The German economy grew unexpectedly in the first quarter. This raises hopes that the economic downturn is coming to an end. The Bundesbank’s growth expectations are nevertheless cautious.
The Bundesbank sees the German economy slowly on the up after a period of weakness lasting around two years. Supported by increasing private consumption and better export business from the second half of the current year, the German economy is gradually regaining its footing.
“Private households are benefiting from sharply rising wages, gradually falling inflation and the stable labor market,” said Bundesbank President Joachim Nagel in explaining his bank’s latest half-yearly economic forecast. In the first quarter, the German economy surprised with mini-growth of 0.2 percent, supported by exports and increased construction investments.
For the whole of 2024, the Bundesbank expects German economic output to grow by 0.3 percent. In December, a 0.4 percent increase in real gross domestic product (GDP) was forecast. In the medium term, the central bank’s economists expect slightly stronger growth of 1.1 (December forecast: 1.2) percent in 2025 and 1.4 (1.3) percent in 2026.
Inflation is declining at a moderate pace
The inflation rate in Germany continues to fall, but at a somewhat more moderate pace. The Bundesbank now expects an inflation rate calculated according to the European method (HICP) of 2.8 percent this year and 2.7 percent in 2025. The December forecast had predicted slightly lower figures: 2.7 percent for 2024 and 2.5 percent in 2025. The Bundesbank’s inflation forecast for Europe’s largest economy for 2026 remains unchanged at 2.2 percent.
“In particular, the price of energy and food is falling considerably this year,” explained the Bundesbank. “However, inflation is proving to be persistent, especially in the services sector. The sharp rise in wages and the resulting cost pressure are playing an important role here.”
ECB “not on autopilot” when it comes to interest rate cuts
The European Central Bank (ECB) is aiming for medium-term price stability for the entire euro area with an annual inflation rate of two percent. Higher inflation rates reduce the purchasing power of consumers. They can then afford less for one euro. After the interest rate cut decided by the ECB Council on Thursday, Nagel reiterated the cautious approach to further downward steps: “With regard to interest rate cuts, we in the ECB Council are not driving on autopilot.”
Source: Stern
