New economic forecast for Germany

After a strong start to the year, the German economy will grow at a more subdued pace before gaining momentum again at the end of this year or early 2009. At the same time, the currently high pressure on prices is unlikely to weaken again significantly until 2009, although the upside risks clearly predominate. This was reported in the Deutsche Bundesbank’s most recent forecast, which was published today and which will also appear in the June 2008 issue of its monthly report.

The macroeconomic forecast for Germany, which the Bundesbank first published in December 2007, represents the Bundesbank’s contribution to the Eurosystem’s biannual staff projections and is based on common/commonly agreed assumptions and an identical forecast horizon. Furthermore, in each of its forecasts, the Bundesbank assesses what uncertainties and risk factors there are with regard to the baseline scenario, ie the development forecast as likely.

Economic growth

According to the Bundesbank’s most recent forecast (completed 20 May 2008), overall economic growth will amount to 2¼% this year and 1½% next year. In calendaradjusted terms, this corresponds to an annual average growth of 2% for 2008 and 1½% for 2009. Calendar-adjusted growth is now expected to be 0.4 percentage point higher in 2008 than forecast in the December 2007 forecast and 0.6 percentage point lower in 2009. That would leave the German economy within the range of normal capacity utilisation whereby the prospect of more favourable growth and the risk of a poorer performance are balanced.

Labour market

The Bundesbank is expecting further improvements in the labour market. The number of persons in work is likely to increase by almost 1½% to 40.3 million in 2008 and again by just under ½% in 2009. Unemployment will continue to decline, dropping by 500,000 to around 3.3 million in 2008 on an annual average and to 3.2 million in the following year. The unemployment rate as defined by the Federal Employment Agency would therefore fall from 9.0% in 2007 to 7.8% in 2008 and 7.6% in 2009.

Price developments

The price climate in Germany has become decidedly gloomier of late and is likely to brighten only slowly. This can be attributed primarily to the strong increase in energy prices but also to a less favourable trend in food prices. Even with gradually receding price pressure in the energy sector and corrections to food prices, the Bundesbank does not expect rates of consumer price inflation below 3% before the end of 2008. The rate of price increase could ease to 2% in the course of 2009. The forecast assumes an annual average inflation rate (HICP) of 3.0% in 2008 and 2.2% in 2009. This represents an upwards revision by 0.7 percentage point for both years compared with the forecast of December 2007. In its risk assessment, the Bundesbank warns: “An increase in wage cost pressure, together with a further rise in input prices might trigger further rounds of price increases.” Overall, the upside risks to future price developments predominate in both the short and medium term.

The forecast and further background information are available as of 11.00 am CEST today, 6 June 2008, on the Bundesbank’s website.