Germany’s growth outlook continues to be favourable, inflation outlook subdued

The growth outlook for Germany continues to be favourable. Business activity and confident surveys indicate unexpected resilience amidst weaker demand from Emerging Markets and emissions scandal by Volkswagen. With the help of strong employment gains and increased real wages, private consumption is likely to continue as the main driver of economic growth. Additionally, a modest growth in investment is expected with rebounding credit conditions, increasing capacity utilisation and lower interest rates.

The country's fiscal policy can become more accommodative of growth, while a weaker euro and rebounding growth outlook in the non-euro EU nations and the US will help boost industrial production. This can help exports; however, weak demand in important markets such as Russia, China and Brazil indicates a downside risk.

"German real GDP growth is forecast at 1.5% in 2015 and 1.8% in 2016-17", says Scotiabank.

Meanwhile, inflation is expected to remain weak. Consumer price inflation of Germany ended 2015 at 0.3% y/y, lowering the 2015's average to 0.3% from 2014's 0.9%. In the following months, the headline inflation is expected to slowly accelerate as base effects from lower oil prices begin to die away. Demand-pull price pressures will help inflation further, supported by wage gains, tight labour market scenario and increase import prices due o a weaker euro.

However, euro area and German inflation are likely to be lower than the ECB's "close to, but below, 2%" target into 2018.  This might urge the central bank to keep a highly accommodative monetary policy stance. The QE programme of €60 billion monthly by the ECB will continue until at least March 2017, whereas the benchmark interest rates are expected to be at record low levels until the beginning of 2018. However, there is likelihood for an additional expansion of the QE program and later tightening of monetary policy.

"We expect German inflation to end 2016 at 1.2% y/y and 2017 at 1.7%", says Scotiabank.