German economic recovery to get a subdued start next year, Bundesbank says

FRANKFURT, Dec 19 (Reuters) - Germany's economic recovery from three years of stagnation will get only a subdued start next year, picking up pace later on the back of higher government spending, the Bundesbank predicted on Friday in a biannual update of its economic projections.

Europe's largest economy has ?been stagnant since 2023 as its vast industrial sector was priced out of key export markets, domestic consumers chose ?to save rather than spend and the government held down expenditure.

A shift only ?started this year when Chancellor Friedrich Merz pushed through new ?spending rules and ?promised a boost in defence and infrastructure expenditure, underpinning a revival in industry and boosting consumer morale.

"While progress will ?be subdued initially, it will then slowly ?pick up," Bundesbank President Joachim Nagel said. "Starting in the second quarter of 2026, economic growth will strengthen markedly, driven mainly by government ?spending and a resurgence in exports."

The Bundesbank ?now sees ?2025 growth coming in at 0.2%, above its earlier forecast for stagnation while growth next year is seen at 0.6% against the June projection for ?0.7%.

Changes in inflation projections were much bigger, however, due to "unusually sharp" increases in forecasts for wage growth, which could stay above long-term averages for years to come, the Bundesbank warned.

Actual wages will rise by 4.7% in 2025 and by 4.0% in 2026 overall, slowing only to 3% in subsequent years, due to low unemployment, ?the ?increasingly widespread shortage of labour and the rise in working hours for employees.

Fast wage growth is keeping inflation higher than once thought and consumer prices ?will rise by 2.2% next year, above the 1.5% seen earlier. Excluding food and fuel prices, a drag on overall price growth recently, inflation for next year was bumped up to 2.4% from 1.9%.

This German revision is among the key reasons why the European Central Bank lifted its own 2026 inflation projection for the euro zone to 1.9% from 1.7% on ?Thursday and signalled it was in no hurry to change policy anytime soon.

The ECB has been on hold since June and markets see no change through 2026, a view policymakers are comfortable with, according ?to sources familiar with the ECB's deliberations. (Reporting by Balazs Koranyi; Editing by Alison Williams)