The cyclical outlook for the German economy has dimmed. Enterprises are cutting back their investment and hiring fewer new staff. The main drags are not only the adjustment recessions in some euro-area countries but also the slowing of the global economy. Nonetheless, in its latest projection the Bundesbank does not foresee a protracted slowdown but instead anticipates a return to a growth path soon. This is predicated on the assumption that the global economy regains momentum and the euro-area reform process progresses further. 

However, given the difficult economic situation in some euro-area countries  and widespread uncertainty, economic growth will be lower than previously assumed. “Nonetheless, the sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the employment, in particular”, said Bundesbank President Jens Weidmann.

Aggregate output

Against this background, the Bundesbank’s semi-annual forecast expects that, following a rise of 0.7% in the current year (0.9% after adjustment for calendar effects), real gross domestic product (GDP) will grow by only 0.4% (0.5% after calendar adjustment) next year. In 2014 real GDP could go up by 1.9% if the euro-area banking and sovereign debt crisis does not escalate further and uncertainty among investors and consumers gradually subsides.

Labour market

The Bundesbank projects that the labour market will come through the economic slowdown in good shape. Working hours will once again act as a cyclical buffer. The unemployment rate could edge up to 7.2% in 2013 before falling back to 7.0% in 2014.

Price developments

Consumer price inflation could ease from 2.1% in 2012 to 1.5% in 2013 and 1.6% in 2014. This is based on the assumption that crude oil prices will decline slightly and domestic price pressures will accelerate only slowly.

Risk assessment

The current projection is characterised by a high degree of uncertainty. The balance of risks is on the downside. If global economic growth falls short of expectations or the debt crisis intensifies in some countries, growth will probably fall below the baseline assumption. “But it is also quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection. In this case, the German economy may be expected to utilise the additional growth opportunities”, Bundesbank President Weidmann added.