Expected Development in the
Remainder of the Fiscal Year

Economy and the Industry

Germany

After a marked increase in gross domestic product (GDP) of 2.2% in 2017, macroeconomic production is expected to accelerate further, according to the Kiel Institute for the World Economy (IfW). In 2018, GDP is expected to grow by 2.5%, with growth of 2.3% predicted for 2019. The German federal government forecast an increase in GDP (price adjusted) of 2.3% in 2018 and 2.1% in 2019 in their spring projection. As reported by IfW, the German economy is drifting into a boom phase, with capacities already noticeably above normal utilization levels. Bottlenecks are starting to become evident in the construction industry in particular, where companies would appear to be virtually unable to process their incoming orders. As a result, economic researchers at the IfW expect construction activity only to increase at a subdued rate in the first instance given the extremely stimulating overall conditions and the marked increase in construction prices. Corporate investment is expected to pick up considerably, because more and more companies see themselves obliged to increase their capacities due to the increasing production capacity utilization rate. Foreign trade will expand at a brisk rate, albeit at a slightly slower pace. While employment is expected to continue to increase considerably for the time being, companies are finding it increasingly difficult to find suitable staff, which will result in an accelerated increase in actual earnings. As a result, the IfW predicts strong growth in gross wages and salaries, which will stimulate private consumption. Private consumption will be stimulated further by tax cuts and benefit increases implemented by the new German federal government. Unemployment will continue to drop. The unemployment rate is expected to drop back from 5.7% in 2017 to 5.2% in 2018 and 4.8% in 2019. The IfW in Kiel also expects to see an upward trend in consumer price inflation, with inflation rates of 1.7% in 2018 and 2.0% in 2019, as well as substantial public-sector budget surpluses due to the economic situation. The IfW’s monetary policy outlook remains unchanged. With only a gradual increase in interest rates, the financing environment is barely likely to become overcast, and fiscal policy will remain slightly expansionary in 2018.

The possible escalation of trade conflicts, for example, could pose a risk to the forecast. The protectionist measures taken by the United States could put a strain on the global economy and, as a result, on the German economy as well. There is also uncertainty surrounding the increasingly difficult monetary policy balancing act in the eurozone. Turbulence in the financial markets in connection with the imminent monetary policy normalization poses a significant risk to the forecast for the global economy. The difficulties involved in interpreting the current cyclical pattern create uncertainty as far as the forecast for the domestic economy is concerned. The current boom phase got off to an unusually slow start, with only a gradual increase in capacity utilization. In addition, it is not certain, from the IfW’s perspective, that the construction industry will manage to overcome the capacity bottlenecks.

Housing Market: Rent and Prices Expected to Rise Again in 2018

The upward trend on the real estate market has reached a “mature” phase, according to experts at Helaba Landesbank Hessen-Thüringen. The overall conditions will remain positive in 2018 and the prices for German residential real estate will continue to rise in 2018, since the factors driving the upswing are unlikely to change to any considerable degree. The real estate market will be characterized by ongoing high demand. The population will continue to grow, albeit at a slower pace than in the exceptional year of 2015, and domestic migration to the country’s major metropolitan areas is tipped to continue. The supply of property available will grow at a moderate rate at best and, despite a slight increase in mortgage rates, the financing conditions will remain very favorable, according to the Helaba experts. In CBRE’s opinion, the housing markets in the metropolitan regions and prosperous university cities will remain tense in spite of the recent rise in construction activity. Given that there are hardly any vacancies in marketable multi-story residential buildings, this is pushing up rents and purchase prices in the influx regions. In view of the strong growth in house and apartment prices in 2017, Deutsche Bank Research expects to see slightly lower purchase price and rent momentum at best in 2018. In its view, demand will be curbed by the high prices, which are likely to force some potential buyers out of the market, as well as by higher capital market interest rates and, as a result, slightly higher mortgage rates. According to Deutsche Bank Research, residential property ownership remains affordable, although nationwide affordability fell slightly in 2017 and is expected to drop slightly in 2018 as well. There are also pronounced regional differences as far as affordability is concerned.

