Inflation in Germany remains stubbornly persistent, primarily due to continued significant wage increases. The Bundesbank stated on Friday, a day after the European Central Bank lowered rates due to an improved outlook for price growth.
Although the inflation rate has decreased from double digits at the end of 2022, the "final stretch" of the disinflation process has become particularly challenging. As the largest economy in the eurozone, Germany warns that this may strengthen market expectations of a slow decline in rates.
In its bi-annual economic forecast update, the Bundesbank noted, "Inflation remains stubborn, especially in the service sector, where strong wage growth and the resulting cost pressures are major factors."
Even though the European Central Bank lowered rates on Thursday as expected, policymakers indicated they might remain on the sideline in July. The market anticipates only one or two rate changes this year, suggesting that the ECB's high rates might dampen growth until next year.
The Bundesbank is particularly concerned about wage prospects, as wage growth in the first quarter was unexpectedly rapid.
"Wages agreed upon this year are expected to rise significantly and continue to grow strongly thereafter," the Bundesbank added.
The Bundesbank currently expects Germany's inflation rate to reach 2.8% this year, up from a forecast of 2.7% six months ago; inflation in 2025 is projected at 2.7%, compared to a previous forecast of 2.5%.
"While Germany's inflation rate continues to decline, it is doing so at a slow pace," Bundesbank President Joachim Nagel stated. "In the ECB's Governing Council, we are not on autopilot regarding rate cuts."
Meanwhile, although economic recovery is expected to accelerate in the second half of the year, Germany's economy may grow only slightly this year.
The Bundesbank forecasts this year's economic growth at just 0.3%, down from a December prediction of 0.4%; next year's economic growth rate is expected to rise to 1.1%, slightly below the previous prediction of 1.2%.
Over the past year, Germany's economy has been struggling, with its large industrial sector in a deep recession due to weak export sales.
However, demand has picked up in recent months, indicating that the economy of Germany and the entire eurozone may have bottomed out, with the slow, shallow recovery long anticipated by policymakers potentially underway.
"The German economy is emerging from a period of economic weakness," Bundesbank President Joachim Nagel said in a statement.
