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IMF Survey: Germany Charts a Steady Course

A yacht sails on Lake Constance: The German economy is set for steady growth in 2015 and 2016 (photo: Felix Kästle/dpa/Corbis)

A yacht sails on Lake Constance: The German economy is set for steady growth in 2015 and 2016 (photo: Felix Kästle/dpa/Corbis)


Germany Charts a Steady Course

IMF Survey

July 15, 2015

  • Cheaper energy prices and a weaker euro fueling growth after mid-2014 blip
  • Government budget surplus providing opportunities to increase needed public investment
  • Full-time employment by more women, and greater competition in the services sector needed to boost growth

The economic outlook appears promising for Germany, which is reaping the benefits of euro depreciation and lower energy prices, according to the latest IMF economic assessment for the country.

Europe’s biggest economy is expected to grow by 1.6 percent this year and 1.7 percent next year. “Boosting public investment, women’s employment, and competition in the services sector now would help face the challenges that loom further ahead,” said Enrica Detragiache, IMF mission chief for Germany.

In the annual review of the German economy, the IMF noted that following an unexpected slowdown in mid 2014, GDP picked up in the last quarter of the year. Higher real wages lifted real disposable income and domestic demand, while a weaker euro helped strengthen exports despite slipping growth in emerging markets. Furthermore the labor market remained strong.

“There is a moderate expansion under way in Germany but possible risks coming from the external environment should not be underestimated,” Detragiache said.

Current account surplus growing

Germany’s current account surplus reached 7.6 percent of GDP last year. It was the largest in the world in U.S. dollar terms, and will likely grow further this year.

To accompany the main report, the IMF has published a “Selected Issues” paper that examines Germany’s sustained current account surplus. In an international and historical context, a key feature of the ongoing current account surplus is the weak domestic demand, particularly private investment, that accompanies it.

The report also investigates what higher wages in Germany could mean domestically and for the euro area. It concludes that higher wages could help raise GDP and generate positive benefits regionally when they are brought about by an expansion in consumption or investment.

Larger doses of public investment needed

Authorities plan a balanced budget at federal level until 2017 and beyond, and small surpluses for the general government. Public debt is on track to fall below 60 percent of GDP by 2020, according to the report.

The German government has stepped up plans to increase public investment, including a fund to help municipalities with less financial firepower. Further investments will be made in public transport, digital infrastructure and energy efficiency. While these are welcome, Germany’s overall public investment plans fall short of the 2 percent increase over four years that IMF staff had recommended in last year’s annual report. New institutions could enable better planning and coordination of public investment at the local level.

Women and services sector reform can boost potential growth

Germany’s population is one of the fastest aging in the world, despite recent record immigration. According to government projections, the working-age population (aged 15-64) is expected to drop 14 percent by 2040 in the baseline scenario. Potential growth is set to be increasingly burdened by this demographic change from 2020 onwards, and the cost of associated pensions and healthcare is also set to rise.

Women could help make up the growth shortfall. More than 70 percent of women work in Germany, but as many as half do so part time, in part because of a combination of limited public childcare options and tax disincentives. If women worked the same average hours as men, potential output would increase by as much as 7.5 percent, the report says.

Labor productivity growth in the services sector remains low, particularly in business services. Barriers to competition have been documented by the Organisation for Economic Cooperation and Development and the German Monopolies Commission in several large sub-sectors, and their removal would stimulate productivity and potential growth. Germany’s leadership in this area would also likely help catalyze similar reforms in other European Union members.

Risks ahead

Unusually for a large economy, Germany is very open, with an exports-to-GDP ratio over 45 percent. This makes it highly sensitive to economic developments abroad. Economic activity would be hurt if financial stress in the euro area returns or China experiences a deeper-than-expected slowdown.

Further uncertainties exist concerning oil and gas prices. Germany’s heavy dependence (30 percent) on oil and gas imports from Russia means it is vulnerable to any expansion of trade sanctions against that country.

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