Bundesbank considers 4 percent inflation possible

German economic output is growing again, and the Bundesbank’s economists are predicting a rapid recovery from the pandemic. And give several reasons.

If the economy recovers faster, prices are likely to rise faster on average.

NAfter the German economic output declined at the beginning of the year, there are now signs of a rapid economic recovery. The experts at the Bundesbank expect at least that the gross domestic product (GDP) will increase significantly again in the second quarter. Increasing easing of the corona measures also boosted the mood of companies in the monetary union in May – it was better than it has been since February 2018.

If the vaccination progress is rapid, there is a prospect that the containment measures could be relaxed considerably in the coming months, write the Bundesbank’s economists in their current monthly report published on Friday. Then the gross domestic product could increase strongly in the third quarter and exceed its pre-crisis level again in autumn.

Better mood

As a result, the inflation rate is likely to rise further in the course of the year. The Bundesbank believes that the harmonized HICP consumer price index, which is decisive for the monetary policy of the European Central Bank (ECB), could temporarily reach four percent in Germany by the end of the year. The main reason is the special statistical effect in the area of ​​package tours, which had temporarily come to a standstill due to the pandemic last year.

In the first quarter of 2021, according to preliminary figures, GDP fell by 1.7 percent compared to the previous quarter. In the monetary union as a whole, economic output fell by 0.6 percent compared with the previous quarter.

The mood in companies in the euro area continued to brighten in May. The purchasing managers’ index of the market research institute IHS Markit rose compared to the previous month by 3.1 points to 56.9 points, as Markit announced after an initial estimate in London. This is the highest level since February 2018. Values ​​above 50 points indicate an accelerating increase in economic activity. The mood in the service sector in particular improved noticeably. The industry indicator has clouded over a little. Experts point mainly to supply chain problems.

What will happen to the Stability Pact?

Service providers such as restaurateurs, retailers or hoteliers suffer particularly from the corona restrictions. In contrast, German industry has been benefiting for some time from strong demand, especially from Asia and America. For example, the exports of the German electrical industry rose by 12.2 percent to 19.7 billion euros in March compared to the same month last year. The losses in March 2020, some of which were caused by the Corona crisis, were more than made up for, reported the industry association ZVEI. For the entire first quarter, in which sales and production were again above the previous year’s values, there was an export increase of 3.4 percent.

According to the Bundesbank, the huge economic stimulus package from the new American government under President Joe Biden should also have a positive effect on Europe. In the monetary union, the level of gross domestic product (GDP) could increase by 0.1 to 0.3 percent in the current year. The estimate is based on two model calculations. The US government’s new billion dollar plans to strengthen the infrastructure are not included.

Germany and other countries are also trying to cushion the corona low with billions in aid. According to the Bundesbank’s assessment, the German government deficit could “move towards a magnitude of six percent of GDP” after a good four percent in 2020. “As long as the pandemic-related restrictions persist, targeted fiscal aid will remain important,” says the new monthly report .

Due to the Corona crisis, the states of the European Union suspended the rules of the Stability and Growth Pact for the first time, according to which the budget deficit must not rise to more than 3 percent and the total debt must not rise to more than 60 percent of the gross domestic product. The EU Commission advocates maintaining the suspension of the rules this year.

The Bundesbank is in favor of deciding on EU rules and the German debt brake later in the year. “Because in the further course of the year it will be much easier to assess whether the respective exception clause is still necessary to overcome the crisis situation,” argued the central bank economists.