The International Monetary Fund (IMF) expects Germany's pace of growth to remain steady, with private consumption set to be the chief driving force behind growth. Upon concluding what is known as an Article IV consultation with Germany, the IMF explained that fiscal expansion, the recent monetary stimulus and ever favourable energy prices should continue to offset the weakness in key trading partners.

Working together with member countries, the IMF performs annual consultations to review these countries' fiscal and economic policies. The legal basis for this is set out in Article IV of the IMF's Articles of Agreement.

Domestic consumption supporting growth

The IMF's Executive Board welcomed the increased contribution to German economic growth from domestic demand, which was supported by lower energy prices, rising wages, declining unemployment and accommodative fiscal and monetary policies. Furthermore, it stated that these developments would also continue to underpin growth in the period ahead.

Directors cited Germany's current account surplus, an aging population and refugee inflows as factors that posed challenges. Against this backdrop, the IMF recommended that Germany strengthen its potential growth and reduce its current account surplus. To this end, to the extent that there are fiscal resources available, Germany should boost investment and initiate growth-enhancing reforms. The IMF Executive Board emphasised that faster progress was essential, particularly on structural reform. It called for measures to promote the labour force participation of women, older workers and immigrants, as well as a reform of the taxation, pension and health systems.

According to the IMF's projections, German gross domestic product will grow in real terms by 1.7% this year and 1.5% in 2017. Moreover, IMF economists anticipate a small positive output gap for 2016, which, together with the effects of recent Eurosystem monetary policy measures, should push up both core and headline inflation. In the medium term, the IMF also forecasts a rise in inflation to just under 2%, which is also in line with the European Central Bank's definition of price stability.

However, the economists emphasised that this forecast does not yet reflect the economic impact of the United Kingdom's pending exit from the European Union. The IMF therefore announced when the report was unveiled that it was considering revising Germany's economic forecast downwards.

Resilient financial system, but credit institutions under pressure

IMF economists assessed the stability of the German financial system in a separate report. The IMF painted a picture of a well-established German financial system that, despite the existence of vulnerabilities, is both stable and resilient overall. Despite banks having a sound capital base, the IMF believes that the banking sector faces a series of challenges that could lead to reduced profitability, including the low interest rate level, high operating costs and new regulatory requirements. According to IMF economists, these developments require credit institutions to make changes to their business models. Additionally, they recommended closely observing property price developments and lending.

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 Article IV consultation process, the report's analyses and economic policy recommendations are discussed by the IMF Executive Board.