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IMF Warns of German Growth Risks While Commending Solid Upswing

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  •  Protectionism, hard Brexit, resurgent debt crisis are threats
  •  Fund sees robust domestic demand amid rising employment, wages

Germany’s solid economic upswing is under threat from increasing global protectionism and a possible resurgence of Europe’s debt crisis, the International Monetary Fundwarned.

“The German economy is performing well” but “risks are tilted to the downside,” the Washington-based fund 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.”

Solid Upswing

Global protectionism among threats to Germany’s economic growth

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Policy makers in Germany and the euro area 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 lowered its 2018 outlook in June, it maintained that the tight labor market will underpin private consumption and wages in the months ahead.

 The IMF said 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 in 2019.

While the fund’s leadership “commended Germany’s strong economic performance and welcomed the prospects for continued solid growth in the near term,” it also encouraged the government to tackle some of the country’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
  • 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 further action is needed to lift long-term growth potential.

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