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Bundesbank expects strong economic growth in Germany

Bundesbank expects strong economic growth in Germany

Two workers in a car factory

In the Bundesbank’s assessment, the German economy has recovered more quickly than expected from its cyclical lull in the middle of last year and has returned to a growth path. "Domestic economic activity is benefitting from the favourable labour market situation and the substantial income increases," commented Jens Weidmann, President of the Deutsche Bundesbank, on the Bundesbank’s latest semi-annual projection. "Although foreign trade is currently being hampered by dampening global dynamics, it is simultaneously being buoyed by the euro’s depreciation and the strengthening cyclical recovery in the euro area," explained Mr Weidmann. He added that the world economy was likely to regain momentum. The Bundesbank believes that German enterprises, given their positive market position, should find it easy to capitalise on the resultant opportunities.

Projection revised upwards

The Bundesbank’s experts have revised their growth forecasts for the current and the coming year upwards significantly since the December projection. They expect real gross domestic product (GDP) to grow by 1.7% in 2015 (1.5% after calendar adjustment). "Overall, as 2015 progresses, strong economic growth may be expected", according to the Bundesbank’s forecast. The second-quarter figures could possibly even offset the comparatively poor first-quarter results to some extent.

For 2016, the Bundesbank’s economists expect GDP growth of 1.8% (1.7% after calendar adjustment). They also, for the first time, voice their thoughts on the outlook for 2017, expecting real GDP to grow by 1.5% (1.7% after calendar adjustment).

In the light of the forecast positive economic growth, the Bundesbank expects capacity utilisation in the German economic to be above average. This means that labour market reserves will be mobilised and wages will rise more strongly in the medium term, according to the forecast.

Accelerating inflation expected

The Bundesbank expects consumer price inflation to accelerate up to the end of 2017. Its economists are forecasting the rate of inflation according to the Harmonised Index of Consumer Prices (HICP) to amount to 0.5% for 2015. Their forecast for 2016 is an inflation rate of 1.8%, with the HICP expected to rise by 2.2% in 2017. "The key factor behind the subdued inflation outlook is the sharp drop in crude oil prices," Bundesbank President Jens Weidmann said. It is assumed that crude oil prices will pick up only slightly over the forecasting horizon.

With reference to Eurosystem projections, ECB President Mario Draghi stated on Wednesday that inflation in the euro area as a whole would amount to 0.3%, with consumer price inflation then rising to 1.5% in 2016 and 1.8% in 2017.

Economic recovery in the euro area

One key element of the Bundesbank’s latest growth forecast for Germany is that the euro-area economic recovery take a firmer hold. According to Mr Draghi, the Eurosystem’s experts project euro-area GDP to grow by 1.5% this year and 1.9% next year, climbing to 2.0% for 2017. This cyclical recovery is expected to lead to a considerable expansion of intra-European trade. German enterprises’ sales markets are thus likely to expand somewhat more strongly in the euro area, in fact, than in the rest of the world, as the Bundesbank’s economists go on to explain.

Potential risks of a setback

Referring to the economic recovery in the euro area, Mr Weidmann cautioned that the risks of a setback had not yet been dispelled. "Moreover, on the domestic front, growing labour market shortages represent a supply-side risk to economic growth, and they could also be reflected in increased price pressures," the Bundesbank President explained.

The Bundesbank’s economists perceive the vulnerability of some emerging markets as additional sources of risk to economic growth, with ongoing geopolitical tensions also representing a risk factor. An accelerated appreciation of the euro would also create downside risks to economic activity, according to Bundesbank experts.

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