Germany: 2022 IMF Article IV Staff Report (original) (raw)

The fallout from the war in Ukraine has hit the German economy before it regained its pre-pandemic GDP level, with effects running through higher energy costs, the possibility of gas shortages and broader supply disruptions, and weaker confidence. Consumer price inflation has spiked above 8 percent, largely because of energy price increases, but inflation pressures are becoming more widespread. Growth is projected to slow to about 1.5 percent in 2022, mostly reflecting significant headwinds from the war. The recovery should pick up modestly in 2023 if energy supplies are secured, supply bottlenecks dissipate, and disruptive COVID-19 infection waves are avoided. Risks are to the downside, especially from a potential further cut-off of Russia’s natural gas exports. The authorities’ policy response to the pandemic and war spillovers has been timely and generally well-designed. Staff’s main policy recommendations are as follows: > Fiscal policy. The broadly neutral fiscal stance in 2022 is appropriate under the baseline forecast. The government’s plan to tighten policy and return to the debt brake rule in 2023 should be manageable under the baseline assumptions of waning drags from the pandemic and energy prices. If downside risks materialize, however, the government should allow automatic stabilizers to operate fully and continue to flexibly provide targeted support, and if needed consider activating the escape clause of the debt break rule for another year. Looking ahead, Germany needs to invest in its own productive potential and resiliency through enhancing energy security, digitalization, life-long learning, innovation, labor supply, and social protection. Higher investment can also help lower Germany’s large external imbalances. Structural increases in spending for strategic priorities should be integrated into the core budget over time, which may require a review of the fiscal framework, including expenditure and revenue policies, and the fiscal rule. > Contingency planning for a gas shutoff scenario. Staff’s analysis suggests that a full and permanent Europe-wide shutoff could lower annual German GDP by 1–3 percent in 2022, 2023, and 2024, which would not be recovered later, and could raise inflation by about 2 percentage points on average. A cold winter, economic frictions, and inefficient rationing could increase these losses. Cooperation with other EU countries to prepare contingency plans for possible gas shortages is key. The authorities should clarify infrastructure needs and potential rationing plans in various cut-off scenarios, to encourage further preparation and investment. Most of the existing measures to help vulnerable households and firms cope with spiking energy costs and potential gas shortages are generally well-designed. However, tax cuts on fossil fuels and subsidies for firms’ energy bills reduce incentives to conserve energy at a critical time, and should be phased out as planned; other support facilities for firms need clear termination dates. > Public investment and structural reforms. Germany needs to boost public investment in energy security and decarbonization; digitalization; and transportation infrastructure. The authorities should rapidly and decisively overcome the long-standing obstacles to ramping up public investment—burdensome administrative procedures, legal hurdles, limited planning capacity, labor and material shortages, and imperfect coordination across different levels of government. Structural reforms should focus on boosting labor supply, skills, and business dynamism. > Financial stability. The 2022 FSAP assesses the German banking sector generally resilient to shocks, but points to pockets of vulnerability and downside risks that require close monitoring and call for some additional buffers for less capitalized banks. Given continued rapid house price gains, the recently activated capital-based measures should be supplemented with borrower-based measures, such as supervisory guidance on a loan-to-value cap. The authorities are also urged to accelerate the closure of data gaps, strengthen guidance on lending standards and add income-based measures to their macroprudential toolkit. The authorities should also consolidate the existing mandatory deposit insurance schemes into a single scheme with a government liquidity backstop.