The German economy is currently following a growth path that is primarily underpinned by domestic demand. Commenting on the Bundesbank's latest semi-annual projection, the Bank's President Jens Weidmann said: "The main drivers are the favourable labour market situation and substantial increases in households' real disposable income, though foreign trade is currently being hampered by frail demand from the emerging market economies." This is making itself felt on industrial investment, the Bundesbank's economists write. "But with export markets outside the euro area expected to rebound and economic growth within the euro area gaining a little more traction, the healthy underlying state of the German economy should stand out even more clearly over the next two years," was Mr Weidmann's upbeat comment on the new semi-annual projection.

Aggregate output

Under these conditions, the Bundesbank's economists expect Germany's real gross domestic product (GDP) to grow by 1.7% this year, followed by a rise of 1.8% in 2016 and 1.7% in 2017. The anticipated upturn in growth is masked by calendar effects. Adjusted for working-day variations, growth rates would stand at 1.7% in 2016 and 1.9% in 2017, following 1.5% this year. The expected rise in GDP thus significantly outstrips the estimated potential growth rate, which has been lifted slightly to 1.3% per annum for the next two years on account of the mass influx of refugees. The Bundesbank's economists therefore expect aggregate capacity utilisation to climb distinctly and build up a widening gap over normal utilisation levels. Despite the expansionary effect which migration is having on the labour supply, the labour market will experience shortages to a growing extent, driving up wage increases. According to the Bundesbank's experts, Germany's general government budget is expected to post a higher surplus still in the current year and record a more or less balanced fiscal outcome in 2016 and 2017 as mounting expenditure, inter alia on account of the influx of refugees, will more than offset favourable cyclical factors and the lighter interest payment burden. 

Price developments 

According to the Bundesbank's projection, consumer price inflation will accelerate as the dampening effect of crude oil prices on inflation gradually peters out. This should more clearly reflect the feed-through of rising domestic cost pressures in the price level. The Bundesbank's economists forecast that inflation, as measured by the Harmonised Index of Consumer Prices (HICP), could rise from 0.2% this year to 1.1% next year and 2.0% in 2017. Oil-price-related base effects can be expected to spark a particularly sharp upturn in inflation rates in the next few months. Excluding energy, HICP inflation should climb from 1.1% in 2015 to 2.0% in 2017. 

Risk assessment

Compared with the June 2015 projection, the Bundesbank's economists have now slightly raised their expectations for economic growth in 2017 and pared back their expectations for inflation over the entire forecast horizon, notably in 2016. The adjustment to expected price developments largely reflects the renewed downturn in crude oil prices, which had not been expected in June. Over the projection period, too, price developments might fluctuate strongly, both upwards and downwards, from the underlying assumptions. Downside risks to economic growth would arise if the current sluggish dynamics in a number of emerging market economies were to worsen; on the other hand, the projected development of world trade is now considered rather cautious, meaning that a more favourable development also appears conceivable. "In addition, the scale of the expected refugee influx and the attendant macroeconomic and fiscal implications are subject to major uncertainty," the Bundesbank's President noted. "Deviations from the scenario assumed in the forecast would chiefly affect government budgets, private consumption, housing construction investment and the labour market," he explained.