IMF warns of looming risks to Germany economy

03 July 2012 18:27  [Source: ICIS news]

LONDON (ICIS)--The International Monetary Fund (IMF) sees looming risks to Germany in a worsening of the eurozone debt crisis, mainly because of its banking sector and its open economy, it said in an update report on Tuesday.

The IMF said that Germany’s banking system remains exposed to adverse external developments given the large size of its loan portfolio and significant exposures to other economies in the euro area.

At the same time, Germany – as one of the world’s largest and most open economies – is prone to external developments in both the euro area and the broader world economy, it said.

“The main risk facing Germany is a strong intensification of the euro area crisis,” said Subir Lall, the IMF’s mission chief for Germany.

“Lower global growth prospects more broadly would also hamper growth prospects in Germany,” Lall said.

Nevertheless, Europe’s largest economy is still relatively robust, the IMF said in its report.

The country’s wages are rising, the unemployment rate - at 5.3% - is low, and inflation expectations are moderate.

Furthermore, Germany’s fiscal deficit is narrowing - from 4.3% in 2010 to 1.0% in 2011 - while corporate and household balance sheets are healthy, the IMF said.

Germany’s growth in the 2012 first-quarter is encouraging, but a genuine switch to a domestic-led growth is yet to be seen, the IMF said.

“With rising household income and stable employment, strong balance sheets among households and firms, and a supportive financing environment, both consumption and investment, including residential investment, are expected to gather pace and propel growth [by the second half of 2012],” it said.

Meanwhile, foreign demand is expected to contribute significantly less to Germany's GDP growth in 2012 and 2013, compared with previous years.

Broad downside risks for Germany’s economy could come from a slowdown in global growth or a sharp rise in oil prices.

“Given Germany’s direct trade linkages, particularly with the US and Asia, an unanticipated slowdown in activity would directly lower the demand for Germany’s exports, in addition to the indirect linkages through other euro area trading partners,” the IMF said.

In addition, a sharp rise in oil prices due to geo-political factors would depress German aggregate demand and put upward pressures on prices, it added.

The IMF projects Germany’s GDP growth at 1.0% in 2012 and 1.4% in 2013, “but the outlook remains uncertain due to downside risks,” it said. Germany’s government has forecast GDP growth at 0.7% for 2012 and 1.6% for 2013.

In a related report on Tuesday, the IMF said that the US recovery has slowed and remains tepid as the country is vulnerable to ongoing eurozone troubles.

Paul Hodges studies key influences shaping the chemical industry in his Chemicals and the Economy Blog

By: Stefan Baumgarten
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