The FINANCIAL — On June 29, 2018, the Executive Board of the International Monetary Fund concluded the Article IV consultation with Germany.
Germany’s economic performance was strong in 2017, underpinned by solid domestic demand and a rebound in exports in the second half of the year. Despite a slowdown in public consumption due to the stabilization of refugee-related expenditures, real GDP grew by 2.5 percent. Already-high capacity utilization continued to rise and the labor market tightened further putting incremental pressure on wages. Reflecting this, headline and core inflation reached 1.5 percent at the end of 2017. The general government surplus reached 1.2 percent of GDP, the highest level since reunification, but the fiscal stance remained broadly neutral. The current account surplus declined to 8 percent in 2017, from 8.5 percent in 2016, as both the trade and income balances deteriorated, according to IMF.
The financial system was characterized by moderate credit growth and weak profitability. Total credit accelerated in 2017, as households and firms took advantage of the low interest rate environment, but it remained broadly in line with nominal GDP growth. Against the backdrop of continued urbanization, an inelastic housing supply, and easy financing conditions, house prices accelerated further in dynamic urban areas. In the banking sector, regulatory capital remained adequate, but profitability continued to be weak, reflecting structural factors, some crisis legacies, and the low interest rate environment. Some banks remain under close supervisory scrutiny. The low interest rate environment also forced some restructuring in the life insurance sector where profitability remains an issue due to the extensive reliance on guaranteed products.
The outlook is for the expansion to continue in the near term but slow markedly over the medium to long term, reflecting unfavorable demographics and productivity trends. Short-term risks are substantial, as a significant rise in global protectionism, a hard Brexit, or a reassessment of sovereign risk in the euro area, leading to renewed financial stress, could affect Germany’s exports and investment.
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