FRANKFURT (Reuters) - The Bundesbank cut its German inflation and growth forecasts on Friday citing weaker demand for exports, even as it predicted that robust consumer demand and a tightening labour market would keep the domestic economy buoyant.
The euro zone's biggest economy has been an outperformer in recent years, posting healthy growth and driving the currency bloc's best run since the start of the global financial crisis almost a decade ago.
Exporters have been forced to "surrender" some of their market share gained in recent years, however, and this trend may continue this year and offset strong domestic factors, the central bank said in a biannual economic outlook.
"This should probably be interpreted mainly as a correction of previous market share gains not explained by price competitiveness," the Bundesbank said.
"This process could continue further into 2016 according to Ifo and DIHK surveys, in which industrial firms reported subdued export expectations and only a comparatively moderate increase in exports this year," it said.
The bank now sees GDP growing at 1.7 percent this year, below a December projection for 1.8 percent, and 1.4 percent in 2017, down from 1.7 percent seen earlier. The growth rate would then rebound to 1.6 percent in 2018.
"The positive outlook for the German economy hinges in key measure on exports regaining their footing over the projection horizon," it said.
Still, once adjusted for work days, growth should be steady, the Bundesbank argued, indicating that the underlying trend is robust, boosted by income and employment growth, driven by employment-related migration.
Lower oil prices and increased budget spending to cover the cost of accepting refugees are also supporting growth, the Bundesbank added.
"The German economy is consistently expanding at a faster rate than production capacity," the Bundesbank said. "The utilisation rate, which is already above average this year, is therefore continuing to rise, with the result that capacity utilisation at the end of the projection horizon will be significantly higher than the long-term average."
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)