“The German economy is overcoming the coronavirus crisis and is poised for the start of a strong upswing,” writes the Bundesbank in its outlook for 2021 to 2023. It assumes that the pandemic – underpinned by a successful vaccination programme in particular – will be quickly and sustainably suppressed, which in turn will allow protective measures to be swiftly rolled back. The Bundesbank’s economists anticipate substantial catch-up effects, primarily in private consumption as well as in services sectors that had been impacted especially hard by the measures. In addition, the upswing will be driven by exports as these benefit from the recovery in global trade, which will level off only gradually. Given these conditions, the Bundesbank expects real gross domestic product (GDP) to grow in calendar-adjusted terms, rising by slightly less than 4% this year and just over 5% next year. This growth should be somewhat weaker in 2023, when it will amount to nearly 2%. “Pre-crisis levels will be reattained as early as this summer,” states the Monthly Report.

Private consumption is key driver of the upswing

In the final quarter of 2020 and the first quarter of 2021, private consumption fell sharply in light of the difficult situation regarding the pandemic and the stringent measures taken to contain it, write the Bundesbank’s economists. At the same time, there was a surge in the household saving ratio. According to an online survey conducted by the Bundesbank, the unusually high level of saving was attributable primarily to mandatory store closures, travel restrictions, and fear of infection. Traditional precautionary motives based on potential losses of income played only a subordinate role. As the vaccination programme progresses and containment measures are eased, it is likely that pandemic-related reasons for saving will swiftly lose significance. Private consumption will subsequently see strong initial growth and the saving ratio with drop off rapidly. The latter will then probably return to its pre-crisis level at the beginning of 2022. “The saving ratio will then continue to fall, as it is assumed that around one-quarter of the involuntary savings that were accumulated during the pandemic will be used for additional consumption expenditure over the rest of the projection horizon.” The Bundesbank expects that the saving ratio will rise again during the course of 2023, which will lead to a perceptible slowdown in the pace of growth in private consumption.

Inflation rate set to rise strongly for a time

The Bundesbank assumes that the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) will rise strongly to 2.6% this year. Among the factors that contributed to this were the raising of VAT rates back to their previous levels and the newly introduced CO₂ emission certificates. In addition, prices for crude oil and agricultural products increased to an unexpectedly large degree. “Overall, as things stand, at the end of the year, inflation rates could briefly hit the 4% mark,” state the Bundesbank’s economists. The headline inflation rate is likely to continue receding markedly in 2022 as the one-off effects largely wear off and will also fall slightly in 2023. Consumer prices for energy are then likely to rise at diminishing rates. This obscures the fact that the core rate excluding energy and food – also adjusted for the VAT effect – will rise as a result of the upswing, the improved labour market situation, and renewed stronger wage growth.

Labour market appears very robust

Despite the resurgence of the pandemic and the containment measures subsequently taken in the fourth quarter of 2020 and the first quarter of 2021, the labour market proved extremely stable. “To adapt to the reduced economic activity, working hours were shortened, especially through the use of short-time working arrangements,” write the Bundesbank’s experts. Employment and unemployment, on the other hand, remained virtually constant. The Bundesbank assumes that, in the wake of the economic recovery, the labour market will already start to show substantial improvement in the second and third quarters of the current year. Strong aggregate demand will probably further stimulate the labour market in the course of 2022, which will see employment subject to social security contributions rise to well over its pre-crisis level. In the last year of the projection period, there are likely to be increasing supply bottlenecks on the labour market. Against this background, the Bundesbank expects noticeably larger increases in negotiated wages in 2023.

Public finances bolstering the economy

“Public finances will continue to significantly bolster the economy in the current year as well,” write the Bundesbank’s economists. This year, the general government deficit will continue to rise to more than 5% of GDP, and the debt ratio will increase to more than 70%. They will both then decline considerably again in the coming years. This is due to the fact that, as the crisis is overcome, most of the government coronavirus-related measures will expire and the burdens placed on the budget due to the economic slump will be resolved.

Pandemic-related uncertainty reduced due to vaccination campaign

According to the Report, the future trajectory of the coronavirus pandemic and its macroeconomic consequences remain difficult to assess. “However, chiefly on account of the ongoing vaccination campaign, uncertainty in this area has already decreased substantially.” If the virus mutates in a way that substantially reduces the efficacy of the vaccine, significant setbacks could occur over the entire projection horizon. The longer it takes to overcome the pandemic on a global scale, the greater this risk will be. Aside from weaker foreign demand, immediate protective measures taken in Germany could also then impair the domestic economy once again.

On the other hand, the Bundesbank’s economic experts also see the possibility that the pandemic-related burdens on the economy could ease up at an even quicker pace. Furthermore, the upswing could be even greater if pent-up demand is released sooner and more strongly overall than expected. For instance, households could spend the additional savings they have accumulated during the pandemic more quickly or on a larger scale. In that case, inflation could also be higher. In addition, the exceptionally high inflation rates projected for the second half of 2021 could ultimately shift economic agents’ inflation expectations. As a result, wage and price-setting behaviour could change and exert further inflationary pressure.