The German economy's underlying cyclical trend is fairly robust. Commenting on the Bundesbank's latest semi-annual projection, the Bank's President Jens Weidmann said, "Its main driver is buoyant domestic demand, which is being bolstered by the favourable situation in the labour market and by rising household income." According to the projection, this year's economic growth is being additionally boosted by purchasing power gains resulting from renewed falls in crude oil prices and from an expansionary fiscal policy. Foreign business, by contrast, is receiving only weak stimuli on account of the sluggish growth in world trade. "In the coming years, however, it is likely that exports will gain more traction and compensate for domestic demand, growth of which is expected to tail off somewhat," explained Mr Weidmann. 

Aggregate output

Against this background, the Bundesbank's economists expect price-adjusted German gross domestic product (GDP) to rise by 1.7 % this year, with growth rates of 1.4 % and 1.6 % projected for 2017 and 2018 respectively. Here, calendar effects mask the rather uniform growth rates in working-day-adjusted terms of 1.6 % in both 2016 and 2017 and 1.7 % in 2018. 

The economists report that the expected growth rates are therefore higher than the estimated increase in potential output, which has been raised slightly as a result of the higher labour‑market‑oriented migration that is now expected. Aggregate capacity utilisation in 2018 is therefore likely to be significantly higher than the long-term average. The attendant labour market bottlenecks and higher wage growth will be mitigated by high levels of migration, particularly this year and in 2017. In terms of public finances, the previously attained sizeable surplus is likely to be largely depleted in 2016 and only just remain in positive territory for the remainder of the time horizon.

Price developments

Against this background, the Bundesbank's economists believe that consumer price inflation is likely to increase considerably. They expect that inflation, as measured by the Harmonised Index of Consumer Prices (HICP), will rise from 0.2 % this year to 1.5 % in 2017 and to 1.7 % in 2018. Excluding energy, HICP inflation is likely to climb from 1.0 % in 2016 to 1.8 % in 2018.

With regard to their projection, the Bundesbank's experts explain that the dampening effect of the renewed fall in the prices of crude oil and other commodities at the start of 2016 should largely vanish as of 2017, which means that growth in domestic wage costs is likely to once again manifest itself more visibly in consumer prices.

Risk assessment

Compared to the projection from December 2015, the Bundesbank's economists have slightly lowered their expectations for economic expansion in 2016 and 2017, while significantly reducing the inflation outlook. The revision of expected price developments was due in part to the unexpectedly low inflation rate for services and industrial goods (excluding energy) in the first half of 2016, but above all to the surprising renewed fall in the price of crude oil. 

"Fluctuations in the price of crude oil continue to present a risk, particularly for the price projection, but on the whole appear balanced, as do the risks to economic growth," explained Bundesbank President Jens Weidmann, commenting on the new projection. However, there is a downside risk to the price projection if wage growth falters or if higher labour costs are not passed on to consumers to the extent assumed in the projection.