German economy set for post-pandemic bounce in growth and prices, Bundesbank says

The shops on Kaufinger Strasse are closed due to the coronavirus pandemic (COVID-19) in Munich, Germany, February 5, 2021. REUTERS / Michaela Rehle / File Photo

German production is recovering from its pandemic-induced slump and inflation could rise faster than currently expected, which could possibly affect the behavior of the economy, the German central bank said on Friday.

The Bundesbank has raised its growth and inflation forecasts for this and next year and assumes that the vaccination campaign will quickly and permanently contain the coronavirus outbreak and that the restrictions will soon be relaxed.

She now expects the German economy to reach the pre-pandemic level in the next quarter and grow by 3.7% this year, 5.2% next year and 1.7% in 2023.

“The German economy is overcoming the pandemic-related crisis,” said Bundesbank President Jens Weidmann.

The German central bank also raised its inflation forecasts for this and next year and warned of “upside risks”.

This year inflation was now 2.6%, the highest since 2008 and well above the European Central Bank’s price growth target of “below, but close to 2%”.

But the Bundesbank downplayed the importance of the increase and blamed energy prices and tax effects in particular.

Without this, inflation would be only 1%, as in the previous year and well below the level of 2019, said the BuBa.

However, she still warned that the sudden spike in prices, with inflation set to hit 4% in late 2021, could hurt perceptions after a long period of low inflation.

“The exceptionally high inflation rates forecast for the second half of 2021 by German standards could ultimately change the inflation perceptions and expectations of economic participants,” it said.

“This could change wage and price-setting behavior and exert further inflationary pressure. This would be the case in particular if overall price inflation were to be even higher than estimated here in the near future.”

The German consumer price index reached a 10-year high of 2.4% in May.

But inflation, usually a hot topic in a savings-oriented country, has not been an issue in the election campaign. All major parties agree with the generally restrictive Weidmann view that the jump is likely to be temporary.

The ECB promised to provide ample incentives on Thursday despite the better prospects, despite three policy makers objecting to the decision at the meeting.

(December forecasts in brackets)

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