The German economy will remain on a sound growth path in the coming years, too, according to the latest Bundesbank projection. "Its main driver is buoyant domestic demand, which is being propelled by the upbeat situation in the labour market and rising household incomes," said the Bundesbank's President Jens Weidmann in reference to the projections of his economists, which are published semi-annually.

However, the Bundesbank's economists expect the present strong growth in household consumption to tail off slightly in the years ahead, seeing as the labour force will increase more weakly than before due to demographic factors. "Moreover, rising energy prices reduced consumers' purchasing power," Mr Weidmann noted. Foreign business, which will continue to be held back by muted growth in global trade next year, should slowly gather steam by 2019, he explained. This is unlikely to fully offset the slight downturn in domestic activity, however, as the economic projection reports.

Against this setting, the Bundesbank's economists expect Germany to post growth rates of 1.8% in calendar-adjusted gross domestic product (GDP) this year and next. For 2018 and 2019, they forecast slightly lower growth of 1.6% and 1.5%, respectively. The raw data, ie the unadjusted figures, produce projected GDP growth of 1.9% for this year. Due to calendar effects stemming from the differing pattern of public holidays, the unadjusted increase in 2017 comes to 1.5%.

Shortages on the labour market

The report states that employment increased more slowly than before in the second and third quarter of 2016. However, the Bundesbank's economists predict that employment will initially rise at a faster rate again in the coming months. Yet the projection indicates that the labour supply in Germany will become increasingly tight in future due to demographic change, amongst other factors. One example given is that the number of working-age residents is constantly falling, and what is more, net immigration could drop considerably. At the same time, the economists believe that growth in labour market participation in Germany is no longer as strong as the average rate over the past few years.

The labour force, which could reportedly grow by another ¾% in both 2016 and 2017, will accordingly expand by only ½% in 2018. Even weaker growth is expected for 2019. According to the report, unemployment will fall slightly in the same period, but here, too, the scope for this to happen will become more limited because of the already low level at present. Nonetheless, the economists argue that the impact of labour market shortages on macroeconomic activity should not be entirely negative. The latter could initially be boosted by longer hours worked per person in employment and rising productivity gains.

The tighter additional labour supply will be accompanied by rising wages in the coming years, according to the projection. Since, at the same time, consumer prices are rising more strongly because crude oil prices are no longer falling, but are on the increase again, households' real income growth is reportedly lower. It can therefore be expected that the rates of increase in private consumption will slacken slightly, predict the Bundesbank's economists. This also applies to the current heavy investment in housing construction, they say, which will be dampened additionally in future by lower demand for housing caused by demographic developments.

Climbing consumer prices expected

Only weak growth in consumer prices is expected this year. Inflation as measured by the Harmonised Index of Consumer Prices (HICP) will probably come to 0.3%, and 1.1% for HICP inflation excluding energy. Non-energy inflation would thus lie somewhat below the ten-year average, the Bundesbank's economists point out. The projection expects considerably higher non-energy inflation in the coming years. One reason given for this is that dampening external factors, such as lower commodity prices, reversed. "In the case of food products, the experience of the past few years has shown that, for many products, increases in commodity prices are passed on to consumers quickly and in full, meaning that inflation should rise markedly in this industry," the report states. Prices of other imports are also expected to rise. Domestic price pressures are thus likely to be felt more strongly.

In Germany, the economists predict that economic growth will distinctly outpace the increase in potential output in the coming years. Aggregate capacity utilisation is therefore likely to be high in 2019. Together with the strained labour market situation, which will result in significantly higher growth in labour costs from 2018, this is predicted to push up consumer prices further. Overall, HICP inflation excluding energy will rise to 1.7% year-on-year in 2018 and to 1.9% in 2019, according to the projection. Energy prices are likely to increase at similar rates as other goods and services in the years following 2016, with the result that consumer prices will rise at the same rates overall.

Balanced risks to projection

Compared with the June 2016 projection, expectations for economic growth have now been raised slightly for 2017 and pared back marginally for 2018. Expectations for inflation thus remain largely unchanged on the whole. Referring to the analyses of the Bundesbank's economists, Mr Weidmann remarked, "The risks to projected economic growth appear balanced overall". That said, as crude oil prices increased markedly after the projection assumptions were made, consumer prices could rise further than projected, particularly in 2017. In the subsequent years, the risks to the price projection appear to be broadly balanced.