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Bundesbank says faster growth has increased inflation risks

The Bundesbank said faster economic growth in the euro region is leading to increased inflation risks, particularly from higher wage demands as unemployment declines.

„While the short-term price outlook has relaxed somewhat after oil prices retreated and the euro firmed on foreign exchange markets, domestic price risks have tended to increase because of the strengthening of demand in the euro-region economy,” the Bundesbank said in its monthly report for February, published today. Price pressures emanate „particularly from the wages side” and „the excessively strong money-supply expansion.” German trade unions are demanding higher pay after the economy, Europe's largest, expanded at the fastest pace in six years in 2006 and money-supply rose the most in almost 17 years in December. The European Central Bank has signaled it will raise interest rates for a seventh time since early December 2005 next month to quell inflation pressures. IG Metall, Germany's largest trade union, said February 6 it would seek 6.5% more pay for its members, defying calls for wage moderation from the ECB.

„In light of strong economic conditions, particularly in export-oriented sectors, it is essential to let workers participate appropriately in the company's success, and at the same time be aware of the overall economic responsibilities,” the Bundesbank report said. Exports were again the mainstay of the German economy, which last year expanded a work day-adjusted 2.9%, the Bundesbank said, making it „the growth motor” of the euro region. Domestic company spending on equipment and construction has also „contributed significantly” to the growth outlook, the report said. A drop in unemployment has „brightened the outlook for a strengthening of consumer spending,” increasing the chances for a „self-sustaining economic upswing.” This will also be supported by strong global growth, „which finds itself in the most dynamic growth phase since the fifties,” the Bundesbank said. (Bloomberg)