Bundesbank Lowers German Growth & Inflation Forecasts

(RTTNews) - Germany's economic growth momentum remains robust, supported by domestic demand and a strong labor market, but the biggest euro area economy is set to expand at a pace slower than those projected earlier due to sluggish exports, the Bundesbank said Friday, while lowering its growth and inflation forecasts.

The German economy is set to grow 1.7 percent this year, the German central bank said in its semi-annual report. The forecast was lower than the 1.8 percent predicted in December.

The growth projection for next year was slashed to 1.4 percent from 1.7 percent. The economy is likely to expand 1.6 percent in 2018, the bank said.

"Its main driver is buoyant domestic demand, which is being bolstered by the favorable situation in the labor market and by rising household income," Bundesbank President Jens Weidmann said.

"In the coming years, however, it is likely that exports will gain more traction and compensate for domestic demand, growth of which is expected to tail off somewhat."

Citing the renewed fall in prices of oil and other commodities, the bank slashed the inflation forecast for this year to 0.2 percent from 1.1 percent. The outlook for next year was also lowered to 1.5 percent from 2 percent. Inflation is seen at 1.7 percent in 2018.

The downward revision was also due to the unexpectedly low inflation rate for services and industrial goods, excluding energy, in the first half of 2016, the bank said.

The dampening effect of the renewed fall in the prices of crude oil and other commodities at the start of this year should largely vanish as of 2017, which means that growth in domestic wage costs is likely to once again manifest itself more visibly in consumer prices, the bank said.

"Fluctuations in the price of crude oil continue to present a risk, particularly for the price projection, but on the whole appear balanced, as do the risks to economic growth," Weidmann said.