FRANKFURT The German economy should stabilize in the second half of 2013 after posting its strongest growth in over a year in the second quarter, the Bundesbank said on Monday.
Growth in Germany and the rest of the euro zone will benefit from the European Central Bank's record-low interest rates, which it has vowed to keep low for an extended period, the Bundesbank said, but added that this was not an unconditional commitment.
Stronger-than-expected growth rates in the euro zone's largest economies, Germany and France, helped pull the currency union out of recession in the second quarter, mainly driven by demand at home.
"In the second half of 2013, economic growth in Germany is likely to return to normal and steady rates," Bundesbank said in its monthly report.
Germany's traditionally export-driven economy is relying on domestic demand to prop up growth as foreign trade looks likely to act as a drag this year, given that much of the euro zone, to which it sends 40 percent of its exports, is still struggling.
The Bundesbank noted that domestic investment was unlikely to pick up discernibly without a long-term improvement in growth prospects for Germany's neighbors and the implementation of measures to solve the debt crisis to dispel uncertainty.
Private consumption will continue to be supported by moderate inflation and low unemployment.
"Over the next few months, the rate of consumer price inflation is likely to ease somewhat," the Bundesbank said. German inflation stood at 1.9 percent in July, slightly higher than in the euro zone overall.
The recent development supports the ECB's expectation for gradual recovery in the currency bloc later this year and next. It kept interest rates at 0.5 percent in August and reiterated its forward guidance that rates would stay low or lower for now.
"This is not an unconditional commitment and does not mark a change in the ECB's monetary policy strategy," the Bundesbank said. The guidance did not exclude a rate hike if inflationary pressure turned out to be stronger than currently expected.
"The actual key ECB interest rates will continue to depend on the medium-term outlook for inflation, which is based on expectations regarding future developments in the real economy and on credit and monetary aggregates," the Bundesbank said.
(Reporting by Eva Taylor; Editing by Paul Carrel)