Focus topic Germany

Focus topic: GermanyGermany has recovered well from the global financial and economic crisis. Achieving sustainable growth, however, will require further improvements to the macroeconomic framework. This is a job for policymakers, businesspeople and the public alike. DB Research’s contribution will be to analyse the broad spectrum of issues, discussing possible solutions as well as the economic and political outlook. These range from assessments of economic-policy decisions and analyses of cyclical activity and sector trends right through to the effects of international developments on Germany as a business location.

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Parties not focusing enough on sustainability
Abstract: The debate over welfare policy in Germany appears to be paradoxical. Albeit steadily rising social spending, some critics believe that there is a social imbalance. But social security continues to have a positive impact while the welfare system is benefiting from the positive economic development. A further expansion of the welfare state is in the cards given not only the demographic trend but also the parties’ proposals in the current election campaigns. Sustainability of the welfare system is playing second fiddle only despite the fact that already taxpayers are burdened with avoidable costs.
Topics: Demographics; Economic policy; Germany; Macroeconomics; Politics and elections; Provision for old age; Social policy
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Robotics and automation outperform, backed by “Industry 4.0”
Abstract: The German mechanical engineering sector recently tripled its growth forecast for 2017, from 1% to 3% (both in real terms). Robotics and automation is an important growth driver; this sub-segment is likely to increase output by 7%, i.e. double the rate of the segment as a whole. The mega issue “Industry 4.0” plays a key role for this development. As this trend is gaining importance both in Germany and around the world, the medium-term outlook for the sub-segment remains excellent as well.
Topics: Germany; Sectors / commodities; Technology and innovation
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Focus Germany: Overheating risks are looming
Abstract: The German economy is likely to have maintained its rapid growth rate in the second quarter. Consumer spending, in particular, has been stronger than expected thanks to the recent fall in oil prices and the continuing significant rise in employment levels. We have revised our GDP forecast for the whole year upwards to 1.6% (1.3%) which is equivalent to a calendar-adjusted rate of 2%. With an expected increase of 1.7% in 2018, German GDP is again likely to exceed the trend growth rate of around 1.25% – for the fifth successive year – and the positive output gap should widen to over two percentage points. The tight labour market could lead to increases in pay settlements of more than 3% during the round of collective pay bargaining (public sector, construction and metals) set to take place in early 2018, especially as these deals that are due to expire were originally negotiated some time ago, which signals some catch-up potential. Against the backdrop of additional fiscal stimuli after the Bundestag election, and monetary policy remaining extremely relaxed, the risk of overheating, at least in parts of the German economy, is increasing. However, the rate of (consumer price) inflation over the coming two years should remain below 2%, especially as we are not anticipating a depreciation of the euro against the US dollar. (Further topics: German house prices; The View from Berlin)
Topics: Business cycle; Economic policy; European issues; Exchange rates; Germany; Macroeconomics; Monetary policy; Prices, inflation; Real econ. trends
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The digital car: More revenue, more competition, more cooperation
Abstract: The traditional automobile industry and companies that, in the past, had no involvement in the sector, are working hard to create software solutions, driver assistance systems and other technologies that will make networked, autonomous, traffic jam and accident-free driving possible. That means the “digital car” in its ideal form is no longer a utopian vision for the future, but is instead gradually taking shape. However, the path to the digital car will be more of an evolution than a revolution. That is the result of factors on both the supply and demand side. They include the considerable development times in the industry and the longevity of its products, cars. Consumer preferences, which have been shaped over decades, are also unlikely to change over night. It will take several decades for digital cars to make up a significant proportion of cars on the road – that is unlikely to happen before 2040.
Topics: Auto industry; Digitalisation; Electrical engineering; Germany; Information technology; Innovation; Internet; Sectors / commodities; Technology and innovation; Telecommunication; Transport
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Focus Germany: Strong economy supports Merkel’s re-election chances
Abstract: After Q1’s sturdy 0.6% qoq GDP growth, soft indicators do not signal any moderation of the growth momentum. Employment in 2017 so far, has been expanding at similar clip as in 2016, making our 1% consumption forecast for 2017 quite conservative. Exports have rebounded in the winter half – in line with global trade. The growth momentum of global trade seems to have peaked; therefore, we remain cautious, predicting 3.6% German export growth in 2017 after 2.7% last year. In combination with lingering geo-political uncertainty this will weigh on investment spending, where a utilization rate of 2pp above its long-term average suggests a still limited necessity to invest. Following Q1 GDP growth of 0.6% we have revised our 2017 GDP forecast to 1.3% (1.1%). Latest confidence surveys, however, hint at further upside potential and increasing risks of over-heating for 2018. Political observers in Germany have recently been focusing on the SPD’s ups and downs in the polls and the CDU’s reverse showing while smaller parties are fighting for public attention. From the present point of view (polls) a Jamaica coalition is the sole arithmetically feasible alternative to a renewed grand coalition after the September election. (Further topics: German industrial output – forecast for 2017; Corporate funding in Q1 – lending)
Topics: Auto industry; Banking; Business cycle; Economic growth; Economic policy; European issues; Exchange rates; Germany; Global financial markets; International capital markets; Macroeconomics; Politics and elections; Prices, inflation; Sectors / commodities; Trade
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Fewer crisis spots on the euro-area housing market
Abstract: The massive overvaluations on the euro-area market for residential real estate (as measured by the price-income ratios for 2007 and 2008) are a thing of the past. Currently, house prices are excessive only in several smaller countries. However, this situation is likely to change towards the end of the decade if the dynamic uptrend in German house prices continues as expected.
