The German economy made a very buoyant start to 2014. Even if it does not maintain the high rate of growth seen in the first quarter, the Bundesbank's economists are still confident about Germany's growth prospects. Commenting on the new spring projection, which for the first time covers a projection horizon of three calendar years, Bundesbank President Jens Weidmann remarked that "Germany's strengthened domestic economy as well as the ongoing improvement in the economic situation of the industrial countries and the gradual recovery of the euro area suggests that Germany will follow a robust growth path". At the same time, the President warned that going forward a tighter labour market shaped by demographic change would impede growth. He explained that "in light of these changes, measures such as the option of drawing a full pension at 63 will not help".

Aggregate output

The Bundesbank's latest projection estimates that German gross domestic product (GDP) will grow in real terms by 1.9% in 2014 (1.9% after calendar adjustment) and by 2.0% in 2015 (1.8% after calendar adjustment), with growth of 1.8% (1.7% after calendar adjustment) expected for 2016. Given potential growth of 1.2% each year, aggregate capacity utilisation would increase perceptibly, starting from a normal level. The Bundesbank's economists forecast continued growth in employment, an estimate which is mainly backed up by the high levels of immigration. The German general government budget might also remain close-to-balance until 2015, and achieve a marked surplus in 2016. The Bundesbank's economists attribute this outlook primarily to the favourable economic situation and a further decrease in the interest burden. Fiscal policy measures such as the pension legislation recently approved by the Bundestag will hinder an improved budgetary development.

Price developments

According to the projection, the expected shortages on the labour market will translate into higher wage increases, as will the new general minimum wage. These factors could drive up consumer price inflation - as measured by the Harmonised Index of Consumer Prices (HICP) - from 1.1% in 2014 to 1.5% in 2015 and then up to 1.9% in 2016. The Bundesbank's experts project that, excluding energy, the rate of inflation is set to increase to more than 2% by 2016.

Risk assessment

Bundesbank President Weidmann warned that despite the favourable overall outlook, there were still risks mainly from the external setting. "Heightened geopolitical tensions or a renewed flare-up of the crises in the euro area would dampen GDP growth not only through the external trade channel, but also by affecting confidence." The Bundesbank's economists also point to considerable uncertainty as to the scale of future migration flows, the reserves that could still be mobilised on the domestic labour market as well as the effects of the minimum wage and the option of retiring on a full pension at 63. If the supply-side conditions prove more favourable than assumed here, economic growth is likely to be stronger and wage pressure weaker. In a scenario in which shortages increase more rapidly, wages and prices would rise more quickly and real economic growth could fall short of the path outlined in the projection.