Chancellor Olaf Scholz is among a growing cohort of Germans over 60. Photo: REUTERS/Nadja Wohlleben
Face of Germany The International Monetary Fund (IMF) has warned that the country's economy is on the verge of stagnation as baby boomers retire and struggle with a shrinking workforce.
The global lender of last resort said Europe's largest economy would be doomed to sluggish growth unless it found a way to keep people in work.
The growth rate of Germany's working-age population will fall by 0.7 percentage points «over the medium term» due to the retirement of a large generation of boomers and a decline in immigration, the IMF said.
That will see the manufacturing hub face the biggest drop in labor force growth of any G7 country, and half as much as previously estimated.
Carsten Brzeski, an economist at ING, said the grim figures marked the beginning «Japaneseization of Germany».
Mr Brzeski said: “Before the pandemic, potential growth in Germany was estimated at around 1.5%. So this shows how much of an impact demographics have.”
The IMF said public finances would suffer due to a much older population, tax revenues would rise at a slower pace and health and pension costs would rise.
Mr Brzeski added: “With the exception of Japan, we simply have no other example of any developed economy that has shown what this demographic change will lead to. We look at the basic numbers and see slowing growth [and] stagnation, but we have no idea what that will mean for society.”
A record 1.4 million Germans will celebrate their 60th birthday this year. According to him, Mr. Brzeski said.
Meanwhile, five to seven million workers will exit the labor force over the next five to 10 years, he added.
Mr Brzeski said: “This is a huge figure for an economy that has a pay-as-you-go pension system. The working population pays pensions to pensioners. Will this be a test of the debt brake? Yes, it will be so.”
Germany's restrictive fiscal rule states that it can borrow a maximum of 0.35% of GDP per year. In particularly difficult times, this figure may be higher, but the government is obliged to pay it quickly as soon as the economic situation improves.
The IMF warned that Germany would face multiple spending challenges in the medium term, in addition to spending by the elderly population.
The country will also likely have to continue to increase defense spending amid the ongoing threat from Russia, the lender noted.
Although Germany has increased public investment in recent years, significant cash is still needed to modernize transport, energy and communications infrastructure, it added.
The IMF said Berlin should consider easing the debt brake to cope with such pressure.
It also warned that in the absence of immigration it needs other measures to increase labor force participation .
There are two million fewer women than men in the labor force, and they are four times more likely than men to work part-time.
To boost their participation, the IMF called on German Chancellor Olaf Scholz to expand access to full-day child and elder care services and revise punitive marginal tax rates for some low-income workers.
Germany has experienced large waves of immigration in recent decades, but public opinion polls increasingly show growing concerns and negative attitudes towards it.
The popularity of the far-right Alternative for Germany (AfD) party surged last year amid discontent with Scholz's government.
Although it was overshadowed scandals, the Populist Anti-Immigration Party gained 10 percentage points in local elections.
Mr Brzeski warned that policymakers in both Germany and other countries were storing up problems for the future by failing to adapt to an aging population.
He said: “In about five -ten years now people will look back and say, “Well, damn it, 2024 really should have been the moment they changed the fiscal rules to have more spending, more redistribution and more transfers.”
“But in political debates
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