Topics: Construction industry; Economic growth; Economic trends; Germany; Prices, inflation; Residential real estate
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Above-average pay in export sectors
Abstract: The traditional German export sectors pay their employees above-average wages and salaries. The top right-hand quadrant of the chart shows those sectors that generated a foreign trade surplus in 2016 and also paid their employees gross wages and salaries above the average for the manufacturing sector as a whole. In the automotive industry alone, the foreign trade surplus in 2016 was EUR 122 billion (39% of the total surplus). Wages and salaries in this sector were 27% higher than the industry mean. Mechanical engineering took second place in terms of foreign trade surplus (2016: EUR 94 billion). Here, however, average wages and salaries are only 7% above average. The chemical and pharmaceutical sectors as well as the other transport equipment sector are also characterised by high foreign trade surpluses and above-average pay. Interestingly, growth in gross wages and salaries between 2005 and 2016 was also above the industry average in all of the sectors specified. Gross wages and salaries per employee in the automotive industry and in other transport equipment increased by 38% and 39% respectively during this period, for example. The manufacturing industry as a whole experienced "only" a 28% increase.
Topics: Auto industry; Chemicals industry; Economic structure; Electrical engineering; Germany; Globalisation; Intern. relations; Labour market; Macroeconomics; Mechanical engineering; Other sectors; Real econ. trends; Sectors / commodities; Social values / Consumer behaviour; Trade
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Focus Germany: Positive signs
Abstract: Growth in global trade almost stagnated at just 1.3% in 2016, and in some months was even negative. During winter, global trade picked up again, rising by around 3% compared to the same period a year earlier. Given the positive sentiment prevailing across the globe, this rebound could well continue. However, this trend is not yet being fully reflected in other hard economic indicators, usually highly correlated with global trade, and sentiment may therefore overstate the actual trend a little. Still, our simple model of world trade, which suggests moderate growth of just over 2% in 2017 and around 3% in 2018 might represent the lower limit of the forecast range. However, compared to previous cycles the upturn could remain weak, not least because of the global trade restrictions that have been progressively ratcheted up since 2008. (Further articles: Germany’s employment miracle, German election campaign not in full swing, yet)
Topics: Business cycle; Economic growth; Economic policy; Exchange rates; Germany; Labour market; Macroeconomics; Politics and elections; Prices, inflation; Real econ. trends; Sectors / commodities; Trade
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Diesel: prematurely written off?
Abstract: The diesel scandal and political uncertainty surrounding future regulation are the main reasons why the proportion of vehicle registrations accounted for by diesel cars has slumped recently in Germany and most other EU countries. If the automotive industry wants to continue to rely on diesel technology, it needs to regain credibility and get to grips with the issue of emissions – including in real-world driving conditions. If it doesn't manage to do this, lawmakers are likely to progressively tighten the regulatory framework for diesel cars. However, should the industry succeed in bringing to market clean diesel cars at affordable prices, these cars would remain the most economical option for a large proportion of motorists – at least until alternative drive technologies become competitive from the customer perspective. This would make current proclamations of the death of diesel somewhat premature.
Topics: Auto industry; Economic policy; Energy policy; Environmental policy; Germany; Natural resources; Sectors / commodities; Sustainability; Transport policy
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Focus Germany: Investment: Public, residential – gradually picking up
Abstract: In international debate public investment is often regarded as a useful lever for promoting higher domestic demand. Despite international criticism and political declarations of intent, public investment in Germany has only increased moderately over the past two years and has remained average, at best, on an international scale. In the coming years, however, public investment is expected to grow significantly. The current investment plans for the federal budget are 40% higher than those adopted in 2013. Public contracts for the construction industry in 2016 were between 15 and 27% above the average of the previous 10 years. The excellent state of the public finances at the various government levels also supports the prospect of increasing investment growth. However, severe capacity shortages in the construction industry are likely to mean that the high demand for investment will not quickly lead to an increase in construction activity. (Further articles: German housing market, Corporate bond boom in Germany, Result of the Saarland election)
Topics: Brexit; Business cycle; Economic growth; Economic policy; European issues; Exchange rates; Germany; Globalisation; Labour market; Macroeconomics; Monetary policy; Politics and elections; Prices, inflation; Real estate; Sectors / commodities; Trade
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