New Bundesbank projection: German economy's solid upswing to continue

The economic upturn in Germany is likely to be sustained. "Thanks to the very healthy labour market situation, private consumption, together with general government demand and investment in housing, will ensure an ongoing solid underlying pace," said the Bundesbank's President Jens Weidmann in reference to the Bank's new semi-annual economic projection. In addition, exports and revived business investment are set to prop up growth. "These factors will combine to produce the scenario of a broad-based and fairly brisk economic upswing," Mr Weidmann added. However, supply bottlenecks in the labour market are likely to become increasingly evident, which is to say that fewer people will be additionally available for employment. "This should not only drive up wage inflation, but may also tend to curtail growth potential," said the Bundesbank's President.

Aggregate output

Against this backdrop, the Bundesbank's economists expect calendar-adjusted economic growth of 1.9% this year, while the growth rate could come in at 1.7% and 1.6%, respectively, in the two subsequent years. Growth in the German economy would thus outstrip the increase in potential output over the entire projection horizon, as it has in the past three years. Aggregate capacity utilisation, already above normal levels last year, would see a clear rise. Due to the high demand for labour, the Bundesbank's experts judge that average working hours are likely to increase, after having been on the decline in the past few years and probably this year as well. However, after the steep rise this year, employment is likely to grow less strongly in 2018 and 2019. The economists state that unemployment will decline considerably this year and only slightly in the two years after that. Furthermore, public finances remain in a favourable position. In the absence of any substantial policy changes, the Bundesbank's experts are expecting distinct surpluses. The debt ratio could thus fall back below the 60% mark in 2019 – for the first time since 2002.

Price developments

According to the Bundesbank's economists, consumer price inflation will spike this year owing to resurgent prices for crude oil and food. As measured by the Harmonised Index of Consumer Prices (HICP), the inflation rate could go from 0.4% in 2016 to 1.5% in 2017 and dip slightly to 1.4% in 2018 before rising to 1.8% in 2019. A key assumption in this projection is that the price increases for energy and food will recede significantly, in 2018 in particular. This would obscure the upward-pointing underlying price trend, which will be manifested in the anticipated gradual increase in the inflation rate, excluding energy and food, from 1.3% in 2017 to 1.9% in 2019.

Risk assessment

As against the December 2016 projection, the Bundesbank's economists are now broadly expecting somewhat higher economic growth. Due to the expected temporary rise in energy and food prices, inflation in 2017 is now expected to be 0.1 percentage point higher in 2017, and 0.3 and 0.1 percentage point lower in 2018 and 2019, respectively. By contrast, the estimated inflation rate excluding energy and food has been revised upwards slightly for 2018 and 2019.

The international setting is the source of predominantly downside risks to both economic growth and inflation. Potentially rising protectionist tendencies could weaken economic growth. Furthermore, inflationary pressure from international competition could lead to a narrowing of margins among domestic enterprises. "By contrast, upside risks to growth and inflation predominate among domestic factors," emphasised Bundesbank President Mr Weidmann in light of the exceptionally upbeat sentiment at present and the unusually long-lasting economic upturn as set out in the Bundesbank's projection. Overall, however, he said that the risks to both the expected economic growth and to the inflation forecast seemed balanced.