising from the shut-off of Russian gas contributed to surging inflation during 2022–23, which in turn weighed on economic activity. The impact of this shock was, however, greatly mitigated by a strong policy response, including the provision of income support while preserving incentives to conserve energy. Conservation efforts, together with steps to secure new energy supplies, have helped return wholesale gas prices to more normal levels. Lower energy prices have in turn, together with monetary tightening, spurred rapid disinflation. Real wages are now growing, and the economy expanded in the first quarter of 2024.

Gradual economic recovery is expected to continue this year. With wage growth now exceeding inflation, private consumption is expected to drive recovery during 2024. A return to growth is, in turn, expected to reinforce confidence, which, alongside a gradual easing of monetary policy, should further bolster consumption and investment next year. Inflation is expected to slowly ease further as lower energy prices continue to pass through to retail prices, with core inflation remaining somewhat above headline inflation due to robust wage growth. Over the medium term, however, rapid population aging is expected to slow GDP growth to below 1 percent, absent significant increases in productivity or much higher-than-expected immigration. Rapid population aging is also expected to significantly increase pension and healthcare costs.

Risks to the outlook are broadly balanced.Upside risks include the possibility that positive economic news could spur a faster-than-expected recovery in consumption and investment. Key downside risks include the potential for accelerating geoeconomic fragmentation, worsening global conflicts, and intensifying stress in global commercial real estate (CRE) markets. Uncertainty about the pace of disinflation poses risks in both directions.

Executive Board Assessment[2]

Executive Directors commended the authorities for their strong economic fundamentals and policy response to the energy-price shock, which greatly mitigated its impact. Directors welcomed the gradual economic recovery underway, with broadly balanced risks, and the decline of inflation toward target levels. Noting persistent structural challenges, they encouraged additional reforms to strengthen potential growth by boosting investment, productivity, and labor supply.

Directors commended the authorities' plans to fully use the flexibility provided within the fiscal rules to avoid an overly tight fiscal stance in the near term. Welcoming increased public investment in recent years, they emphasized that further increases are needed to help upgrade infrastructure in transport, energy, communications, and other critical areas. Higher public investment would also help with external rebalancing, raise productivity and potential growth, and support the green and digital transitions.

To accommodate this investment and given rising spending pressures related to aging and defense, Directors noted that further fiscal room could be generated by pension reforms, reducing environmentally harmful subsidies, and other revenue and expenditure measures. Improving public investment execution is also needed.

Noting that the debt brake has served Germany well, most Directors concurred that a moderate easing could create additional fiscal room without endangering debt sustainability. However, some Directors noted that the debt brake rule is constitutionally binding and any changes need to be carefully considered.

To further boost potential growth, Directors urged the authorities to continue efforts to cut red tape, promote digitalization and innovation, and deepen the European single market, including by progressing towards a Capital Markets Union. They also encouraged continued efforts to strengthen labor supply, including by enhancing the integration of immigrants and further promoting women's full-time labor market participation. In that context, they welcomed ongoing efforts to expand access to childcare and eldercare services and reduce the effective marginal tax rate on second earners.

Directors positively noted that Germany's banking and insurance systems remain resilient, with strong capital and liquidity positions. However, they encouraged continued vigilance in monitoring and addressing the elevated risks in banks' commercial real estate exposures. Directors welcomed efforts to strengthen the AML/CFT framework, including by establishing a new federal financial crime agency and improving data quality in the beneficial ownership transparency registry. They encouraged continued progress in implementing the 2022 FSAP recommendations.

Directors commended Germany for its leading role in the climate agenda and welcomed recent measures to streamline approval processes for solar and onshore wind projects. They underscored that additional efforts are needed to meet Germany's ambitious climate targets, including in the deployment of renewable power.

Directors commended the authorities for Germany's leadership in multilateral cooperation and strong support for free trade policies and the multilateral rules-based trading system. They looked forward to its continued leadership in addressing global challenges.