FRANKFURT (MNI) – Domestic price pressures in Germany are beginning
to pick up, just as the economic recovery slows following 1Q’s robust
expansion,, the Bundesbank said Friday.

“Those components more influenced by domestic supply and demand
conditions are clearly showing a slow, albeit discontinuous rise in
price inflation,” the central bank said in its Monthly Report.

The Bundesbank warned that the “a significantly deteriorated price
climate poses a risk to an otherwise still optimistic economic outlook.”

Noting that the economy grew “very sharply” in 1Q, due in part to
“catch-up effects”, the Bundesbank cautioned that the “quarterly GDP
growth rate therefore considerably overstates the underlying economic
momentum”.

“Nonetheless, the economic advance is unmistakable,” the central
bank said, adding that, “as it gains a broader base, the upturn could
support economic activity in Germany for some time to come.” Still,
“growth is likely to ease somewhat in the foreseeable future following
the explosive start to 2011.”

The Bundesbank predicted that the recent catastrophe in Japan will
not “significantly influence” developments in Germany. However, it
warned that “a tension-free environment” would be would be key to ensure
positive developments ahead.

“Potential risks in this respect accompany the current scenario in
that the economy is traversing the corridor of normal utilisation at
what appears to be a virtually undiminished pace of expansion compared
to the previous recovery phase, and that both enterprises business
expectations and consumers economic and income outlook have reached
highs exceptionally early on in this cycle,” the report read.

Looking the different sectors of the economy, the Bundesbank
projected that, despite higher consumer price inflation, consumption
should benefit from the “decidedly good state of the labour market” and
the growing optimism regarding income expectations. Households are “more
willing to undertake major purchases.”

“Private consumption could therefore continue its moderate upward
trend in the coming months,” the report read.

Indeed, the Bundesbank expects the underlying dynamics of wages to
accelerate significantly in the months ahead. The labour market should
continue to improve, the bank said, citing forward-looking indicators.

Regarding exports, the Bundesbank said that the “basis for the
upward trend remains in place, as economic momentum in the emerging
markets is still strong, despite having eased somewhat in the meantime,
and current economic dynamics in other important traditional sales
markets remain buoyant.”

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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