According to the Bundesbank’s latest projections, the German economy will gradually emerge from its current lull. They indicate that, although calendar-adjusted real gross domestic product (GDP) is likely to grow by only around ½% next year, as it did this year, 2021 and 2022 could each see distinctly stronger growth of just under 1½%. “Besides Germany’s distinctly supportive fiscal policy and highly accommodative monetary policy, the main driver of the improved economic outlook is exports,” Bundesbank President Jens Weidmann said of the new macroeconomic projections.

According to the Bundesbank’s economists, exports, which have been lacklustre for some time now, will probably grow more strongly again over the course of next year, in line with foreign demand. “These developments should see industry pick up and the two-speed nature of Germany’s economy become less pronounced”, Mr Weidmann remarked. Germany’s economic growth was driven chiefly by its domestically oriented sectors in recent times, while the export-oriented industrial sector flagged.

According to the projections, however, domestic demand will not rise as dynamically as in the boom period of previous years. The Bundesbank’s experts believe that this is because households’ real disposable income will increase at a slower rate than in previous years, largely on account of much weaker employment growth.

Aggregate capacity utilisation is set to be more or less average next year and therefore much lower than before. German economic output is also expected to grow broadly in line with the increase in potential output in 2021 and 2022, meaning that capacity utilisation in Germany will remain within normal range.

Bundesbank President Jens Weidmann stressed that, for economic growth, the risks are tilted to the downside, justifying this assessment by noting that “External sources of risk persist, which could exacerbate or prolong the downturn in the industrial sector”.

Higher inflation rate again after temporary decline

Consumers will see inflation continue to weaken temporarily in the coming year due to falling energy prices. After already decreasing significantly to 1.4% this year, Bundesbank experts put the inflation rate at 1.3% next year. The inflation rate is then set to pick up markedly to 1.6% and 1.9% in 2021 and 2022, respectively. One reason for this is that energy prices could rebound strongly owing to the climate measures taken by the Federal Government.

Given robust wage growth overall, rising import prices and recovering profit margins, the projections indicate that inflation excluding energy and food (core inflation rate) is likely to remain broadly unchanged at its present level of around 1½%. According to the projections, it could rise slightly to 1.6% in 2022.

Falling general government surplus expected

The general government surplus is expected to decrease to 1½% of GDP this year. A gradual reduction in the surplus is on the cards in the years ahead, driven primarily by fiscal loosening and the associated rise in spending. The debt ratio (debt as a percentage of GDP) will remain on its downward trajectory and is set to fall below the 60% limit stipulated by the Maastricht Treaty by 2020 at the latest.

Projection December 2019

Source: Federal Statistical Office. 2019 to 2022 Bundesbank projections.