Germany's economy will expand by a robust 3.2 percent this year but its medium-term growth prospects are poor unless it implements structural reforms, the International Monetary Fund said on Tuesday. The IMF said Germany should stimulate domestic demand to become less dependent on exports and ensure higher, steady growth rates, while providing impetus for other economies.
"Germany has recovered all the employment and output losses from the global financial crisis and it is now in a position that most advanced countries can only dream about," Juha Kahkonen, deputy director of the IMF's European Department, told reporters after presenting an annual report on Europe's biggest economy.
"Yet all is not well going forward. The current high growth rate masks the fact that potential growth in the medium term remains ... still at about 1.25 percent - Germany can do better." Strong exports helped Germany recover swiftly in 2009 from its deepest post-war recession, outpacing eurozone peers. Domestic demand is now also contributing more to growth, driven by business investment and bolstered by a robust labour market.
But the IMF said this was not enough and now that the economy was back at pre-crisis levels, growth would slow to 2 percent in 2012, with fiscal consolidation measures and slowing global trade growth putting the brakes on expansion.
In the report, a conclusive summary of a review known as an Article IV consultation, the IMF underscored "the importance of structural measures targeting labour, capital and productivity to raise medium-term potential growth and domestic demand". It suggested tax reforms to promote labour market participation among women and the elderly and corporate tax relief to stimulate investment as possible policy measures needed.
"The government's fiscal consolidation path, while appropriate, needs to allow room for consolidating growth," the IMF said, noting it was not in favour of general tax relief. Leaders of Chancellor Angela Merkel's ruling coalition reached a political agreement last week to cut taxes from 2013 although polls show that Germans are overwhelmingly opposed to cuts and want the government to focus instead on cutting debt. While higher commodity prices would temporarily lift German headline inflation to 2.5 percent in 2011 from 1.2 percent in 2010, the IMF said, core inflation would rise "only moderately".
The direct impact of the debt crisis in Greece, Ireland and Portugal on the German economy via its banks' exposure was small, the IMF's Kahkonen said. "For other countries, depending on what kind of contagion ... the impact could be larger, but I don't want to speculate," he added. Generally, the German financial sector had returned to broad stability, the IMF said in its report, although pockets of vulnerability remained, with banks still highly leveraged and the quality of their capital low by international standards.
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