FRANKFURT, Jan 22 (Reuters) - The German economy ended last year with momentum building but first quarter growth is likely to be modest, with inflation stabilising at 2%, the Bundesbank said in a monthly economic report on Thursday.
Germany's economy, Europe's biggest, became stuck in stagnation in recent years as industry suffered a big recession and U.S. tariffs ate deep into exports, putting recovery bets squarely on the government's spending spree.
"The somewhat more pessimistic expectations of
companies recently suggest that economic output is likely to grow only moderately in the first quarter of this year," the central bank said.
"However, the easing of fiscal policy should provide a stronger boost later in the year."
Exports are still weak but industry appears to have bottomed out, households are spending more given big wage gains, and domestic demand is up sharply, likely driven by the government's efforts to beef up defence spending, the report said.
While the outlook is far better than any time in recent years, the recovery could take longer and the government is expected to cut its own growth forecast for this year to 1.0% from 1.3%, a source familiar with the projections told Reuters earlier this week.
On inflation, the Bundesbank maintained a sanguine outlook, predicting German price growth remaining close to the European Central Bank's 2% target in the coming months.
Overall euro zone inflation is seen dipping below 2%, mostly on lower energy costs, before recovering next year as domestic price pressures hold around target.
(Reporting by Balazs KoranyiEditing by Ros Russell)
