After a boom phase, the German economy is currently experiencing a marked cooldown. While the forces driving the domestic economy remain intact, the underlying cyclical trend is subdued. This is mainly attributable to the downturn in industry, where lacklustre exports are taking their toll. According to the Bundesbank’s latest projection, exports should, however, gradually start to pick up again from the second half of the year onwards. Once this happens, industrial output should also rise again. “These developments should see Germany’s economic dichotomy become less pronounced,” Bundesbank President Jens Weidmann commented on the new macroeconomic forecast. “Once foreign demand picks up, German economic growth will be more broadly based again,” Weidmann added. Growth in private consumption and investment should remain solid. Fiscal policy is expected to provide stimulus to support the domestic economy. Over the next two years, however, private consumption and investment will grow somewhat more slowly than this year, according to the projection. This is the result of the demographic ageing of the population, amongst other things, which will cause a considerable slowdown in employment growth.

Aggregate output

Against this backdrop, the Bundesbank’s economists expect real gross domestic product (GDP) to expand by just 0.6% after calendar adjustment in the current year. However, momentum should be noticeably higher again next year, at 1.2%. It could then accelerate slightly again in 2021 and return to the pace at which aggregate capacity is expanded. The Bundesbank’s experts believe that capacity utilisation will remain distinctly higher than the norm throughout the projection horizon.

Price developments

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP), is likely to weaken significantly this year, from 1.9% in 2018 to 1.4%, according to the Bundesbank projection. This is due, above all, to lower energy price inflation. In the following two years, energy prices are expected to accelerate slightly, if at all. Other goods and services, by contrast, are likely to experience somewhat stronger price growth from year to year given rising import prices and persistent wage pressure. Accordingly, the inflation rate excluding energy and food could go up from 1.3% in 2018 to 1.7% in 2021. “Headline inflation is likely to come in at 1.5% next year and rise to 1.7% in 2021,” Weidmann said.

Risk assessment

As compared with last December’s projection, the Bundesbank’s economists now expect significantly lower economic growth for 2019, in particular. They anticipate lower consumer price inflation, especially for 2020. “As things currently stand, the downside risks predominate for economic growth and, to a lesser extent, for inflation,” Bundesbank President Weidmann stressed.

Projection June 2019

Source: Federal Statistical Office. 2019 to 2021 Bundesbank projections.