Despite the setback in the third quarter of 2018, the German economy should continue to see solid growth for the time being, in the Bundesbank’s estimation. The Bank’s recently published autumn forecast primarily attributes the slight decline in economic output in the previous quarter to temporary supply-side difficulties in the automotive industry and believes it will be overcome rapidly. The Bundesbank anticipates calendar-adjusted gross domestic product (GDP) growth of 1.5% in 2018, 1.6% in both 2019 and 2020, and potentially 1.5% in 2021. Bundesbank President Weidmann commented that in contrast to the June 2018 projection, the new estimates project German economic growth to be only marginally higher than potential output growth in the coming year. According to the forecast, the already high level of capacity utilisation in the economy is thus likely to rise only slightly over the coming years.

Consumption driving domestic demand

One key factor which is set to shape the next few years is the progressive ageing of the population, which is leading to increasing shortages in the labour market and braking growth potential, according to Mr Weidmann. It is also dampening demand for housing and enterprises’ propensity to invest. For the Bundesbank’s economists, private consumption is the main reason why domestic demand is nevertheless as brisk as it is. The favourable economic situation and tight labour market conditions are leading to robust wage growth, which in turn is spurring on private consumption. The Bundesbank’s economists state that domestic demand will see additional stimulus from the accommodative fiscal policy, especially in 2019. Higher spending is planned above all on pensions, healthcare and long-term care, as well as on education, transport infrastructure, domestic security and defence. Alongside strong domestic activity, exports are contributing to encouraging growth prospects.    

Inflation rate temporarily depressed in 2019

According to the Bundesbank’s forecast, the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) will initially fall from 1.9% in 2018 to 1.4% in 2019, before reaching 1.8% again in 2020 and 2021. Energy and food prices will be the main factor behind the drop between 2018 and 2019. “While they have been rising strongly in 2018, they will only see limited growth next year,” Mr Weidmann said. “This masks the fact that, against the background of high aggregate capacity utilisation and considerable growth in unit labour costs, the prices of other goods and services are increasing at an accelerated pace.” Excluding energy and food, the inflation rate is likely to climb from 1.2% this year to 1.8% in 2020, and might reach 2.0% in 2021, the Bundesbank’s economists write. 

Risk assessment

According to the Bundesbank’s economists, the uncertainty surrounding the macroeconomic outlook has declined somewhat overall compared with the June projection, but is nevertheless still elevated. In their view, unforeseen developments in future international trade relations or a disorderly Brexit, for instance, could result in deviations from the forecast.