In the current issue of its Monthly Report, the Bundesbank provides an overview of the economic situation in Germany at the turn of 2015-16. According to this report, impetus for economic growth in the fourth quarter came from buoyant domestic demand, whereas external demand had a marked dampening effect. According to the Federal Statistical Office, real economic output in the fourth quarter grew by 0.3% on the quarter. For 2015 as a whole, the increase was therefore 1.7%.

Consumption growth the dominant factor

According to the Bundesbank's report, domestic demand was driven by brisk consumption, which was predominantly attributable to robust increases in employment and significant rises in wages. This was probably boosted by transfer payments and other government expenditure related to the influx of refugees. An additional stimulus was provided by sharply growing housing investment. However, there was only a slight rise in enterprises' willingness to invest in equipment and new buildings.

The Bundesbank's economists state that, at the end of the year, the German economy felt the effects of a lack of demand stimuli not only from China and commodity-producing emerging economies, but also from some industrialised countries outside the euro area. Demand from within the euro area and the euro's sustained favourable exchange rate were unable to make up for this absence.

Expansion of the global economy slowing down slightly

In its Monthly Report, the Bundesbank also gives a detailed account of recent global economic activity. The report explains that global economic growth in the final quarter of 2015 was unable to keep pace with its tempo of the period spanning the second and third quarters of the year. However, this recent deceleration does not reflect a broad-based economic slowdown. Rather, it was due mainly to a perceptible weakening of economic growth in the United States. The authors of the Monthly Report point out that the quarterly US growth figures are subject to comparatively sharp fluctuations. By contrast, the major commodity-exporting countries remained in a tight spot. The ongoing decline in the prices of many commodities is likely to further hurt these countries' economies.

Inflation forecast revised downwards

The Monthly Report draws attention to the fact the prolonged decline in oil prices was reflected in lower energy prices for consumers in the fourth quarter in Germany, while other prices, including for food, went up. Overall, this resulted in constant consumer prices throughout the fourth quarter. However, if crude oil prices develop in line with the current assumptions, the Bundesbank economists expect the year-on-year changes in consumer prices to be negative in some of the coming months.

The sharp fall in oil prices has prompted the Bundesbank's economists to update their projection for the development of consumer prices in Germany in the current edition of the Monthly Report. The Bundesbank now forecasts that annual inflation as measured by the Harmonised Index of Consumer Prices (HICP) will run at around ¼% on average for 2016. This compares with the December forecast that the HICP would rise by 1.1%. To quote the Monthly Report, "This is due primarily to the energy component's significantly sharper negative effect compared with the December projection, which has probably had an even stronger dampening effect than in 2015 and 2009." The Bundesbank is now expecting the HICP to climb by 1¾% in the coming year, which is ¼% down on the rate shown in the December projection.

Growth stronger at beginning of year

In the Bundesbank's view, the German economy could expand at a slightly quicker pace again in the first quarter of 2016 than it did at the end of the previous year. The Monthly Report states that "Greater momentum is likely to be provided by consumption, which is continuing to benefit from the buoyant labour market situation". Furthermore, the economists expect households to have enjoyed substantial purchasing power gains owing to the fresh drop in crude oil prices at the turn of the year. A key prerequisite for boosting economic growth is overcoming the lull in external demand, which, according to the report, would stimulate industrial activity.

Public finances still favourable in 2015

The Bundesbank gave a positive assessment of Germany's public finances in 2015, though the structural budget surplus did contract somewhat. Whilst interest expense continued to fall, social benefits, in particular, increased significantly in the areas of pensions, healthcare and long-term care, but also on account of the influx of refugees. The economists therefore expect to see Germany's public finances to deteriorate to a more or less balanced budget in the current year.

The Bundesbank's economists note that the massive influx of asylum seekers was posing tough challenges for Germany in more ways than one, but that the country's public finances offered ample scope initially thanks to the favourable current economic situation. The deficit ceilings are thus likely to be adhered to in the current year even if the gap will narrow owing to the additional expenditure on asylum seekers and the generally rather lax budget policy. The longer-term budgetary impact of migration is still difficult to gauge. The economists advise fiscal policymakers to gradually restore the safety margins in future budgets. "The pursuit of sound public finances and the implementation of important reforms are not contradictory aims", they state. Not least given Germany's unfavourable demographic outlook, it would make good sense to swiftly reduce the debt ratio to below the ceiling of 60% of GDP.