MercoPress. South Atlantic News Agency

IMF praises Germany; suggests more stimuli to a tepid performing US economy

Managing Director Lagarde: remarkable performance of German economy

An IMF report revealed that the German economy’s performance has been remarkable despite facing considerable headwinds and that the US recovery “remains tepid and subject to elevated downside risks.”

The 2012 Article IV Consultation with Germany prepared by a staff team of the IMF, following discussions that ended on May 8, 2012, with the officials of Germany on economic developments and policies revealed that the German economy’s performance has been remarkable despite facing considerable headwinds.

Thus, the report remarks that the “German financial market turbulence and weakening external demand led to a broad-based contraction of activity in Germany in the last quarter of 2011, with the notable exception of construction. However, economic growth appears to have bottomed out and activity picked up in the first quarter of 2012 fuelled by a rebound in external demand and strong consumption growth.”

“Several conditions are now in place in Germany for a domestic demand-led recovery. Employment creation has been robust and unemployment at 5.3% is at a post-reunification low“, the article emphasized.

Likewise, the IMF said that thanks to reforms implemented in the 2000s ”the labour market is trending towards a lower natural rate of unemployment, and since 2010, the creation of jobs with full social security benefits has grown faster than atypical employment.“

Furthermore, Bank lending rates ”are lower than elsewhere in Europe, but the rise in bank lending is moderate, reflecting still low demand from households and firms. Headline inflation has fallen to 2.2% in April 2012, in line with the moderation of fuel price increases, while core inflation remained low at 1.4%. Medium-term price expectations remain well anchored below 2%“.

Germany’s current account surplus remained large at 5.75% of GDP in 2011, in part reflecting a relatively comfortable competitiveness position.

The strength of German banks has improved but vulnerabilities remain.

”While German banks are generally meeting the minimum levels of required regulatory capital and have ample liquidity, they remain highly leveraged, dependent on wholesale funding, have low capital quality and profitability, and some institutions are significantly exposed to the euro area periphery.”

Fiscal consolidation is on track. The overall deficit narrowed to 1% of GDP in 2011 (from 4.3% in 2010), reflecting in part the phasing out of one-off financial sector support measures.

Meanwhile the concluding Statement of the 2012 Article IV Mission to the United States says that the US recovery “remains tepid and subject to elevated downside risks, in light of financial strains in the Euro area and uncertainty over domestic fiscal plans.

”Monetary policy conditions appropriately remain very accommodative, with some room for further easing should the outlook deteriorate. Aggressive implementation of the measures proposed by the Administration to speed up the housing recovery could yield sizable benefits to the broader economy. Good progress has been made in reforming the US financial system, but vulnerabilities remain and appropriate resources should be devoted to complete and implement the new regulatory framework and monitor systemic risk.”