Since the outbreak of the coronavirus pandemic, the economic cycle has been shaped to a considerable degree by the measures taken to protect against infection. Following a strong recovery from the first wave of the pandemic, the German economy experienced a temporary setback on the back of tighter restrictions to contain the coronavirus pandemic at the beginning of 2021, and gross domestic product (GDP) fell by 1.8% in the first quarter of 2021. The restrictions left a particular mark on private consumer spending, which was 5.4% lower in the first three months of 2021 than it had been in the fourth quarter of 2020 after adjustments to reflect price, seasonal and calendar effects. By contrast, public consumption expenditure increased slightly and was up by 0.2% on the level seen in the previous quarter. Positive impetus came primarily from construction investments, which rose by 1.1% compared to the previous quarter. The amount invested in equipment – especially machinery, devices and vehicles – was down slightly on the previous quarter (-0.2%) after seasonal adjustments. Foreign trade increased at the beginning of the year. Imports of goods and services rose by 3.8% (after adjustments to reflect price, seasonal and calendar effects) in the first three months of 2021, but at a much faster rate than exports, which increased by 1.8%.
In parallel with the rising vaccination rates, the easing of the coronavirus restrictions and brisk demand from abroad, the German economy is on a strong recovery path. The recovery process in the six months from the start of spring to the start of fall will be driven primarily by consumer-related sectors of the economy, such as retail and the contact-intensive service sector. Following a significant increase in private consumer demand in the second quarter of 2021, the pre-crisis level should already have been exceeded by the end of the year. In the second half of the year, the Kiel Institute for the World Economy (IfW) expects to see strong impetus from international business and domestic investment activity. Supply bottlenecks in a number of sectors brought about by the global recovery are, however, limiting the expansion process. This is reflected in what is currently a large discrepancy between the very positive order situation and production in the manufacturing sector. The bottlenecks affecting the procurement of semiconductors from East Asia are likely to reduce the momentum not only in exports, but also in investments. As these frictions ease, exports are likely to start accelerating at a faster pace again, particularly as the rise in global investment activity should provide stimulus. The construction industry, which reported a strong increase in the six months from the start of the fall until the start of the spring, is currently also struggling with supply bottlenecks for raw materials such as construction timber. The positive trend in the ifo business climate index and incoming orders, which remain stable at a high level, nevertheless create a positive outlook for the industry in the coming months despite an unexpected slump in orders in May, which leading economists attribute to the supply bottlenecks and extreme price increases. As far as this year is concerned, the German Institute for Economic Research (DIW Berlin) expects to see year-on-year growth of 3.2% and anticipates a strong continuation of the recovery with growth of 4.3% in 2022. The IfW goes further, predicting growth of 3.9% for 2021 and 4.8% for 2022.
Despite the marked escalation in the pandemic in the winter months and the associated containment measures, the labor market proved to be extraordinarily stable. Adjustments to reflect reduced economic output were made in particular in the form of short-time work. Now that the economy is increasingly starting to open up again, a slight uptick in employment is evident. According to the Federal Statistical Office, the number of people employed (according to the domestic concept) increased by 15,000 month-on-month in seasonally adjusted terms in May 2021, and the unemployment rate fell from 6.3% at the beginning of the year to 5.7% in June. The Leibniz Institute for Economic Research (RWI) expects to see an average unemployment rate of 5.8% for the year, with a further drop to 5.2% predicted in 2022.
The inflation rate has accelerated significantly since January 2021, reaching 2.5% in May, the highest level seen since 2008. This was largely due, on the one hand, to the move to increase VAT again and, on the other, to the marked rise in energy prices compared to the previous year, mainly as a result of the dramatic increase in global market prices for crude oil and the introduction of a carbon emissions levy. According to estimates by the ifo institute, consumer prices are predicted to rise by an average of 2.6% for this year as a whole. Consumer prices should return to a more moderate trend in 2022 and increase by an average of 1.9%. No sustained increase in inflation would appear to be on the cards from today’s perspective.
The IfW does not expect the European Central Bank (ECB) to make any changes to its monetary policy instruments. As a result, no key interest rate hike (the main refinancing rate is currently 0.0%) is expected between now and the end of the forecast period.
The forecasts depend to a considerable degree on how the pandemic continues to unfold and on the progress made in the vaccination drive, but also on the solvency of many companies. Downside risks include the possibility that the production and distribution of COVID-19 vaccines will not be quick enough, or that vaccination uptake is too low, which could lead to new, and even more infectious, variants of the virus. This could, in turn, lead to renewed infection control measures which would put a damper on consumption and investment spending. The forecasts are also based on the assumption that the freight and commodities bottlenecks will be resolved in the course of the summer. If these bottlenecks prove to be more prolonged, this will not only have an impact on the recovery in a large number of economies, but could also lead to persistently higher input costs, which would then filter through to consumer prices and increase inflation rates in the long run, especially since private households have accumulated substantial pent-up purchasing power as a result of the pandemic. This would, in turn, result in mounting pressure on central banks to adopt a more restrictive approach earlier than previously announced. Finally, there is also uncertainty as to the direction that fiscal policy will take in the coming year after the German Bundestag elections. The parties are discussing various reforms of the tax and social security system, as well as climate policy measures that could result in both additional burdens and relief for private households and the corporate sector alike compared with the status quo on which the forecasts are based. Other risks, and in particular foreign trade risks, are starting to wane: Brexit is complete and trade relations between the UK and the EU are already stabilizing. The United States and China have launched new trade talks following the change in the US presidency, and some punitive tariffs have already been suspended.
