The German economy is currently following a growth path that is primarily underpinned by domestic demand. Commenting on the Bundesbank's latest semi-annual projection, the Bank's President Jens Weidmann said, "The main drivers are the favourable labour market situation and substantial increases in households' real disposable income."

Foreign trade was, however, currently being hampered by frail demand from the emerging market economies, he added. For 2016 and 2017, the ECB, in its current projection, nevertherless expects the labour markets outside the euro area to rebound as well as somewhat stronger economic growth within the euro area. President Weidmann expressed his confidence that the healthy underlying state of the German economy should stand out even more clearly over the next two years.

Economists raise projection

The Bundesbank's economists expect Germany's economy to grow by 1.7%. Germany's economy could gain additional momentum over the course of 2016 if, as expected, world trade expands more strongly again and German exports recover from their sluggishness. Under these conditions, the economists predict growth of 1.8% for 2016. For 2017, they are raising their earlier (June) projection to 1.7% this year. Moreover, the expected upturn in growth is being masked by calendar effects. Adjusted for working-day variations, growth rates would thus stand at 1.7% in 2016 and 1.9% in 2017, following 1.5% this year.

In the light of the forecast positive economic growth, the Bundesbank expects capacity utilisation in the German economy to be above average over the next two years. Despite the expansionary effect which immigration is having on the labour supply, the labour market will experience shortages to a growing extent, driving up wage increases.

According to the Bundesbank's economists, Germany's general government budget is expected to post a higher surplus still in the current year and record a more or less balanced fiscal outcome in 2016 and 2017. Mounting expenditure, inter alia on account of the influx of refugees, will probably more than offset favourable cyclical factors and the lighter interest payment burden.

Higher prices expected

According to the Bundesbank's economists, consumer price inflation will accelerate as the dampening effect of crude oil prices on inflation gradually peters out. The Bundesbank's economists forecast that inflation, as measured by the Harmonised Index of Consumer Prices (HICP), could rise from 0.2% this year to 1.1% next year and 2.0% in 2017. Excluding energy, HICP inflation should climb from 1.1% in 2015 to 2.0% in 2017. Compared with the June projection, the Bundesbank's economists now expect a lower rate of inflation over the entire forecast horizon, notably in 2016. This is due in large part to a hitherto unanticipated renewed decline in crude oil prices.

Risks to economic growth

In the Bundesbank's view, downside risks to economic growth could arise if the current sluggish dynamics in a number of emerging market economies (EMEs) were to worsen. Nevertheless, growth in world trade is now being assessed rather cautiously, meaning that a more favourable development also appears conceivable. "There is also major uncertainty about the scale of the expected influx of refugees and its economic and fiscal implications," said Mr Weidmann. Deviations from the scenario assumed in the projection could chiefly affect government budgets, private consumption, housing construction investment as well as the labour market, he explained.