Germany's economy looks set to continue booming for the time being, and it will ride out the recent setback in the third quarter of 2018, which was largely down to temporary supply-side difficulties in the automotive sector. In their latest projection, the Bundesbank’s economists expect the economy to quickly overcome the dip in growth these problems caused. However, it is probable that aggregate capacity utilisation, which is already at a high level, will increase only slightly further in the coming years. Gross domestic product (GDP), meanwhile, is projected to rise at only a slightly faster pace than potential output, the growth rate of which will also decline. Bundesbank President Jens Weidmann put this outlook down to demographic trends, explaining that on the supply side, they will restrict further growth in employment, thereby contributing to increasing shortages on the labour market, whilst on the demand side, they will depress the need for housing as well as enterprises’ propensity to invest. For the Bundesbank’s economists, private consumption is the main reason why domestic demand is nevertheless as brisk as it is. Private consumption will be buoyed not only by strong wage growth, but also, in 2019 in particular, by expansionary fiscal policy. Furthermore, the new projection assumes that external economic conditions will be stable.

Aggregate output

Against this background, the Bundesbank’s economists expect German GDP to rise by a calendar-adjusted 1.6% in both 2019 and 2020, following an increase of 1.5% this year. In 2021, too – the last year of the projection horizon – growth is projected to remain within this narrow range, coming in at 1.5%. However, while the annual average growth rates will be fairly stable, they mask the fact that the quarterly increases over the course of 2019 will be, on average, considerably higher than in 2018 and will then drop off again slightly.

Price developments

According to the Bundesbank’s projection, the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) will initially fall from 1.9% in 2018 to 1.4% in 2019, before reaching 1.8% again in 2020 and 2021. The main reason for the swing from 2018 to 2019 is prices for energy and food. “While they have been rising strongly in 2018, they will only see limited growth next year. This masks the fact that, against the background of high aggregate capacity utilisation and considerable growth in unit labour costs, the prices of other goods and services are increasing at an accelerated pace,” explained Mr Weidmann. Excluding energy and food, the inflation rate is likely to climb from 1.2% this year to 1.8% in 2020, and might reach 2.0% in 2021, the Bundesbank’s economists write.

Risk assessment

Mr Weidmann commented that in contrast to the June 2018 projection, the new estimates project German economic growth to be only marginally higher than potential output growth in the coming year. The changed outlook for energy prices is the main reason why the inflation forecast for 2019 has been noticeably reduced. In further remarks, the Bundesbank President explained that for economic growth and, to a lesser extent, for the rate of inflation as well, it is the downside risks that predominate as things stand today.