Germany's economy saw strong and steady growth last year. Initial calculations by the country's Federal Statistical Office indicate that real gross domestic product (GDP) was up by 1.9% compared with 2015, which is the strongest rate of growth in five years. The Bundesbank's latest forecast had expected growth to come in at this figure. GDP had expanded at a similar pace in the two preceding years (at rates of 1.7% in 2015 and 1.6% in 2014).

Consumption picks up strongly

The strong showing in 2016 was mainly propelled by consumption, with household consumption spending reported as having expanded by a price-adjusted 2.0% on the year. Government consumption grew even more sharply still, rising by 4.2%. The Federal Statistical Office identifies the strong influx of people seeking refuge and the attendant costs as one of the factors behind this brisk growth. Altogether, consumption expenditure climbed by 2.5%, making it once again the strongest factor, but not the only one, driving growth in the German economy in 2016.

Investment was another component which contributed to German economic growth. Price-adjusted construction investment in 2016 was up by a robust 3.1%, primarily on account of stronger investment in residential buildings. Machinery and equipment (a category which also includes transport equipment) likewise attracted more investment (+1.7%) than one year earlier.

GDP growth was held back, however, by inventory destocking (-0.4 percentage point). The external balance of goods and services (ie the difference between exports and imports) also caused a slight arithmetical drag overall on GDP growth (-0.1 percentage point). Price-adjusted exports of goods and services climbed by 2.5% on the year but were outpaced by the 3.4% growth in imports.

Forecast: upward path still intact

The Bundesbank expects the German economy to follow an upward path again this year. "Its main driver is buoyant domestic demand, which is being bolstered by the favourable situation in the labour market and by rising household income," said the Bundesbank's President Jens Weidmann in December 2016 at the unveiling of the Bank's latest semi-annual economic projection. He warned, however, that the highly favourable setting for household consumption would see a slightly less favourable development in the years ahead.

The Bundesbank's economists are expecting the German economy to expand by a calendar-adjusted 1.8% in 2017, followed by rates of 1.6% in 2018 and 1.5% in 2019.