IMF split on whether Germany must do more to boost economy

The IMF’s executive board is split on the need for German chancellor Angela Merkel’s government to do more to boost the economy while it united in criticising the country’s trade surplus.

“Most directors supported the current policy stance for this year, although some saw scope for a more proactive stimulus, given the significant risks to the outlook,” the IMF said.

Germany should “sustain reform momentum to raise the economy’s growth potential and promote a more balanced economy”.

Europe’s largest economy will expand 0.3% this year, depressed by sluggish exports and “uncertainty” weighing on corporate investments, the IMF said in a report on its so-called Article IV consultations with Germany.

At 1.4%, growth will reach potential again next year, it said, after predicting growth of 1.3% in July.

Pressure on Merkel, who is seeking a third term in Sept 22 elections, to boost spending at home to foster recovery in cash-strapped eurozone countries has been growing. A year ago, the IMF did “not see the immediate need to have a contingency plan for a fiscal stimulus”.

Uncertainty surrounding policies and prospects for the eurozone is weighing on business investment and exports to the region, the IMF said. German policies should be geared to reducing this uncertainty to rebuild confidence, it said.

Finance Minister Wolfgang Schäuble has offered German loans from state-owned development bank KfW Group to Portugal, Spain, and Greece to kick-start lending to their small and medium-sized businesses.

Ursula von der Leyen, the labour minister, is sharing Germany’s vocational training experiences with other euro nations.

German factory orders, industrial production, and exports slumped in May. Its sales abroad are being curbed as the eurozone struggles to emerge from recession.

“Given the size of Germany’s economy and its large external imbalances, stronger and more balanced growth in Germany is critical to a lasting recovery in the euro area and global rebalancing,” the IMF said.

Germany’s trade surplus rose to €188.1bn last year, the second-highest since Germany started keeping trade records, from €158.7bn in 2011, the Federal Statistics Office said earlier this year. The trade surplus reached a record €195.3bn in 2007.

The Bundesbank last month lowered its growth projection for 2013 to 0.3% from 0.4%, and cut its 2014 outlook to 1.5% from 1.9%. The economy expanded 0.1% in the three months to the end of March.

Germany has provided “an important anchor of regional stability” by achieving fiscal targets even while allowing for a “modest loosening of fiscal policy to help generate growth in domestic demand,” the IMF said.

Merkel’s Christian Union-Free Democrat government aims to balance the federal budget in “structural” terms — adjusted for economic swings and one-time factors — in 2014 and dispense with new debt from 2015.

The IMF “welcomed the authorities’ intention to avoid over-performance on fiscal consolidation, and encouraged a recalibration of policy should growth fall short of expectations”, according to the report.

“Ensuring fiscal sustainability remains a long-term objective in light of demographic pressures.”