The Deutsche Bundesbank sees the German economy poised for the start of a strong upswing. It currently projects economic growth to reach 3.7% this year and 5.2% next year. In 2023, growth in real gross domestic product (GDP) is set to lose momentum, but will still amount to 1.7%.

“The German economy is overcoming the coronavirus crisis,” said Bundesbank President Jens Weidmann, noting that the projections assumed that the pandemic would be quickly and sustainably suppressed by the vaccination campaign and that protective measures would be swiftly rolled back. “This will result in substantial catch-up effects, primarily in private consumption as well as in services sectors that had been impacted especially hard by the measures,” he explained. In addition, exports have continued to show robust growth. “Economic activity could return to its pre-crisis level as early as this summer,” said the Bundesbank President, adding that aggregate capacity utilisation would reach an above-average level from as early as next year.

Price developments

Price developments this year are being shaped by the return to higher rates of VAT, the new CO₂ emission certificates, and the steep rise in prices for both crude oil and food. According to the Bundesbank’s projections, this exceptional inflationary pressure will see consumer prices surge by 2.6% this year. “It is possible that inflation rates could temporarily hit the 4% mark towards the end of the year,” said Weidmann. Owing to the expiry of the one-off effects next year, the Bundesbank’s economists then anticipate inflation rates of 1.8% (2022) and 1.7% (2023). The more subdued rise in energy and food prices masks the fact that core inflation excluding energy and food (and also adjusted for the VAT effect) will rise as a result of the upswing, the improved labour market situation and stronger wage growth. 

Public finances

Public finances have continued to provide significant support to the economy. “According to our projections, the deficit ratio will rise to more than 5% this year, and the debt ratio to over 70%,” said the Bundesbank President. They will then decrease again significantly next year as the economy recovers and fiscal crisis assistance measures largely expire, he noted.

Risk assessment

Compared with the December 2020 outlook, the Bundesbank expects GDP to be considerably higher over the entire projection horizon. Over the next two years, consumer price inflation is set to be significantly higher, mainly because energy prices are rising much faster than anticipated at the time. Core inflation excluding energy and food has also been revised upward. Given the uncertainties surrounding the current projections, the Bundesbank’s experts consider the risks to economic growth to be broadly balanced. By contrast, risks to the outlook for inflation are tilted to the upside.

Projection June 2021