Germany's economy is continuing to move on a sound upward path. "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 reference to the Bank's latest semi-annual economic projection. However, the highly favourable setting for household consumption at present looks set to see a slightly less favourable development in the years ahead. In this regard, Mr Weidmann pointed out that employment would grow less dynamically as a result of demographic change, whereby the pool of people available to work would shrink. This, he said, would have a dampening effect on consumption growth. "Moreover, rising energy prices reduce consumers' purchasing power," he pointed out. Mr Weidmann explained that foreign business, which will continue to be held back by muted growth in global trade next year, should slowly gather steam as the markets for German exports improve, "but this is unlikely to fully offset the slight downturn in domestic activity".

Overall output

Against this backdrop, the Bundesbank's economists expect calendar-adjusted economic growth rates of 1.8% this year and next, before expanding at a slightly flatter pace of 1.6% in 2018 and 1.5% in 2019. The rates of expansion expected throughout the projection horizon are therefore distinctly higher than the increase in potential output. Aggregate capacity utilisation at the end of the projection horizon is thus likely to be significantly higher than the long-term average. According to the Bundesbank's economists, this will be accompanied by mounting labour market bottlenecks that will be amplified still further by unfavourable demographics and be a catalyst for markedly brisker wage growth. In their view, barring new expansionary measures, Germany's public finances are projected to continue generating surpluses, though these are likely to fall slightly short of last year's figures. However, upbeat cyclical factors and dwindling borrowing costs are masking the underlying expansionary fiscal stance. A steady decline in the debt ratio is projected, possibly down to the 60% ceiling by 2019.

Price developments

The Bundesbank's economists regard average consumer price inflation for 2016 to still be distinctly muted, above all given the sharp fall in energy prices. Only from next year onwards will the effect of domestic factors on consumer prices probably begin to become evident. As measured by the Harmonised Index of Consumer Prices (HICP), inflation could therefore rise from 0.3% this year to 1.4% next year. Excluding energy, HICP inflation is expected to climb from 1.1% to 1.4%. With labour costs then projected to pick up more strongly, both the headline inflation rate and the rate excluding the energy component could increase to 1.7% in 2018 and 1.9% in 2019.

Risk assessment

Compared with the June 2016 projection, expectations for economic growth have now been raised slightly for 2017 and pared back marginally for 2018. Expectations for inflation remain largely unchanged on the whole. Referring to the analyses of the Bundesbank's economists, Mr Weidmann remarked, "The risks to projected economic growth appear balanced overall." That said, as crude oil prices increased markedly after the projection assumptions were made, consumer prices could rise further than projected by the Bundesbank's economists, particularly in 2017. In the subsequent years, the risks to the price projection appear to be broadly balanced.