Germany Mustn’t Reduce Fiscal Stimulus Too Quickly, IMF Warns

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Germany must be careful when unwinding its pandemic support to limit economic scarring from the crisis and ensure the recovery is sustained, according to the International Monetary Fund.

The Washington-based lender predicts Europe’s largest economy will return to pre-crisis output levels early next year with a sustained pickup in exports, an improving outlook for services and the release of some pent-up savings.

Yet it also said the recovery path remains uncertain, beset by risks such as vaccinations failing to outpace new infections and coronavirus variants.

“Given considerable uncertainty about the dynamics of the pandemic, it is preferable to err on the side of doing too much so as to minimize scarring effects, rather than too little,” the IMF said in a statement after its so-called Article IV consultation. It added that public debt remains sustainable.

Germany’s economy shrank 1.7% in the first quarter, more than forecast, after surging infections forced tighter lockdowns. Since then, the government has started to loosen its curbs, gradually allowing shops and hospitality businesses to reopen, pushing investor expectations in the economy to a two-decade high.

“The aim should be to set the economy on a sustained recovery path by reducing labor market scarring, protecting vulnerable sections of the population, and ensuring that viable firms remain in business,” the IMF said. “Germany should use its fiscal space to expand public investment, facilitate structural transformation, and decarbonize the economy.”

Fiscal policy is set to remain “appropriately expansionary” this year, it said. Marginal workers and the self-employed were judged to be in particular need of continued support to cope with income losses and find their way back into the labor market.

The IMF also said banks face a rise in loan impairments and provisions when public support is withdrawn, and called on authorities to set an appropriate timetable for them to rebuild capital buffers in order to avoid a squeeze in lending.

©2021 Bloomberg L.P.