According to GdW, the situation on Germany’s housing markets in attractive conurbations and fast growing regions has changed rapidly in recent years from a largely balanced to a tense market situation. Driven by immigration, the past few years have brought steady population growth. In 2020, however, the growth process was stopped in its tracks for the time being in the wake of the coronavirus pandemic, marking the first time Germany’s population has not grown since 2011. Destatis reports that net migration has fallen sharply and the surplus of deaths over births has increased. In their latest population forecast, the experts from the German Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) expect the population to continue to grow in the short term, not reaching its peak until 2024. It remains to be seen to what extent potential immigration from countries on Europe’s periphery that have been hit by economic difficulties will provide a further boost to long-term demand for housing in Germany’s major cities. According to Helaba, the increase in working from home could boost demand for housing in the future and shift demand more from central inner-city locations to the outskirts of conurbations. In any case, when it comes to the internal migration links between Germany’s major cities, one trend is starting to reverse. Capacity in metropolitan areas to accommodate more people moving into the area is becoming increasingly scarce. People looking for housing are being pushed out into areas surrounding the major cities, or are once again focusing more on the dream of owning a house with a garden on the outskirts of the city or in neighboring areas. The rental housing market has long been characterized by very low vacancy rates. Not all regions, however, are benefiting from population growth. GdW reports that sparsely populated administrative districts located far from the country’s metropolitan centers, in particular, are faced with shrinking populations. The shortage of housing is particularly pronounced in major cities, metropolitan areas and university cities.
Despite increasing construction activity, the number of homes being built remains too low. A very respectable 306,000 of the 320,000 homes per year that the country needs, according to GdW, were actually built in 2020, although the number of affordable homes and social housing created remains too low. In 2020, only 85,000 or so out of the 140,000 affordable homes required were actually built. This is despite the fact that residential construction was barely affected by the measures taken to contain the pandemic, according to Helaba, meaning that most construction activity continued. According to GdW, construction is being hindered not only by sustained capacity bottlenecks in the construction industry but also, among other factors, by rising construction costs and the fact that building materials are becoming scarcer and more expensive due to demand from abroad.
Despite the coronavirus pandemic, the upward trend in German residential real estate prices continued until only recently according to reports by the experts at the National Association of German Cooperative Banks (BVR). They confirm the figures released by the analyst empirica based on the empirica price database (basis: VALUE market data). Accordingly, the empirica price index for condominiums (all years of construction) increased by 14.1% in the second quarter of 2021 compared to the same period of the previous year (new construction 11.7%). Apartment rents again showed much less dynamic development than purchase prices. empirica reports that, across the country, quoted rents continued to increase on average over all years of construction in the first and second quarters of 2021, and were an average of 3.9% higher in the second quarter of 2021 (new construction 4.3%) than in the same quarter of 2020. Unlike their counterparts at empirica, the experts at F+B identified an ongoing stagnation phase for new contract rents at the beginning of the year (data for the first quarter). Meanwhile, F+B reported another increase, namely by 1.2%, in rents under existing rental contracts in the first three months of 2021. All in all, the trends are varied. The real estate portal Immowelt, for example, reports that quoted rents for existing apartments in the second quarter of 2021 in a quarter-on-quarter comparison only rose in six out of the 14 major German cities with populations of more than 500,000. The remaining eight cities show stagnating or slightly declining quoted rents over the same period. The experts at Immowelt still expect rents to increase slightly throughout Germany, particularly in those major cities where prices are low to medium. According to an analysis by the real estate portal ImmoScout24, the ruling on the Berlin rent freeze is causing supply and rents in Berlin to rise again. DB Research (in its forecast published in December 2020) expects rent growth in 2021 to roughly reflect inflation, while nationwide house and apartment prices are expected to rise considerably by more than 6% year-on-year. The empirica bubble index for Germany showed a moderate to high risk of a bubble for 324 out of 401 administrative districts and self-governing cities in the first quarter of 2021.
According to CBRE, the pandemic has served to boost the residential investment market as opposed to slowing it down. Demand clearly outstrips the available supply. The transaction volume (based on transactions involving 50 residential units or more) came to around € 9.7 billion in the first half of 2021, 14% higher than the average for the last five first half-years. At € 2.8 billion, the proportion of forward deals was particularly high in the first half of 2021. The outskirts of metropolitan areas and other regions are starting to play more of a role.
The debate on housing policy measures and more stringent regulation is likely to make the headlines in 2021, also because of the German Bundestag elections. Political measures and decisions with an impact on the housing industry in the first half of 2021 include, by way of example, the CO2 pricing system that has been in force since January 1, 2021, and has an impact on housing costs, for example, on heating costs. On June 23, 2021, the Building Land Mobilization Act (Baulandmobilisierungsgesetz) came into force and features provisions designed to facilitate housing construction, but also an approval requirement for the conversion of rental apartments into condominiums in tense housing markets. In May, the German upper house (Bundesrat) approved legislation that should make share deals less attractive. It came into force on July 1, 2021. A reform of the rent indices legislation was also passed by the German lower house (Bundestag) and approved by the Bundesrat in the second half of June in a quest, among other things, to ensure that rent indices provide more valid information. Rent indices have become compulsory for cities with more than 50,000 inhabitants. In its decision of March 25, 2021, the German Federal Constitutional Court declared the Act on Rent Controls in the Housing Sector in Berlin (Berlin rent freeze) to be unconstitutional and, as a result, null and void.