Germany facing ‘strong upswing’ – Bundesbank

Central bank revises 2021 GDP growth forecast from 3% to 3.7%
Deutsche Bundesbank headquarters, Frankfurt
Fabian Stürtz

The Deutsche Bundesbank has significantly increased its GDP growth projection for Germany, forecasting a rapid economic recovery, it announced today (June 11).

In its latest biannual economic projections, the Bundesbank revised up its GDP growth estimate for 2021 from 3% in its December 2020 forecast to 3.7%. The Bundesbank expects GDP to expand by 5.2% in 2022 and by 1.7% in 2023.

“The German economy is overcoming the pandemic-related crisis and is at the beginning of a strong upswing,” says the report. The Bundesbank argues that thanks to “a successful vaccination campaign” the pandemic “will be pushed back quickly and sustainably and that the protective measures can be quickly scaled back”.

As a result its experts “anticipate strong catch-up effects, especially in the service sectors that were previously particularly affected and in private consumption”, says the report. In addition, the upswing is being driven by exports, which are benefitting from a gradual recovery in world trade.

The Bundesbank now forecasts German GDP will recover its pre-crisis level this summer.

Key factor

Private consumption will be the main factor boosting the German economy in the months ahead, the Bundesbank report says. This is mainly due to the fact that households’ savings rate has “skyrocketed during lockdown, reducing spending opportunities”.

The Bundesbank estimates additional savings are around €210 billion higher than its expectations in December 2019, or approximately 6.8% of German GDP in 2020.

“Private consumption will initially increase strongly and the savings rate will decrease quickly,” the report says. “The latter should then reach its pre-crisis level at the beginning of 2022.” 

It continues: “After that, the savings rate will continue to fall because it is assumed that around a quarter of the savings that were involuntarily accumulated during the pandemic will be used for additional consumer spending in the further projection period.”

Through 2023, the Bundesbank expects savings to start rising again, supported by a slower growth in the rate of private consumption.

Temporary high inflation

Partly as a result of much higher consumption, the Bundesbank expects inflation to increase at a much higher pace than in the years leading up to the pandemic. In 2021, the harmonised index of consumer prices would rise by 2.6%, the report says.

Another factor contributing to the increase is the government’s restoration of VAT rates to their pre-pandemic levels. Rising crude oil prices are contributing to sharp base effects.

According to early estimates by the European Union’s statistical agency Eurostat, year-on-year inflation in the eurozone reached 2% in May, reaching the inflation target of the European Central Bank (ECB) for the first time since October 2018.

The main contributing factor to this increase have been energy prices, which Eurostat foresees have increased by 13.1% year on year.  

“From today’s perspective, inflation rates of around 4% are possible for a short time at the end of the year,” says the Bundesbank.

Nonetheless, the Bundesbank says in 2022, once these base effects expire and consumption returns to more normal levels, it expects inflation to “decline significantly again”. It expects inflation to “continue to decrease somewhat in 2023”. This is consistent with the ECB’s macroeconomic projections, updated on June 10.

The ECB’s projections now forecast annual inflation at 1.9% in 2021 and 1.5% in 2022, up from 1.5% and 1.2% respectively. As in March, the ECB forecasts inflation to decline to 1.4% in 2023.

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