Germany may grow twice as fast this year as earlier thought, Bundesbank says

FRANKFURT: The German economy could grow around 1percent this year — roughly twice as fast as the most recent projections — driven by robust export demand and government investment, Bundesbank President Joachim Nagel said on Friday.

Germany, the world’s third-largest economy, has barely expanded for the past three years and the Iran war is expected to weaken it further, as expensive energy hits its industries.

But output has been surprisingly resilient and the country is in a cyclical upswing, even if its potential growth remains sluggish, Nagel said in a speech in Frankfurt.

“It’s quite possible that we’ll see real economic growth of around 1percent on average for the year,” Nagel said. “After three years of stagnation, that would indeed be a small but welcome sign.”

The Bundesbank predicted annual growth of 0.5percent in June. While this is among the more pessimistic projections, nearly all major forecasters had seen growth well below 1percent.

“One driver of economic growth is the federal government’s fiscal package, meaning the debt-financed extra government spending focusing on defence, infrastructure and climate protection,” Nagel said. Germany is benefiting from unexpectedly robust demand from abroad, he added.

Germany’s surprisingly strong performance is a key to why forecasters keep upgrading their euro zone projections and now see the bloc expanding at or above its 1percent growth potential this year.

The downside is that resilient growth means more inflationary pressures and this could force the European Central Bank to raise interest rates even further as price growth is now near twice its 2percent target and could accelerate further.

GERMAN INFLATION HITS HIGHEST LEVEL IN ALMOST 3 YEARS

BERLIN: German inflation accelerated to its highest level since December 2023 and seasonally adjusted unemployment rose back above 3 million in September, illustrating the challenges still facing Europe’s largest economy after a stronger-than-expected first half of the year.

Harmonised inflation in Germany rose to 3.3percent year-on-year, preliminary data from the federal statistics office showed on Wednesday, showing the impact of the energy price shock of the Iran war.

Analysts polled by Reuters had forecast the EU-harmonised consumer price index at 3.2percent in September, compared with 2.9percent the month before. Energy inflation rose to 14.9percent in September from 10.5percent in August, and in line with the trend in other big euro zone economies.