The IMF is likely to lower its growth forecast for the German economy in the coming weeks as a result of Britain’s decision to leave the EU, a senior IMF official said on Wednesday.
Britain is an important trade partner for Germany, and significant changes in the economic relationship between the two nations would have repercussions for Germany, Enrica Detragiache, assistant director of the IMF’s European department, said in a telephone conference on its latest report on Germany and general policy recommendations.
“In terms of the new forecast, of course we are thinking of a downward revision,” Detragiache said. “We are already indicating in the report that the UK referendum was a downside risk.”
“We will not know what this new relationship will look like for some time,” she said, adding that the uncertainty alone would hurt growth prospects.
In its assessment, which was concluded before the British vote, the IMF raised its forecast for this year slightly, predicting the German economy would grow 1.7 percent, compared with 1.5 percent previously. However, it lowered its growth outlook to 1.5 percent for next year from 1.6 percent.
“We expect this growth to be led by domestic demand, rather than foreign demand, supported by good wage growth, low energy prices and expansion of fiscal and monetary policies,” she said.
The IMF urged the German government to implement structural reforms to address the growing challenges of its rapidly aging society, such as a shortage of skilled workers.
“We encourage the German authorities to deal more forcefully with these challenges through various structural reforms,” Detragiache said.
The German government should set more incentives for women to work full time and for older workers to retire later, she said. Migrants also needed to be integrated into the labor market, she said.
Britain’s decision to leave the EU is likely to reduce German exports and reduce growth by as much as half a percentage point next year, the economic institute DIW has estimated.
The German economy expanded by 1.7 percent last year, its strongest rate in four years, driven by private consumption and higher state spending on refugees.
Like the IMF, the government expects the economy to grow 1.7 percent this year as well, then slow to 1.5 percent next year. However, the British decision to leave the EU is not yet incorporated into its outlook.
Bavarian Minister of Finance Markus Soeder was quoted as saying yesterday that Germany should not be burdened with the extra costs arising from Britain leaving the EU.
Soeder, whose Christian Social Union governs the southern state of Bavaria and is allied with German Chancellor Angela Merkel, told Die Welt newspaper that the EU should compensate for the missing British payments into its budget by cutting costs instead.
“People are saying we could face about 1 billion [euros, (US$1.11 billion)] in additional contributions. We Germans need to make sure that after a Brexit, the British contributions up to now are not simply transferred on to Germany and the rest of the net contributor countries,” Soeder said.
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