Development of the Economy and the Industry

Rate of Expansion in the German Economy Picks Up Again in the Fourth Quarter of 2016

According to the Kiel Institute for the World Economy (IfW), Germany has been experiencing an unusually prolonged upswing for three years now. Economic output increased considerably in the first half of 2016, although the first quarter of 2016, which brought growth of 0.7% in a quarter-on-quarter comparison, was followed by a much weaker second quarter (0.4%). The IfW attributed the dip in construction activity in the spring first and foremost to a reaction to the very strong rate of expansion seen in the winter due to favorable weather conditions. Nevertheless, the drop in value creation in the manufacturing industry pointed towards more subdued economic development. The fact that incoming industry orders were very subdued in the middle of the year, coupled with the marked deterioration in the business climate, resulted in weaker growth of 0.2% in the third quarter of 2016, whereas growth is expected to have picked up considerably again to 0.6% in the fourth quarter of 2016, also due to increasing orders from countries outside of the eurozone. The IfW therefore expects to see gross domestic product (GDP) increase by 1.9% in 2016 in price-adjusted terms, while the German federal government forecasted growth of 1.8% in its autumn projection, which has since been raised to 1.9%.

Despite the damper in the second quarter of 2016, the upswing is still being fueled by domestic economic drivers. The IfW reports that the domestic economy was already able to match its previous high pace of expansion in the third quarter of 2016. Thanks to the extremely stimulating overall environment, construction activity continued on an upward trajectory following the end of the weather-related fluctuations and reached an annual high in the fourth quarter of 2016. Private consumption grew at a brisk rate, bolstered by substantial growth in real income as a result of the positive situation on the labor market, a significant increase in monetary social benefits, and low inflation (at least for the time being). There are, however, signs that the price-dampening effect of oil prices is waning and that consumer prices will start to pick up again.

Equipment investments dropped considerably during the six-month summer period, largely due to the considerable political uncertainty worldwide. This uncertainty relates, first and foremost, to the future focus of US policy, the implications of the Brexit vote, the events in Turkey and their impact on relations with the EU, and the consequences of the constitutional referendum in Italy. Nevertheless, this uncertainty would not appear to have put any considerable damper on German economic growth to date, especially given that equipment investments were on an upward trend – albeit a moderate one – again in the fourth quarter of 2016.

The monetary policy pursued by the European Central Bank (ECB) remains expansive, with the main refinancing rate still hovering close to the zero percent mark. The US Federal Reserve, on the other hand, lifted its key interest rate by 0.25 percentage points in December 2016. This will bring it to somewhere in the region of between 0.50% and 0.75% in the future, although this still corresponds to a loose monetary policy and had already been anticipated by the markets in advance.

According to information supplied by the German Federal Statistical Office (Statistisches Bundesamt), the average number of employed people in 2016 rose by 429,000 or 1.0% year-on-year, compared with an increase of 395,000 or 0.9% in the previous year. This brings the employment level to its peak since reunification in 1990. Based on the total civilian labor force, the German Federal Employment Agency (Bundesagentur für Arbeit) put the unemployment rate at 5.8% in December 2016, down by 0.3 percentage points year-over-year. The demand for new employees remains high and the introduction of the minimum wage in 2015 would not appear to have had much of an impact: The number of people with “mini-jobs” has declined, while the number of people with second jobs has increased.

While consumer price performance stabilized at a relatively low level last year and in the first half of 2016, the rate of inflation – based on the consumer price index – had risen by the end of the year and is likely to have reached 1.7% in December 2016, the highest level seen since July 2013. The average annual rate of increase was up slightly on the previous year (0.3%) to 0.5%. Falling prices for household energy (with the exception of electricity) and fuel continued to have a dampening effect, while the price of food, tobacco and stationery pushed inflation up.

Housing Market

Increase in Quoted Rents and Quoted Prices

As in the previous year, quoted rents rose continuously from the start of 2016 onwards, and were up by a nationwide total of 5.8 percentage points (or 4.7%) year-on-year in December 2016 according to IMX, the price index of the real estate portal lmmobilienScout24. According to lmmobilienScout24, the market for owner-occupied apartments was characterized by extreme price developments. The increase was much more pronounced than the increase in rents. As reported by IMX, the prices for newly built apartments rose by 13.0 percentage points (or 8.6 %) in December 2016 compared with the same month of the previous year. The prices for existing owner-occupied apartments increased by 19.6 percentage points (or 13.8 %) during the same period. These developments are attributed to the low interest rates and extremely strained housing markets, particularly in Germany’s metropolitan areas. The independent research institute F+B Forschung und Beratung für Wohnen, Immobilien und Umwelt GmbH (F+B) reports that the prices for owner-occupied apartments and single-family residences are becoming less and less correlated with rental price development. F+B says that the trend witnessed in recent years is gaining even more momentum, documenting the sustained boom for residential property as an investment, a trend that would increasingly appear to apply irrespective of the rents that can be achieved in real terms.

Investors Continue to Show Keen Interest in German Residential Investment Market

In 2016, residential building bundles and residential developments accounted for a total transaction volume of around € 13.7 billion on the German residential investment market, according to the real estate consultancy firm CBRE. The analysis includes transaction bundles encompassing 50 or more units. Although the transaction volume is down considerably on the record result of around € 23.3 billion achieved in the previous year, it is still just ahead of the average value for the last five years. According to CBRE, the very strong closing quarter of the year, in which almost half of the total transaction volume for 2016 was realized, is clear testimony to the ongoing interest showed by national, and increasingly also by international, investors on the German residential investment market. CBRE reported a further increase in prices in an environment characterized by short supply and situations in which investors were forced to divert their attention towards new construction developments. Around three quarters of the transaction volume was attributable to existing portfolios. The volume invested in project developments increased again, accounting for 25 % of the transaction volume. In addition to project developments, investors are also focusing increasingly on student residences. Looking ahead to 2017, CBRE expects to see a similarly high transaction volume extending into the double-digit billions.

Demand for Housing Driven by Immigration

The last time the German population contracted was around six years ago. While the euro crisis, freedom of movement for employees from the eastern European EU states and refugees from war and crisis regions had already started contributing to population growth in Germany back in 2010, the number of refugees skyrocketed in the second half of 2015, in particular, and has been driving the immigration trend ever since. According to the German Association of German Housing and Real Estate Companies (GdW), this is driving the demand for housing in major towns and cities, in particular. High levels of immigration are predicted for the next few years, too. GdW puts the need for housing resulting from the influx of refugees from early 2015 until mid-2016 at an estimated 260,000 apartments. What is more, rising student numbers have already been creating short-term tension on the housing markets in university towns for some years now. According to GdW, the vast majority of students, like other low-income households, are looking for apartments in the lower price segment. The demand is focused on low-cost small apartments or apartments that can be used by flat-sharing communities. Analyses of domestic migration highlight growing disparity on the housing markets. Whereas, according to GdW, 30 or so high-influx cities (“Schwarmstädte”) are reaping above-average benefits from domestic migration, virtually all rural districts are losing inhabitants.