New Bundesbank projection: economic boom continues

By   /  June 15, 2018  /  Comments Off on New Bundesbank projection: economic boom continues

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Source: Deutsche Bundesbank in English

Germany’s economic boom will continue. The already high level of capacity utilisation in the economy will increase up until 2020, although growth is unlikely to be quite as strong as in 2017. Growth in exports and business investment will be less strong. In addition, the rising shortage of skilled workers will increasingly dampen employment growth. Despite significantly stronger wage dynamics, this will act to brake the rise in households’ disposable incomes, which will reduce the underlying momentum of private consumption. By contrast, aggregate demand will be supported by expansionary fiscal measures, particularly in the coming year, although the extent to which government announcements were factored into the projection was limited. “Overall, the projection paints a picture of an ongoing economic boom, in which increasing supply-side bottlenecks are reflected in strong wage growth and in higher domestic inflation,” noted Bundesbank President Jens Weidmann in reference to the Bank’s latest economic projection. 
Overall output
Against this backdrop, the Bundesbank’s economists expect calendar-adjusted economic growth of 2.0% this year and 1.9% next year. In 2020, real gross domestic product (GDP) could increase by 1.6% in calendar-adjusted terms. German economic growth will therefore consistently outstrip potential output growth, they write.
Price developments
According to the Bundesbank’s forecast, the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) will rise to an annual average of 1.8% in 2018. Price pressures are thus marginally higher than in the previous year. The inflation rate will then remain at roughly this level in the next two years. “The fact that energy prices are forecast to lose a lot of their momentum and finally even to fall will mask stronger inflation for other goods and services,” explained Mr Weidmann. Excluding energy and food, the inflation rate is therefore likely to climb from 1.4% this year to 1.7% in 2019. The Bank’s economists project a core inflation rate of 2.0% for 2020.
Risk assessment
Compared with the December 2017 projection, the Bank’s experts now expect noticeably lower economic growth for 2018, as opposed to slightly higher growth for 2019 and 2020. “Uncertainties regarding the prospects for the German economy are considerably greater than they were,” emphasised Bundesbank President Weidmann. According to the Bank’s economists, downside risks relating to the external environment outweigh the effects resulting from the probably more expansionary fiscal policy in Germany. The inflation forecast for 2018 was raised slightly, mainly because of the changed outlook for energy prices, while that for 2020 was marginally lowered. In this context, risks to price developments are viewed as being balanced overall.

MIL OSI

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