The empirica bubble index surpassed the “zero threshold” for the first time in 13 years in the third quarter of 2017, as against the “bubble-free” reference year of 2004. As of the fourth quarter of 2017, the overall index is stagnating in growth regions and is increasing slightly in shrinking regions. Rents and purchase prices in 247 out of 402 administrative districts and self-governing cities are no longer developing in tandem. According to empirica, too many apartments are being built in 17 districts. The bubble index indicates a medium to high risk for 199 districts. Nearly half of the economists surveyed for the economics barometer of the “€uro am Sonntag” newspaper and the news channel n-tv believe that real estate prices in Germany will increase by at least 5% over the next five years, with 13% even expecting an increase of more than 15%. The situation is particularly expected to escalate in metropolitan areas. The majority of the experts surveyed, however, believe that there is clear evidence of excessively high prices for residential real estate in Germany. Only one in every eight respondents expect prices in the top 7 cities to fall. They believe that the solution to the difficult housing situation lies in moves to increase the amount of land approved for construction and simplifying building regulations.

The overarching housing policy objective of the new German federal government is the construction of 1.5 million homes or an annual average of 375,000 units. The rent ceiling is to have been evaluated in terms of its suitability and effectiveness by the end of the year, and experts from Helaba have not ruled out more stringent regulations, e.g., an obligation to disclose the previous rent level. The rent ceiling, which was only introduced a few years ago, is in place in more than 300 municipalities in twelve federal states.

Austria

Driven by the widespread global economic upswing, the economy in Austria is likely to continue to report strong growth, according to the Institute for Advanced Studies (IHS). After the Austrian economy expanded by 2.9% in the previous year, experts from the IHS expect to see growth of 2.8% and 1.9% for 2018 and 2019 respectively. As part of its 2018 winter forecast, the European Commission expects to see robust growth for Austria’s economy of 2.9% and 2.3% for 2018 and 2019 respectively. According to the IHS, the upswing is being supported by exports and private consumption, while investment activity has slowed down markedly. The vibrant economy still offers good conditions for a sustainable budget strategy and urgently needed structural reforms. The strong economic upswing has fueled the demand for employment, meaning that the unemployment rate fell last year – for the first time since 2011. Based on the national definition, the unemployment rate is expected to drop from 8.5% in 2017 to 7.8% in 2018 and 7.7% in 2019. The IHS expects to see an inflation rate of 2.1% in 2018, on par with the previous year. It also expects a virtually unchanged inflation rate of 2.2% for 2019.

According to the OeNB, the residential construction segment overcame a prolonged period of weakness in 2017, and the strong momentum in granting building permits points toward a further acceleration. According to CBRE, the dynamic population growth in Austria’s metropolitan areas and the diminishing availability of land approved for construction will reinforce the trend towards more concentrated residential construction in the form of residential high-rise buildings. According to the RE/MAX Real Estate Future Index – which consolidates the expert opinions of around 560 real estate professionals throughout Austria – demand on the real estate market is expected to increase at a much faster rate than the supply in 2018. The prices for residential real estate are expected to continue to increase slightly in 2018. Purchase prices for apartments will show a more pronounced increase than rents. According to the real estate service provider EHL, the marked increase in new construction activity in Vienna is helping to stabilize the price level, which is therefore expected to remain consistently stable over the next few years. In 2018, rent in Vienna is expected to increase by around 1.5%, with purchase prices for properties in average locations expected to rise by between around 2.75% and 3%. The fundamental price indicator of the OeNB for residential real estate shows a slight reduction in a possible overvaluation for Vienna in the fourth quarter of 2017 compared with the previous quarter. For Austria as a whole, the value in the fourth quarter was also down on the level seen in the previous quarter – albeit only slightly.