The German economy is slowly regaining its footing after a roughly two-year period of weakness, according to the Bundesbank’s current Forecast for Germany. The German economy is extricating itself from the period of economic weakness, Bundesbank President Joachim Nagel said. The Forecast for Germany expects German gross domestic product (GDP) to grow again somewhat this year and then increase more strongly in the following years. Not only will private consumption gradually pick up again, but export business will also improve again from the second half of the year. Against this backdrop, industry will also grow more strongly again. 

Consumption and exports will drive the economic recovery over the next two years as well. Households are benefiting from strong wage growth, a gradual decline in inflation and a stable labour market, Nagel explained, while at the same time warning: While the inflation rate in Germany is continuing to decline, the pace is subdued. We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts.

According to the Bundesbank’s Forecast for Germany, real GDP will increase by a calendar-adjusted 0.3% this year. In 2025 and 2026, the German economy will then grow by 1.1% and 1.4%, respectively. The Bundesbank is thus broadly confirming its December 2023 Forecast for Germany.

The Bundesbank’s experts are expecting inflation as measured by the Harmonised Index of Consumer Prices (HICP) to decline from an annual average of 6.0% last year to 2.8% this year, up from the 2.7% the Bundesbank had been expecting in December. Energy and food price inflation in particular is likely to ease considerably this year. However, inflation is proving to be stubborn, especially in the case of services, where strong wage growth and the resulting cost pressures are major factors. Negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter. The higher labour costs will also be reflected in food prices, especially next year. Energy price inflation will then also pick up again somewhat. The Bundesbank’s experts are expecting headline inflation to decline slightly to 2.7% in 2025, before dropping more sharply to an average of 2.2% in 2026. Core inflation (the rate excluding energy and food) is expected to decrease only hesitantly, falling to 3.1% this year, 2.5% in 2025 and 2.3% in 2026. 

The Forecast for Germany sees public finances improving, with the government deficit ratio expected to shrink from 2.5% last year to 1.1% in 2026. Until 2025, this will be due to the expiry of fiscal crisis assistance measures. The decline in assistance will outweigh sharply rising expenditure in areas such as pensions, defence and staff. Beyond 2025, relief will stem chiefly from somewhat more restrained central government spending, including special funds, and a more favourable economic situation. The debt ratio is expected to fall to somewhat more than 60% by 2026. 

Projection June 2024