The International Monetary Fund (IMF) reports that the German economy can look forward to the expansion continuing in the near term, but warns in its Article IV Consultation that external imbalances could cloud the upbeat outlook over the medium term. In these annual consultations, the IMF reviews the fiscal and economic policies of its member states on the basis of Article IV of the IMF’s Articles of Agreement.

In the near term, the IMF expects domestic demand in Germany to be solid amid a tight labour market and accelerating wages. The IMF’s Executive Board warns that the outlook is for the expansion to slow over the medium term, reflecting unfavourable demographics and productivity trends. A significant rise in global protectionism and a hard Brexit are two of the headwinds cited by the IMF’s staff team.

Expand public investment

In the IMF’s view, the positive near-term economic outlook provides an opportunity for Germany to address its long-term challenges. It recommends bolstering potential growth by further expanding public investment and prioritising measures that incentivise labour supply and help improve the environment for private investment. “Such measures would bolster productivity growth, further lift long-term output, and reduce Germany’s large current account surplus,” the IMF’s press release explains.

The IMF’s Executive Board urges Germany to use its available fiscal space to further raise public investment and implement individual structural reforms. These include expanding childcare, reforming the tax system, and providing additional funding for primary education and life-long learning. A number of IMF Directors, however, emphasise a need to maintain strong buffers for potential economic risks and upcoming demographic challenges.

Real estate market: address data gaps

Another topic covered by the IMF’s annual review is Germany’s real estate market. The accelerating house prices, above all in urban areas, deserve close monitoring, the IMF notes, and it also faults the lack of granular data at the city level, which prevents a full assessment of developments in the real estate market. In this context, the IMF recommends strengthening the macroprudential toolkit and urgently addressing data gaps.

Turning to Germany’s banking sector, the IMF’s staff team criticise the sector’s weak profitability, which they put down to structural factors, some crisis legacies, and the current low-interest-rate environment. “Restructuring efforts must be accelerated to durably strengthen [banks’] resilience and reduce risks,” the IMF writes.

Article IV consultations

The Bundesbank exercises Germany’s IMF rights and responsibilities in conjunction with the country’s Federal Ministry of Finance. It cooperates with the IMF in the latter’s surveillance of German economic and fiscal policy in the context of the annual Article IV consultations. The consultation process culminates in an assessment of the Article IV report by the IMF’s Executive Board.