The German Business Climate Index released on March 27 hit the record high since mid-2011. Does that mean that German companies are, in general, indifferent to the existing political uncertainties, such as the US President Donald Trump's protectionist policy, the upcoming elections in Germany and France and hot disputes about the two-speed Europe idea?
© Timo Klein
I would not say that they are completely indifferent. The Business Climate Index did show an initial reaction to the Brexit referendum decision back in the middle of 2016; however, despite the political uncertainties, the overall global demand picture has actually brightened up over the last six to nine months. Indeed, this is something the German economy benefits very much from due to the importance of its export industry. And the fact that we have seen the Euro weakening over the last year or so helped additionally. This is the result of the US reserves tightening up, while the ECB is not prepared to change its monetary policy yet.
Some experts assess the situation in the German construction sector as the best since 1991, referring to positive demographics, growing wages and record-low borrowing costs. Does that mean that we are entering the new housing boom? If so, what are the chances of us repeating the mistakes of the previous housing boom across the world?
I would say that it is quite unlikely because in Germany we did not have any housing boom prior to 2010. Moreover, we did not have an upscaling in the housing market. The German housing market was in its worst shape around 2005, when developments in the construction sector, especially in the residential construction sector, were very different in Germany from what we have seen in the US or the UK and many other Southern European countries. In that sense, what we are seeing now is in a way a catching up process of what has happened elsewhere.
At this point, we are witnessing quite an interesting situation when you look at construction orders and building permits. Over the last 12-15 months they have increased significantly, while borrowing costs remain very low. In addition, we also have the demographic influences due to the net migration that is associated with refugees coming in 2015 and partly in 2016, and other demographic factors such as changes in the structure of the market in the terms of household sizes that are becoming smaller, which results in the fact that, overall, people need more apartments and, thus, start to move from the countryside towards the inner cities. Furthermore, house prices in the inner cities have risen quite a lot in the last few years and this is certainly not over yet. In international comparison, we have come from relatively low levels on house prices observed 10 years ago to where we are now. So, even though sometimes there is an overheating, especially in the inner cities, the housing market is certainly not in a situation yet where we would see a big risk of a crash in the near term.
An important thing that has to be remembered about the housing market is that there are big regional differences, i.e. differences between countryside and bigger cities. In fact, we are starting to see a bit of a counter-reaction because of the spread in house prices that became so large that some people are reconsidering now to move back to the countryside. These are the very latest developments, which are mainly driven by the excessive house and rental prices.
How do you think the German economy will perform this year in light of its robust start in the first quarter?
We did have a brief weakening around the middle of last year, but there was already acceleration in late 2016, and we expect this positive trend to continue going forward in 2017. In q/q terms, GDP growth will be around 0.6%, to our mind, after which it will most probably stabilise around 0.5%. This then translates to a whole year for 2017, with our current forecast sitting at 1.9%.
On the geopolitical side, if the factors such as Brexit and US protectionist policies did not exist, then we could see more robust growth in Germany that could even exceed 2.5%. Thus, there is an evident restraining factor to the economic growth. For instance, trade and especially investment into the UK are less than it would be if we did not have the uncertainty surrounding economic relations in the foreseeable future.
Still, domestically, the consumer demand in Germany continues to be very robust. Even though we have seen a slight slowdown due to the rise in inflation over the recent quarters, this does not seem to be leading to any major retraction by consumers because the labour market is still doing quite well and the wage growth is solid, especially if take into consideration the nominal wage growth, which is about 2.5% at the moment.
Nevertheless, despite the international uncertainties and domestic concerns, the overall growth remains near the 2% level, which is fairly good for Germany, because the country has the long-term growth potential of around 1.5% at the moment; therefore, we are slightly above the capacity at the moment.