The German economy continued to pick up in the fourth quarter of 2016 after a brief setback last summer, according to the February issue of the Monthly Report. Data from the Federal Statistical Office indicate that real gross domestic product (GDP) increased by 0.4% on the quarter at the end of the year. GDP had risen by just 0.1% in summer. In 2016 as a whole, real GDP grew by 1.8% in calendar-adjusted terms. "Thus, the upswing in the German economy with growth rates significantly above the rate of potential growth has been persisting for three years now and overall capacity utilisation is now exceeding normal levels," the Bundesbank economists report.

The report states that consumer prices rose significantly in the final quarter of 2016, climbing by 0.5% on the quarter after seasonal adjustment, following an inflation rate of just 0.3% in summer. It notes that consumers had to pay considerably more in the past few months for energy and food, in particular. However, average consumer price inflation for the year barely rose, increasing by 0.4% in total.

Unemployment down further, despite strong influx of refugees

According to the Monthly Report, the labour market situation improved again somewhat in autumn 2016, with employment once more on the rise after a slight dip in summer. The Bundesbank economists’ assessment of the outlook for employment remains favourable, but they write that it is becoming increasingly clear that filling vacant positions will pose more of a challenge. One possible reason they posit for this is the demographically-induced decline in the potential domestic labour force, which can no longer be fully offset by greater labour market participation.

Unemployment reportedly fell significantly in the final quarter of 2016, despite the high number of refugees registering as job seekers after their applications for asylum had been approved in the past few months; in December 2016, the figure was 6%. According to the Bundesbank economists, leading indicators signal that the labour market is likely to remain upbeat in the coming months, too.

As for the German economy as a whole, the Bundesbank experts also take an optimistic view of the first quarter of 2017 and are anticipating a further expansion in growth. They particularly see industrial activity as a major source of impetus. The favourable situation in the construction sector and the labour market along with the continued positive consumer sentiment were reportedly also contributory factors in this regard, although the rising energy prices could have a dampening effect on private consumption.

Euro area showing robust growth

The cyclical recovery in the euro area remained intact at the end of 2016, the Bundesbank economists report. According to Eurostat, real GDP in the final quarter of 2016 rose by a seasonally adjusted 0.4% on the previous quarter and by 1.7% on the year. Compared with December 2015, the unemployment rate fell by just under one percentage point to 9.6%.

At the beginning of 2017, household and business sentiment remained positive, the economists added. To quote the Monthly Report, "the sentiment indicators for both industry and the services sector were up significantly on their long-term averages." The current high degree of political uncertainty brought about by the political changes both within and outside Europe does not, as yet, appear to be having a noticeable impact on economic activity.

Deflationary fears now less significant

Sentiment and the economic situation have also improved further in the global arena, the Bundesbank economists write. Although growth in global GDP is likely to have declined slightly in the final quarter of 2016, they mainly put this down to the fact that the strong growth in the US economy in the third quarter of 2016 had been fuelled by special factors and was therefore not sustainable. The inflation rate in the industrial countries rose from 0.9% to 1.6% between September and December. Excluding energy and food prices, the rate of inflation climbed to 1.5%. The fears of deflation have therefore become less significant, "whereas upside risks to inflation have clearly come to the fore recently," the Bundesbank economists report.