Industriegelände ©Giuseppe Porzani / Adobe Stock

Bundesbank projections: Economy recovering only arduously

In the Bundesbank’s view, the German economy is recovering only arduously from the crises of the past three years. “In particular, the German economy is still struggling with the consequences of high inflation. This is reducing citizens’ purchasing power,” Bundesbank President Joachim Nagel said as he presented his institution’s latest projections. Although the economy is slowly regaining its footing in the current year, gross domestic product (GDP) contracted by a calendar-adjusted 0.3% due to the decline in the past winter half-year. 

According to the Bundesbank’s projections, the German economy is expected to expand by 1.2% in 2024 and by 1.3% in 2025. Bundesbank experts revised their expectations for the GDP rate for the current year slightly upwards compared with the December 2022 projection, chiefly owing to the easing in the energy markets. By contrast, higher interest rates and decreased competitiveness will lead to lower economic growth in 2024 and 2025 than was expected six months ago. 

June 2023 projections

Easing inflation and lower energy costs supporting recovery 

Easing inflation, strongly rising wages and a robust labour market will come together in the near term, the experts note. As a result, households’ purchasing power will gradually increase, putting them in a position to be able to consume more. However, tighter monetary policy has led to higher financing costs, thereby dampening private investment, especially in housing construction. In addition, the stronger euro and the high wage dynamics constitute a headwind for exporters. Thanks to rising foreign demand, though, exports are still increasing moderately. Real government consumption will decline sharply this year due to pandemic-related expenditure petering out, and will then rise significantly again. “Overall, the expansion of economic activity is likely to increase only gradually in the second half of the year. The economy will then see somewhat stronger growth over the remainder of the projection horizon,” the experts write. 

No all-clear signal yet for inflation

“We are seeing a welcome decline in inflation, but we’re still far from giving the all-clear signal,” Mr Nagel said. Although energy price inflation, in particular, is declining rapidly initially, core inflation (i.e. excluding energy and food) is persisting at a high level. Mr Nagel warned that high inflation could become entrenched if wages and corporate profits were to rise even more strongly, noting that a pass-through of this kind is possible in an environment of high aggregate demand. “Decisive monetary policy action is key to counteracting the economic and societal risks of persistent inflation,” Mr Nagel said.

Overall, the inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) is set to fall from 8.7% last year to 6% in the current year. According to the Bundesbank, in the next two years it will be 3.1% and 2.7%, respectively. Energy price inflation is receding strongly this year, the Bank writes in its projections. There are also signs that food price inflation is no longer as broadly based as it has been thus far. For example, dairy products have recently become cheaper, and prices for fruit and vegetables have also receded. However, as a result of the sharp rises in prices at the start of 2023, inflation for food products will remain in double digits overall on average for the year, the Bundesbank notes. For 2024, the economists then expect to see another decline in energy price inflation and a significant drop in food price inflation. In addition, profit margins are normalising somewhat. However, the high price pressure exerted by labour costs only eases noticeably in 2025. Due to energy price developments, the headline inflation rate is projected to be lower, particularly for 2023 and 2024. However, the projection for core inflation is now consistently noticeably higher.

Employment growth expected to decline in short term

Owing to the only sluggish economic recovery, the pace of employment growth is likely to slow markedly in the current summer half-year. This is also indicated by the less expansionary hiring intentions amongst enterprises. “A moderate rise in unemployment is also expected over the coming months,” the Bank’s economists write. A particular role will be played here by the fact that refugees who arrived in Germany over the past year will then be increasingly available to the labour market. Even so, the labour market will remain in good shape in terms of its underlying trend until the end of 2025. This is because firms’ demand for labour will remain high and the supply of labour will, leaving aside the one-off effect of additional refugees, grow only slightly over time. The Bank’s experts expect unemployment to decline over the next two years and, by 2025, return to its previous record low from 2019.