Bundesbank projections: German economy recovering only arduously – Nagel: “No all-clear signal yet for inflation”

According to the Deutsche Bundesbank’s current projections, the German economy is set to recover only arduously from the crises of the past three years. In particular, the German economy is still struggling with the consequences of high inflation. This is reducing citizens’ purchasing power, Bundesbank President Joachim Nagel explained as he presented his institution’s projections. Although the economy is slowly regaining its footing in the current year, gross domestic product is set to contract by 0.3% due to the decline in the past winter half-year.

We are seeing a welcome decline in inflation, but we’re still far from giving the all-clear signal, Mr Nagel said. Although energy price inflation, in particular, is declining rapidly, core inflation (i.e. excluding energy and food) is persisting at a high level. Overall, the inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) is set to fall from 8.7% last year to 6.0% in the current year. According to the Bundesbank, in the next two years it will be 3.1% and 2.7% respectively.

As the Bundesbank President explained, declining inflation, strongly rising wages and a robust labour market will come together in the near term. As a result, households’ purchasing power will gradually increase, putting them in a position to be able to consume more. However, tighter monetary policy has led to higher financing costs, thereby dampening private investment, especially in housing construction. In addition, the stronger euro and the high wage dynamics constitute a headwind for exporters. Thanks to rising foreign demand, though, exports are still increasing moderately. Real government consumption will decline sharply this year due to pandemic-related expenditure petering out, and will then rise significantly again. All in all, we can expect economic growth of 1.2% and 1.3% in 2024 and 2025 respectively, Mr Nagel said.

The Bundesbank President warned that high inflation could become more entrenched if wages and corporate profits were to rise even more strongly. A pass-through of this kind is possible in an environment of high aggregate demand. Decisive monetary policy action is key to counteracting the economic and societal risks of more persistent inflation, Mr Nagel said.

According to Bundesbank experts, the general government deficit ratio will fall slightly to 2.4% in 2023 and significantly to 1.2% in 2024, remaining virtually unchanged in 2025. While coronavirus measures are largely being eliminated in 2023, the volume of support measures related to the energy crisis and high inflation is still rising slightly. This volume will decrease strongly in 2024 and the measures will fall away thereafter. The debt ratio is set to fall to 62% in 2025.

Bundesbank experts revised their expectations for the rate of gross domestic product slightly upwards compared with the December projection, chiefly owing to the easing in the energy markets. By contrast, higher interest rates and decreased competitiveness will lead to lower economic growth in 2024 and 2025 than was expected six months ago. Due to energy price developments, the inflation rate is projected to be lower overall, particularly for 2023 and 2024. However, the projection for core inflation is now consistently noticeably higher.

Projection June 2023

Year-on-year percentage change





Real GDP, calendar adjusted





Real GDP, unadjusted





Harmonised Index of Consumer Prices





Harmonised Index of Consumer Prices excluding energy and food





Source: Federal Statistical Office. 2023 to 2025 Bundesbank projections.