The Bundesbank predicts that the outlook for Germany's economy will remain upbeat. Commenting on the Bank's most recent semi-annual projection, Bundesbank President Jens Weidmann says, "Its main driver is buoyant domestic demand, which is being bolstered by the favourable situation in the labour market and by rising household income." The Bundesbank's economists expect Germany's price-adjusted gross domestic product (GDP) to climb by 1.7% this year and by 1.4% in 2017. This downward revision by 0.1 and 0.3 percentage point, respectively, of the figures projected in the Bank's December forecast came mainly in response to what the economists assume will be a deterioration of the international environment. The Bank predicts that the economy will expand by 1.6% in 2018 and that a phenomenon known as calendar effects will mask rather uniform growth rates in working-day-adjusted terms of 1.6% in both 2016 and 2017 and 1.7% in 2018.

EU migration driving high employment

The Bank's projection assumes that domestic activity will once again this year be spurred by the strong employment growth which is being fuelled to a considerable degree by employment-driven migration. "The number of migrants from other EU countries, who integrate comparatively quickly into the labour market, remained very high," the Bank's economists write, pointing to the 310,000 boost in German employment in the fourth quarter of 2015 and the first quarter of 2016, which is substantially up on the last-published December projection. The combined impact of robust income growth and migration from other EU countries is bolstering private consumption and residential construction, they note. 

Yet activity is being fuelled by more than just stronger employment and income levels. The Bundesbank's projection assumes that the renewed slide in crude oil prices will also shore up domestic demand this year, since consumers generally tend to have more money in their pockets if goods and services influenced by oil prices cost less. The Bank's experts identify an expansionary fiscal policy as another factor spurring activity, singling out the additional government expenditure in connection with the influx of refugees as a major source of stimulus. 

Stimuli for foreign business limited at best

On a more downbeat note, foreign business looks set to receive only limited stimuli in the current year, as world trade is growing at only a subdued rate. Another strain which the Bank's experts assume will become evident in annual average terms is the loss by German exporters of some of their considerable earlier gains in market share in the second half of 2015, a development the Bank's experts believe will continue somewhat in 2016. "In the coming years, however, it is likely that exports will gain more traction and compensate for domestic demand, growth of which is expected to tail off somewhat," Mr Weidmann explained. The Bank's experts see a pick-up in exports as a key prerequisite for sustaining the German economy's upbeat outlook, since a number of the drivers currently propelling activity, such as housing demand, might lose steam towards the end of the projection horizon. "In 2018, the unfavourable demographic trends that Germany is currently experiencing could intensify as immigration decreases, which will probably be accompanied by a perceptible decline in housing demand and considerably weaker investment activity in the housing market," they caution.

Consumer price developments

Besides analysing economic growth, the Bundesbank's projection also includes an assessment of price developments in Germany. As measured by the Harmonised Index of Consumer Prices (HICP), inflation could rise from an expected 0.2% this year to 1.5% next year and 1.7% in 2018.

The Bank's economists have thus lowered their inflation expectations, which, in the December projection, had stood at 1.1% for 2016 and 2.0% for 2017. They attribute their downward revision to the price projection to an unexpectedly low inflation rate for services and industrial goods (excluding energy) in the first half of 2016, but it was the surprising renewed fall in the price of crude oil at the beginning of 2016 which mainly prompted their revision. "Fluctuations in the price of crude oil continue to present a risk, particularly for the inflation forecast, but on the whole appear balanced, as do the risks to economic growth," Mr Weidmann explained. The Bundesbank's experts predict that the growth in domestic wage costs will once again manifest itself more visibly in consumer price inflation and that the dampening effect of the prices of crude oil and other commodities will then vanish.