New Bundesbank projection: German economy facing moderation of growth over winter months

The crisis in public finances in a number of euro-area countries, the ensuing uncertainty and general economic slowdown are increasingly placing a strain on economic activity in Germany. Even so, the domestic conditions for an extended, broadly based upswing are still intact. This is reported in the Deutsche Bundesbank’s new projection for 2012 and 2013. The sovereign debt crisis harbours considerable downside risks, however.

Aggregate output
According to the Bundesbank, the increase in price-adjusted gross domestic product (GDP) will be reduced perceptibly to 0.6% in the coming year due to a lean period in the winter months. With regard to the lower growth rate for 2012, however, what should not be overlooked is that, once the cyclical weakness has been overcome, the upswing will gradually resume as early as during the next year. Against this background, growth should pick up to 1.8% in 2013. A 3.0% increase in GDP may be expected in the current year. The projection and its underlying baseline scenario assume that there will be no further significant escalation of the sovereign debt crisis and that, instead, investors’ and consumers’ uncertainty will be gradually somewhat allayed.

Labour market
Despite the initially marked cyclical moderation, the Bundesbank does not expect any significant decline in employment. Rather, there should be a slight rise in employment again from the end of 2012, with a certain time lag compared with overall activity. The official unemployment figure is likely to average just under 3 million in the coming year, which corresponds to a 7.0% unemployment rate.

Price developments
Consumer price inflation in Germany over the forecast horizon is likely to be within the range compatible with stability again. Average annual inflation rates of 1.8% and 1.5% respectively are to be expected for 2012 and 2013. Consumer prices are likely to have increased on average by 2.5% this year compared with 2010. The assumption of no more than a limited rise cost of energy and only a moderate increase in domestic price pressure support the favourable outlook for inflation in the next two years.

Risk assessment
The Bundesbank, in its baseline scenario of the projection, assumes that the uncertainty caused by the sovereign debt crisis will recede again somewhat, although consumers’ and investors’ caution stemming from a deep feeling of insecurity will not be fully eliminated. If the crisis can be overcome more rapidly and durably, medium-term economic growth in Germany could be higher than expected in the Bundesbank forecast. A continuation or  further escalation of the sovereign debt crisis would imply considerable downside risks, however. Additional strains might emerge if the pace of economic growth in the emerging market economies were to level off to a significant extent. This would affect Germany in particular given its dependency on exports.

The Bundesbank projection, which also appears in the Monthly Report for December 2011, may be found on the Bundesbank website at