IMF: Germany is an engine of growth in the euro area

The International Monetary Fund (IMF) perceives Germany to be an "engine of growth in the euro area". Upon concluding this year's Article IV consultation with Germany, IMF experts primarily attributed this to robust domestic demand and increasing employment.

The IMF performs annual consultations to review the fiscal and economic policies of its member states. The legal basis for this is set out in Article IV of the IMF's Articles of Agreement. 

Take advantage of fiscal leeway

In the medium to long term, however, the IMF also foresees risks –  for example, anti-globalisation trends worldwide could harm Germany's growth prospects. Moreover, it believes insufficient reform efforts in the euro area and demographic change pose a threat to long-term growth.

IMF experts took a critical view of Germany's large current account surplus, which declined only slightly from 8.6% in 2015 to 8.3% in 2016. The IMF Executive Board recommended that greater use be made of the available leeway in the fiscal rules in order to reduce the surplus, allowing Germany to expand its investment in infrastructure projects and overcome administrative hurdles, particularly in the area of public investment. The IMF also proposed widening the provision of childcare services, promoting refugee integration and reducing labour taxation.

In the light of demographic change, the IMF proposed that the effective retirement age be raised in order to increase potential growth, reduce the need to save for retirement and ultimately reduce the current account surplus, too.

Rise in wage and price inflation

IMF experts anticipate growth of 1.8% this year and 1.6% in 2018, citing the principal driving forces behind private consumption as the increasing employment level and the accommodative monetary policy in the euro area at present. However, they also believe that increasing energy costs are set to curb consumption growth. A rise in wage and price inflation in Germany would help lift inflation in the euro area as a whole, which, according to the IMF Executive Board, could facilitate the normalisation of monetary policy.

Furthermore, the IMF determined that income inequality in Germany had remained stable. Experts attributed this to employment gains and a well-developed redistributive system. Yet at the same time, the IMF warned of an increasing relative poverty risk. It recommended continuing to keep a close eye on reform measures, and urged that the achievements of past labour market reforms be maintained.

Despite rapidly increasing prices, the IMF Executive Board judged that housing prices remained affordable in the aggregate. However, growing regional price differences and some hot spots warranted close monitoring. The Board welcomed the introduction of additional macroprudential instruments for the real estate market and encouraged a further expansion of intervention options for public authorities.

Article IV consultations

Germany's IMF rights and duties are fulfilled jointly by the Bundesbank and the Federal Ministry of Finance. It cooperates with the IMF in its surveillance of German economic and fiscal policy in the context of Article IV consultations. At the end of the consultation process, the Article IV report is discussed by the IMF Executive Board.