Germany’s solid economic upswing is under threat from increasing global protectionism and a possible resurgence of Europe’s debt crisis, the IMF said.
“The German economy is performing well,” but “risks are tilted to the downside,” the IMF said in its regular update on Europe’s largest economy. “Rising protectionist trends, geopolitical uncertainty, or a reassessment of sovereign risk in the euro area could lead to bouts of financial turbulence, negatively affect export prospects and weigh on investment.”
Policymakers in Germany and the eurozone are confident that economic growth will rebound after a slow start to the year — despite some rather gloomy data that have hinted at more moderate momentum going forward.
Even though the Bundesbank last month lowered its outlook for this year, it maintained that the tight labor market would underpin private consumption and wages in the months ahead.
The latest data of industrial orders bounced back in May after a string of setbacks, official data showed yesterday, suggesting Europe’s largest economy might not face the sharp slowdown some observers feared.
New contracts at industrial firms grew 2.6 percent month-on-month in May, federal statistics authority Destatis said in figures adjusted for price, seasonal and calendar effects.
The performance beat expectations from analysts surveyed by data company Factset, who had forecast 1.1 percent growth after four months of declines.
However, the IMF said that Germany’s positive output gap should put upward pressure on prices, raising both headline and core inflation to 2.5 percent by 2023.
Wage growth is expected to accelerate steadily and exceed 3.5 percent next year.
The fund “commended Germany’s strong economic performance and welcomed the prospects for continued solid growth in the near term.”
However, it also encouraged the government to tackle some of the nation’s long-term challenges: enhance potential growth by increasing public investment in physical and human capital and fostering labor supply, using more public spending as a tool; reinvigorate competition-enhancing reforms and improve the environment for entrepreneurship and venture capital; consider pension and labor market reforms to lengthen working lives; and complete the toolkit for managing financial stability risks.
The IMF said the government’s coalition agreement contains “several welcome measures,” citing efforts to strengthen digital infrastructure, investment in childcare and initiatives to integrate refugees.
It said that further action is needed to lift long-term growth potential.
Additional reporting by AFP
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