Key facts
- Government spending is projected to be the sole factor preventing a decline in German GDP.
- The Bundesbank estimates government spending will boost growth by 1.3 percentage points by 2028.
- High energy costs and interest rates are expected to negatively impact households and businesses.
- Inflation is forecast to remain above the European Central Bank's 2% target through 2028.
- The Bundesbank chief suggested potential interest rate hikes in July.
The German economy is expected to avoid a recession this year, primarily due to significant government spending on defense and infrastructure, according to the Bundesbank. Despite these fiscal measures, the ongoing war in the Middle East and its impact on energy prices, coupled with higher interest rates, are projected to hinder growth and keep inflation elevated.
The Bundesbank forecasts that expansionary fiscal policy will offset the negative effects of the war, providing a cumulative boost of 1.3 percentage points to growth by 2028. However, the central bank warns that high energy costs will diminish household purchasing power, while businesses may face supply bottlenecks and weaker demand. Uncertainty and rising interest rates are also expected to dampen private investment.
The outlook for inflation remains concerning, with the Bundesbank not expecting underlying price growth to return below the ECB's 2% target within its forecast horizon through 2028. Overall inflation is projected at 2.9% this year and 2.7% in 2027, with underlying inflation at 2.6% and 2.5% respectively. These figures support the Bundesbank chief's stance that the ECB may need to consider further interest rate increases in July.