IMF warns Germany faces challenging growth outlook without bold reforms

ISTANBUL

The International Monetary Fund (IMF) on Wednesday said that Germany faces a persistently challenging medium-term growth outlook unless bolder reforms are implemented at home and at the EU level.

"Following several years of large economic shocks and negative growth, Germany’s landmark reform of its fiscal rule earlier this year has set the stage for economic recovery, driven by a gradual acceleration of domestic investment and consumption," the fund said in a statement.

However, it was emphasized in the statement that medium-term prospects remain limited due to rapid population aging and weak productivity growth, and therefore, it is important to use existing fiscal space wisely to increase the economy's long-term production capacity.

It stated that such efforts should be complemented by pro-growth structural reforms, including measures to foster more innovation and digitalization, cut red tape, reduce labor supply constraints—especially among women, older workers, and immigrants—and deepen European economic integration, including by reducing barriers to cross-border trade and investment and better integrating capital and energy markets.

"Continued prudent financial sector policies are also important to contain risks," it noted.

Risks to outlook tilted downside

The IMF emphasized that risks to the economic outlook are on the downside, noting that rising geopolitical tensions, escalating trade conflicts, and commodity price volatility are among the primary external risks.

Stating that the country's economy is expected to grow by 0.2% this year, the IMF said the weak growth in recent years is partly due to long-stalled structural reforms and limited underlying productivity growth due to increased competition in export markets.

"The authorities’ landmark reform of the debt-brake rule earlier this year is expected to help drive a gradual economic recovery," it said, adding that the lagged effects of fiscal expansion and monetary policy easing planned for 2026–2027 will boost growth in the coming years, with growth expected to rise to 1% in 2026 and 1.5% in 2027.

"However, without further bold reforms both domestically and at the EU level, Germany still faces a persistently challenging medium-term growth outlook," the fund noted.

The statement also noted that slower-than-expected domestic productivity growth, weak implementation of public investment projects, and persistent labor shortages could also constrain growth and increase fiscal pressures.