World Economy

German Growth Forecast Raised

IMF warns that Germany’s aging population and Berlin’s slow progress on structural reforms would dampen growth in the medium term
Germany should invest more in public infrastructure, where investment has declined, as better infrastructure would encourage  more private investment.Germany should invest more in public infrastructure, where investment has declined, as better infrastructure would encourage  more private investment.

The International Monetary Fund raised its growth forecast for Germany, citing soaring domestic demand and rebounding exports, and it repeated its call for Berlin to increase investment and reduce its current account surplus.

The IMF now expects Europe’s largest economy to grow by 1.8% in 2017 in real terms, compared with its April forecast of 1.6%, and by 1.6% in 2018, up from 1.5%, Reuters reported.

“Germany’s growth momentum has remained solid, underpinned by robust domestic demand,” the IMF said, pointing to rising employment, increased state spending and the European Central Bank’s continued monetary stimulus.

But it also noted that the ECB’s ultra-loose policy was partly to blame for weak profitability in the banking sector. “Low interest rates, if prolonged, would also negatively affect life insurers given their extensive reliance on guaranteed products,” it said.

The IMF predicted German exports growth would gradually recover after shipments abroad slowed last year and said this would push up business investment and imports.

German wage growth has stayed stable and core inflation steady at about 1% despite record low unemployment, high job vacancy rates and rising capacity utilization, it said.

Germany’s large current account surplus shrunk slightly, to 8.3% of gross domestic product in 2016 from 8.6% in 2015, mainly due to the deterioration of the income and services balance, the IMF said.

It warned that Germany’s aging population and Berlin’s slow progress on structural reforms would dampen growth in the medium term, and urged the government to boost potential growth and speed up external rebalancing to help rein in the current account surplus.

“To this end, directors recommended using leeway available within the fiscal rules to further expand public investment in infrastructure, widen the provision of childcare services, foster refugee integration, and reduce the tax burden on labor.”

The IMF welcomed signs from German politicians that further reform measures are being mulled. Heading toward a federal election on Sept. 24, Chancellor Angela Merkel’s conservatives and their rival Social Democrats both have promised to lower income tax for the middle class and increase investment on digital infrastructure.

A large current account surplus can be evidence that a country is investing abroad instead of at home. This might be because the country is not very attractive to investors. In the long run, this translates into lower growth. "This is why we suggest that Germany invest more, for example, in public infrastructure, where investment has declined. Better infrastructure would encourage more private investment, too," the IMF said.

Retire Later

The IMF has a message for Germans: Retire later. The European and global economies need you to work longer.

As the baby boom retirement bubble has grown, many countries have been pushing back the age at which workers can start collecting public pensions. Germany went the other way.

Chancellor Angela Merkel, in a move that was popular with voters but criticized by some economists, lowered the age at which many Germans can retire to 63 in 2014, according to the European Observatory of Working Life.

The German Council of Economic Experts forecast at the time that the change would cost Germany an extra €10 billion ($11.4 billion) per year.

On Friday, the IMF, which aims to ensure global monetary stability, called on Germany to raise its retirement age. The agency did not propose an age.

The IMF argument goes like this: A pension reform encouraging people to retire later in life would reduce the need to save for retirement, encouraging consumption and thus reducing the surplus. This reform would also limit the effects of aging on employment and growth.

These policies would be good both for Germany and for the rest of the world.

Gathering Steam

Germany will remain the economic power center of Europe, but the next government should go beyond just managing a recovery, according to a forecast by Handelsblatt's Research Institute.

Shortly before the national election, the German economy is in better shape than it has been in a long time. The Ifo business climate index is at an all-time high, and consumer sentiment is excellent, according to the report. In view of record employment of more than 44 million people, income expectations are particularly high.

According to the forecast, the German economy will continue to grow, at least until the end of 2018. If that happens, it will be one of the longest recoveries in German postwar history.

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