German economy improving but inflation remains 'stubborn' - Bundesbank

The German economy is gaining momentum after two years of weakness, the Bundesbank said on Friday, despite "stubborn" inflation.

Publishing its latest forecast for Germany, the central bank said the economy was "slowly regaining its footing" after a two-year period of weakness.

It forecast calendar-adjusted GDP of just 0.3% this year, but expects it to rise to 1.1% in 2025 and 1.4% in 2026.

President Joachim Nagel said: "Not only will private consumption gradually pick up again, but export business will also improve from the second half of the year. Against this backdrop, industry will also grow more strongly again."

Nagel noted that households were benefiting from strong wage growth, a gradual decline in inflation and a stable labour market.

However, the Bundesbank said that inflation, although falling, was "proving to be stubborn", especially in the services sector, which has seen strong wage growth.

Headline inflation was forecast to be 2.8% in 2024, compared to 6% in 2023, but is expected to decline only marginally in 2025, to 2.7%. It is then anticipated to fall further, to 2.2%, in 2026.

Said Nagel: "While the inflation rate is Germany is continuing to decline, the pace is subdued. We on the European Central Bank Governing Council are not driving on auto-pilot when it comes to interest rate cuts."

In common with central banks around the world, the ECB upped the cost of borrowing to tackle surging inflation.

With inflation now well off highs, however, central banks are moving to cut interest rates. On Thursday, the ECB reduced the rates by 25 basis points to 3.75%, for the first time in five years.

However, it is not thought it will cut again until the autumn.