The economic upturn in Germany is likely to continue, according to the Bundesbank’s latest projection. It indicates that calendar-adjusted gross domestic product (GDP) could grow by 1.9% this year, 1.7% next year and 1.6% in 2019. Compared to their projection last December, Bundesbank economists have thus revised their expectations upwards, citing as a reason the recovery of global trading activity, which at the time had not been expected to occur so rapidly and on the scale seen. This is providing added impetus to the upturn, which was previously propelled mainly by consumption and housing investment. The current underlying cyclical trend is now deemed to be somewhat stronger than previously expected, write the Bundesbank’s economists, who now expect somewhat higher growth for German exporters’ sales markets in 2017 as well.  

Tight labour market 

Overall, the positive outlook for the German economy is due to a broad-based and fairly brisk upswing. “Thanks to the very healthy labour market situation, private consumption, together with general government demand and investment in housing, will ensure an ongoing solid underlying pace,” said the Bundesbank’s President Jens Weidmann in reference to the Bank’s new projection. In addition, exports and revived business investment are set to prop up growth. However, supply bottlenecks in the labour market are likely to become increasingly evident, which is to say that fewer people will be additionally available for employment. “This should not only drive up wage inflation, but may also tend to curtail growth potential,” said the Bundesbank’s President. According to the projection, enterprises are, given the high demand for labour, already frequently having difficulty filling positions with properly skilled staff. Thus far, labour-market-oriented immigration, particularly from other EU countries, has mitigated the tightness in the German labour market. However, the reasons for workers coming to Germany in recent years – which include the introduction of the free movement of workers for eastern European countries, the pay gap between Germany and these countries, and the high unemployment in some southern European countries – are now waning, note the Bundesbank’s economists. 

Energy and food prices to rise 

Consumer prices in Germany will spike initially, according to the current projection. The inflation rate as measured by the Harmonised Index of Consumer Prices (HICP) could rise from 0.4% in 2016 to 1.5% in 2017. In 2018, it could see a slight drop to 1.4% before climbing to 1.8% in 2019. As against December 2016, expectations are thus 0.1 percentage point higher for this year, and 0.3 and 0.1 percentage point lower, respectively, for the coming years. The Bundesbank’s experts believe that the resurgent prices of crude oil and food are fuelling the steep rise expected in the first instance. According to the assumptions, however, the price increases for energy and food will subside again considerably in 2018. “This would obscure the upward-pointing underlying price trend,” write the economists, noting that this is manifested in their projection for core inflation excluding energy and food. They expect this rate to gradually increase from 1.3% in 2017 to 1.9% in 2019. 

Risks balanced overall

The international setting is the source of potential risks to inflation and economic growth, according to the Bundesbank’s expert assessment. Possible protectionist measures could weaken German growth, while inflationary pressure from international competition may eat into German enterprises’ margins. “By contrast, upside risks to growth and inflation predominate among domestic factors,” Bundesbank President Weidmann emphasised.