The German economy is currently in a difficult environment. Nevertheless, in its new projection for 2012 and 2013, the Deutsche Bundesbank expects the upturn to continue. At present, the German economy is mainly being influenced by three factors. Firstly, demand for German products from within the euro area is suffering as a result of the adjustment recession in some euro-area countries. Secondly, the world economy has regained its footing. Thirdly, good labour market conditions and very favourable financing conditions are generating important stimuli for domestic demand.  Jens Weidmann, President of the Bundesbank, has commented on the new projection as follows: “Provided that the sovereign debt crisis in the euro area does not escalate, I assume that expansionary forces will keep the upper hand. All in all, the economic picture in Germany is much more favourable than in most other European economies.”

Macroeconomic output

In its half-yearly projection, the Bundesbank therefore expects price-adjusted gross domestic product (GDP) to rise by 1.0% in 2012. Economic activity is likely to gain momentum over the course of 2012 in view of the still-sound state of the world economy and very favourable financing conditions. Real GDP could then grow by 1.6% in 2013.

Labour market

The Bundesbank anticipates that the positive labour market trend will essentially continue. However, growth in employment will probably lose pace. The official unemployment figure is likely to average 2.8 million for 2012, which would correspond to an unemployment rate of 6.7%. The rate could decline to 6.5% in 2013.

Price developments

Consumer price inflation in Germany will probably slow down in the forecast period. The average annual inflation rate could thus be 2.1% in 2012 and 1.6% in 2013, based on the assumption that energy prices will see a merely limited rise and domestic price pressures will increase only moderately.

Risk assessment

The risks to this projection are mostly external. If the weaker activity in the euro area – which is already included in the estimate – were to be compounded by a perceptible dampening of economic activity in non-euro-area countries, this could have a severe impact on the German economy. In view of the political situation in Greece and the problems in the Spanish banking sector, further developments in the euro-area sovereign debt crisis are another source of considerable uncertainty.

All in all, this projection is therefore subject to exceptionally high uncertainty and risk. However, by no account does President Weidmann see only downside risks: “If confidence is restored more quickly than we assume in the baseline scenario, the very advantageous financing conditions could also have a stronger expansionary effect on the German economy.”