Germany's economy is experiencing a strong upswing. Driven by lively foreign demand, the manufacturing sector is seeing dynamic growth, while the sharp upturn in business investment is continuing. In addition, private consumption and housing investment continue to benefit from the outstanding labour market situation. "We will see a persistently high underlying pace of economic growth not only in the final quarter of 2017 and the first quarter of 2018, but also over the remainder of 2018, during which time the German economy will grow robustly," said the Bundesbank’s President Jens Weidmann in reference to the Bank’s new semi-annual economic projection. However, this broad-based, robust economic upswing is reaching an increasingly mature state, which means that the pace of growth is likely to slow in the medium term and converge towards that of potential growth. "The further growth opportunities are being constrained, above all, by strong capacity utilisation and, in particular, labour shortages," said Mr Weidmann. Furthermore, the currently particularly brisk export activity is set to lose momentum, he added.  

Overall output 

Against this backdrop, the Bundesbank's economists expect strong calendar-adjusted economic growth of 2.6% this year and 2.5% next year. In 2019 and 2020, however, growth will slow to 1.7% and 1.5% respectively (in unadjusted terms: 2.3% in 2017 and 1.9 % in 2020). According to Bundesbank experts, the growth rates of gross domestic product (GDP) are thus markedly outpacing those of potential output, particularly in the short term, and aggregate capacity utilisation could soon reach similarly high levels to those seen at the peak of the last economic cycle in 2007. This will be accompanied by increasing bottlenecks in the labour market and perceptibly rising wage increases. 

Price developments 

As measured by the Harmonised Index of Consumer Prices (HICP), the inflation rate, which has increased considerably to 1.7% on average for 2017 owing to markedly higher crude oil prices as well as food shortages, is likely to remain similarly high until 2019 and could rise to 1.9% in 2020. The Bundesbank’s economists state that energy prices, which according to expectations will scarcely rise any further, are concealing increasing price pressure among other goods and services resulting predominantly from more dynamic wage growth. Excluding energy and food, inflation is therefore likely to climb from 1.3% in 2017 to 1.9% in 2019. According to the forecast, an inflation rate of 2.1% is conceivable for 2020. 

Risk assessment 

According to the economists public finances are developing very favourably under the current fiscal policy stance. Buoyed by the exceptionally good economic development and the low interest rates, the fiscal surplus would rise to around 1½% of GDP in the coming years in this scenario. "However, it is likely that once a new federal government has been formed, additional budgetary burdens will be approved and fiscal policy will therefore be more expansionary," Bundesbank President Weidmann explained. This is a key reason why economic growth, and also consumer price inflation, to a lesser extent, could potentially even be somewhat stronger than currently forecast, he explained. 

Compared with the June 2017 projection, the economists have revised the growth forecast upwards by a considerable degree, particularly for 2017 and 2018. Mainly due to the changed outlook for energy prices, the inflation forecast has been raised somewhat for 2017 and 2018 and lowered slightly for 2019.