According to current Bundesbank projections, the economy will probably grow by 1.9% this year. Germany’s economic recovery is therefore likely to continue, but at a considerably more subdued pace than projected last December. For 2023 and 2024, the Bundesbank’s experts are expecting real gross domestic product growth of 2.4% and 1.8%, respectively, in their new projections.

At the same time, they stress that uncertainty about future economic developments is exceptionally high, mainly as a result of Russia’s war of aggression on Ukraine. The baseline scenario of the projections builds on the assumption that the war and its consequences will not intensify any further. The Bundesbank has, in addition, calculated an alternative risk scenario which includes a cessation of Russian energy supplies. In this scenario, economic activity could experience a pronounced decline in 2023.

According to the Bundesbank’s projections, the German economy is currently caught between opposing forces. From the second half of 2022 onwards, the expansionary forces resulting from the largely eliminated pandemic protection measures are likely to predominate to a greater extent. It is also to be expected that energy commodity prices fall somewhat, supply bottlenecks gradually ease and foreign demand picks up again. At the same time, households are likely to spend at least part of the savings accumulated during the coronavirus pandemic on consumption. The projections indicate that additional government defence spending will provide further stimulus. However, the exceptionally high inflation is expected to stoke uncertainty among consumers and will erode their purchasing power.

Furthermore, the labour market is projected to remain on an upward trajectory whilst employment growth weakens and unemployment barely falls any further. With regard to the forthcoming wage agreements, the Bundesbank expects wage bargainers to agree on noticeably higher new pay deals. The substantial wage increases initially only partially offset the high inflation rate, however.

Price pressure to remain high for the time being

According to the Bundesbank’s projections, the inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) is expected to rise to 7.1% on an annual average in 2022. “Inflation this year will be even stronger than it was at the beginning of the 1980s,” President Joachim Nagel remarked concerning the Bundesbank’s projections. “Price pressures have even intensified again recently, which is not fully reflected in the present projections,” he stressed, adding, “If this development is assumed to continue, the annual average HICP rate for 2022 could be considerably above 7%.”

According to the Bundesbank’s economists, the strong price pressure is mainly coming from the rapid rise in energy and food prices. However, core inflation (excluding energy and food) is also likely to be well above average, at around 3.6%. Alongside sharply higher commodity prices, supply bottlenecks are the main factor driving the core rate of inflation.

Starting next year, inflation in Germany is likely to recede gradually. According to the latest projections, the HICP rate could decline to 4.5% in 2023 and to 2.6% in 2024. “Euro area inflation rates won’t fall by themselves,” Mr Nagel said. “Monetary policy is called upon to reduce inflation through resolute action.” Compared with the December 2021 projection, the inflation rate has been revised upwards for all the years of the projection horizon.

Decline in government deficit and debt ratio

According to the Bundesbank’s projections, the general government deficit ratio will fall significantly to 1½% by 2023 and will remain at around this level in 2024. This decline is largely because coronavirus-related fiscal burdens will expire. At the same time, the structural deficit will move upwards. Above all central government will record deficits due to extensive borrowing via its special funds for the purposes of defence and climate protection, in particular. The debt ratio is also projected to fall, but will still stand at over 60% in 2024.

Projection June 2022