Warns about stubborn services inflation, wage pressure (Il Sole 24 Ore Radiocor) - Berlin, 07 Jun - The German economy is expected to slowly regain its footing this year with gross domestic product rising 0.3% and then accelerating growth in the following two years driven by a pick up in consumption and an improvement in exports from the second half of the year, according to the latest projections released by the Bundesbank, the German central bank.

Real GDP is seen rising 1.1% in 2025 and 1.6% in 2026. In its December report, the Bundesbank had forecast a 0.4% GDP rise this year followed by a 1.2% and 1.3% increase in the following two years.

"Households are benefiting from strong wage growth, a gradual decline in inflation and a stable labour market," said Bundesbank president Joachim Nagel.

The harmonized index of consumer prices is expected to come in at 2.8% this year, compared to 2.7% forecast in December, dipping to 2.7% in 2025 and to 2.2% in 2026, still above the European Central Bank target of 2%.

Core inflation, which excludes food and energy, is seen at 3.1% this year, 2.5% in 2025 and 2.3% in 2026.

The central bank noted that energy and food price inflation in particular is likely to ease considerably this year but in services it remains stubborn with strong wage growth and the resulting cost pressures are major factors.

Negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter. The higher labour costs will also be reflected in food prices, especially next year. Energy price inflation will then also pick up again somewhat, the central bank said.

"While the inflation rate in Germany is continuing to decline, the pace is subdued. We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts," Nagel said.

The Bundesbank said that public finances are expected to improve, with the government deficit ratio seen shrinking from 2.5% last year to 1.1% in 2026.

"Until 2025, this will be due to the expiry of fiscal crisis assistance measures. The decline in assistance will outweigh sharply rising expenditure in areas such as pensions, defence and staff. Beyond 2025, relief will stem chiefly from somewhat more restrained central government spending, including special funds, and a more favourable economic situation," it said.

The debt ratio is expected to fall to somewhat more than 60% by 2026.

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(RADIOCOR) 07-06-24 10:14:53 (0209) 5 NNNN