Publication - Outlook for the German economy – macroeconomic projections for 2017 and 2018 and an outlook for 2019
Germany’s economy is on a sound upward path. The chief source of growth is buoyant domestic demand, which is being propelled by the upbeat situation in the labour market and rising household incomes.
However, the highly favourable setting for household consumption at present looks set to turn slightly gloomy in the years ahead as demographic constraints soften employment growth and higher rates of inflation erode consumers’ purchasing power. Foreign business, which will continue to be held back by muted growth in global trade next year, should slowly gather steam as the markets for German exports improve, but this is unlikely to fully offset the slight downturn in domestic activity.
In this scenario, the German economy could post calendar-adjusted growth rates of 1.8% this year and next, before expanding at a slightly flatter pace of 1.6% in 2018 and 1.5% in 2019. The rates of expansion expected throughout the projection horizon are therefore distinctly higher than the increase in potential output. Aggregate capacity utilisation at the end of the projection horizon is thus likely to be significantly higher than the long-term average. This will be accompanied by mounting labour market bottlenecks that will be amplified still further by unfavourable demographics and be a catalyst for markedly brisker wage growth. Barring new fiscal charges, Germany’s public finances are projected to continue generating surpluses, though these should fall slightly short of last year’s figures. Upbeat cyclical factors and dwindling borrowing costs are masking the underlying expansionary fiscal stance. A steady decline in the debt ratio is projected, possibly down to the 60% limit by 2019.
The sharp fall in energy prices is the chief reason why average consumer price inflation for 2016 remains distinctly muted. Only from next year onwards will the effect of domestic factors probably begin to become evident. As measured by the Harmonised Index of Consumer Prices (HICP), inflation could rise from 0.3% this year to 1.4% next year. Excluding energy, HICP inflation is expected to climb from 1.1% to 1.4%. With labour costs then projected to pick up more strongly, both the headline inflation rate and the rate excluding the energy component could increase to 1.7% in 2018 and 1.9% in 2019.
Compared with the June 2016 projection, expectations for economic growth have now been raised slightly for 2017 and pared back marginally for 2018. Expectations for inflation remain largely unchanged on the whole. The risks to projected economic growth appear balanced overall. Consumer price rises could be stronger in 2017 than projected here, as oil prices have risen considerably since the assumptions were made. The risks appear balanced in the subsequent years seeing as the rise in the price of crude oil is then likely to have less of an inflationary effect and it might not be possible to pass on higher labour costs to prices to the extent assumed here.
page source http://www.bundesbank.de/
