Bundesbank Says German Upswing Ages as Growth Outlook Raised

(Bloomberg) -- The German economic upswing is reaching an “increasingly mature state,” according to the Bundesbank.

The Frankfurt-based institution lifted its projections for growth in Europe’s largest economy through 2019 and said it expects momentum to remain strong over the coming year, before moderating in the medium term. The Bundesbank sees inflation accelerating to 1.9 percent in 2020, with energy costs concealing underlying price pressures.

“We will see a persistently high underlying pace of economic growth not only in the final quarter of 2017 and the first quarter of 2018, but also over the remainder of 2018, during which time the German economy will grow robustly,” Bundesbank President Jens Weidmann said in a statement. “The further growth opportunities are being constrained, above all, by strong capacity utilization and, in particular, labor shortages.”

German GDP growth Headline inflationCore inflation
20172.6% (prior forecast 1.9%)1.7% (prior forecast 1.5%)1.3% (prior forecast 1.3%)
20182.5% (1.7%)1.6% (1.4%)1.6% (1.7%)
20191.7% (1.6%)1.7% (1.8%)1.9% (1.9%)

Europe’s largest economy has excelled this year as record-low unemployment bolsters private consumption and a recovery in global trade fuels exports and investment. The 19-nation euro region is benefiting from Germany’s success -- the European Central Bank upgraded its outlook on Thursday, even though President Mario Draghi cautioned that monetary stimulus is still needed.

The strength of the upswing is underlined by the fact that German companies seem to be little fazed about German Chancellor Angela Merkel’s struggle to form a new government. Business confidence hit a record in November as expectations improved. Economic momentum accelerated at the end of the year, with a Purchasing Managers’ Index for manufacturing jumping to the highest level since data collection started in 1996.

Stellar economic performances across the currency bloc have encouraged some policy makers -- including Weidmann -- to call for a commitment to end unprecedented support.

At its meeting on Thursday, the Governing Council reiterated its plans to halve asset buying to 30 billion euros ($35 billion) a month in January and continuing purchases until at least the end of September. Draghi said the discussion at the ECB’s final policy meeting of the year “reflected the increasing confidence that we have in the convergence of inflation toward a self-sustained path in the medium term.”

Economists surveyed by Bloomberg before Thursday’s decision predicted the ECB will end quantitative easing with a short taper by the end of next year, before raising interest rates for the first time in the second quarter of 2019.

German Surplus

Buoyed by strong economic momentum and low interest rates, Germany’s fiscal surplus could rise to around 1.5 percent of gross domestic product in the coming years, according to the Bundesbank.

“It is likely that once a new federal government has been formed, additional budgetary burdens will be approved and fiscal policy will therefore be more expansionary,” Weidmann said, adding that as a result, growth and inflation could potentially be even stronger than currently forecast.

©2017 Bloomberg L.P.