The German economy has picked up momentum. Aggregate output is expanding at a faster pace again after an interruption due to the escalation of the sovereign debt crisis in the euro area. The driving forces are changing, however. While external impulses had the upper hand following the economic and financial crisis, domestic economic activity has come to fore recently. "The German economy is in good shape: the unemployment rate is low, employment is rising, and wage growth is returning to normal," commented Jens Weidmann, President of the Deutsche Bundesbank, on the new semi-annual projection. He also pointed out that interest rates are at a low level. "These factors are supporting private consumption and driving housing construction." By contrast, external trade has been weakening of late, he added. "With the cyclical situation continuing to become brighter in the industrial countries and the emerging improvement in the euro area, there should, however, also be a pick-up in exports and, in their wake, an upturn in corporate investment and imports," explained Mr Weidmann.

Aggregate output

The Bundesbank’s economists estimate that, under these conditions, the German economy will grow by 1.7% in 2014 and by 2.0% in 2015 (1.8% after calendar adjustment), compared with a rise of no more than 0.5% (0.6% after calendar adjustment) in the current year. Given potential growth of 1.4% in each of the next two years, aggregate capacity utilisation will increase moderately from a normal level. Employment would show a further increase; above all, newly arrived immigrants are likely to find a job. The current account surplus could fall to the level it had been at before the sovereign debt crisis escalated. Leaving aside the effects of the new German government’s coalition agreement, which were not incorporated into the projection, the government budget will show something of an improvement and achieve a surplus of just under ½% of gross domestic product (GDP) in 2015. There is likely to be a distinct fall in the high debt ratio.

Price developments

The sustained improvement in the labour market situation compared with the past decade is reflected in an acceleration of wage growth, which is to be seen as a normalisation. Consumer price inflation as measured by the Harmonised Index of Consumer Prices (HICP) could initially moderate from 1.6% in 2013 to 1.3% in 2014, but then go up again to 1.5% in 2015. If energy is excluded, the rate of inflation is likely to increase to 1.9% in 2015 in the wake of the accelerated rise in wages.

Risk assessment

The risks to the forecast are to be seen, first, in the external setting. The effects of the euro-area sovereign debt crisis have been contained and major reforms have been initiated. Nevertheless, the high level of debt and the structural problems that continue to exist mean that the European and global economies will remain highly vulnerable. The existence of domestic risks is another factor. "A number of the prospective measures in the coalition agreement, such as the minimum wage, risk harming the efficiency of the labour and goods markets, and the fiscal stance is to be eased," warned Mr Weidmann. The fact that the underlying pace of growth might turn out to be stronger than described in the projection is to be seen as a cyclical upside opportunity.