In IMF/OECD News 30/06/2016
The International Monetary Fund said that Britain’s pending exit from the European Union is posing “a downside risk” to Germany’s economic outlook, indicating that a downward revision to its current growth forecast is on the cards.
“The U.K. is an important economic partner for Germany” and changes in the economic relationship between Europe’s largest economy and its second-largest member won’t go by unnoticed, said Enrica Detragiache, the IMF’s mission chief for Germany. “Of course we are thinking of a downward revision,” she said.
Many private-sector economists have already trimmed their growth expectations for Germany and the rest of Europe in light of looming negotiations of the U.K.’s exit from the EU.
Juergen Michels, the chief economist at BayernLB, said that heightened uncertainty will cost Germany’s economy 0.2 percentage points in growth this year and 0.5 percentage points next year, but forecast that a pickup in government spending in the run up to the 2017 general elections will help cushion the economic fallout from a drop in U.K. investment and trade.
“The German government will probably make greater use of its fiscal leeway next year to fund additional investments–also to cushion the negative effects of the Brexit referendum,” Mr. Michels said.
The IMF, in its Article IV report on Germany, urged the government to accelerate structural reforms and use any fiscal wiggle room–within the fiscal rules–to finance investment in transport and other infrastructure, including high-speed internet connections.
“Policies should focus on raising potential growth and reinforcing rebalancing, which will also support the fragile recovery in the euro area,” the fund said, warning that Germany’s external position has remained “substantially stronger than implied by medium-term fundamentals and desirable policy settings.”
Germany’s current account surplus–which represents its net trade and finance–is forecast to narrow to 8.2% of gross domestic product this year from a record-high of 8.5% of GDP in 2015.
The IMF further forecast that German economic growth will slow to 1.5% next year from an estimated 1.7% this year, but cautioned that its estimates are already outdated and that it will release new forecasts as part of its World Economic Outlook in mid-July.
“A foreseen fiscal expansion of 1% of GDP in 2016 comes at an opportune time, as, if it materializes, it will cushion the effect of slowing foreign demand, though revenues might again surprise on the upside,” the IMF said. It also forecast that German spending on a record influx of migrants could reach 0.5% of GDP a year in 2016 and 2017.
Michaela Erbenova, who is responsible for the IMF’s assessment of Germany’s financial sector, said German banks’ combined direct exposure to the U.K.–albeit being second-largest after the U.S.–“is small in absolute terms”. But “second-round effects”, stemming from potentially weaker economic growth, will have to be monitored, she said.
Source: Dow Jones
