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June 1, 2015
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The Q1 GDP details provide some comfort relative to the disappointing 0.3% qoq headline number. Final domestic demand was up 0.8% qoq while net-exports as well as inventories both provided a drag. Thus, our 2015 story of GDP growth driven by strong domestic demand remains intact. Despite this, we lower our 2015 GDP forecast from 2.0% to 1.6%. This is primarily due to the weaker-than-expected Q1 GDP growth that provides a lower starting base for 2015. However, we still expect quarterly growth rates to average a healthy 0.4% qoq in 2015. Further topics in this issue: Construction investment: Sharp increase expected, but focus on downside risks, The view from Berlin. German politics: Quarrel among friends and families. [more]
Focus Germany: Lower GDP forecast – but domestic demand alive and kicking Current Issues Business cycle Germany: 2015 GDP forecast revised to 1.6% despite robust underlying momentum. The Q1 GDP details provide some comfort relative to the disappointing 0.3% qoq headline number. Final domestic demand was up 0.8% qoq while net-exports as well as inventories both provided a drag. Thus, our 2015 story of GDP growth driven by strong domestic demand remains intact. Despite this, we lower our 2015 GDP forecast from 2.0% to 1.6%. This is primarily due to the weaker-than-expected Q1 GDP growth that provides a lower starting base for 2015. However, we still expect quarterly growth rates to average a healthy 0.4% qoq in 2015. Despite softening in April and May ifo expectations and the composite PMI still point to 0.4%-0.5% qoq GDP growth for Q2. The details of the ifo report broadly confirm the domestic strength vs lack of external traction story. For now, we still expect global developments to provide a bit more momentum in H2, but the most recent business cycle data out of Germany have generally disappointed, raising question marks over the (external) momentum going into H2. Construction investment: Sharp increase expected, but focus on downside risks. With leading indicators having reached record highs investment in construction should climb by 2.7% yoy in 2015 and 3.1% yoy in 2016 (in the wake of a 3.4% increase in 2014). Residential construction should remain the growth engine, expanding by over 3% in each of these two years, while commercial construction grows moderately. Given the plans for government spending programmes, to upgrade Germany's infrastructure in particular, we look for strong impetus from public construction. Some leading indicators point to a slowdown in construction growth. This might be partly driven by changes in the regulatory environment, particularly the introduction of the "Mietpreisbremse" (rent control), as well as capacity restrictions. If this trend continues, our baseline forecast could prove overly optimistic. The housing shortage in Germany's major cities and metropolitan regions is still the main feature of the German property market. A strong boost to construction investment would be needed to prevent further price increases. The view from Berlin. German politics: Quarrel among friends and families. In Germany an increase in bickering within Chancellor Merkel’s CDU/SPD coalition has even lead to speculation about its future. However, no-one is likely to be interested in early elections, given that a shift in the distribution of power in the Bundestag is unlikely. The populist AfD, last year’s political shooting star, has its wings quarrelling over the party’s course, so that a breakup may be looming. Although, the liberal FDP seems to be emerging from a crisis in new harmony, it is still doubtful whether the party’s recovery will last. Author s Dieter Bräuninger +49 69 910-31708 dieter.braeuninger@db.com Jochen Möbert +49 69 910-31727 jochen.moebert@db.com Heiko Peters +49 69 910-21548 heiko.peters@db.com Oliver Rakau +49 69 910-31875 oliver.rakau@db.com Stefan Schneider +49 69 910-31790 stefan-b.schneider@db.com Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Ralf Hoffmann Content Page Forecast tables ...............................................2 Germany: 2015 GDP forecast revised to 1.6% despite robust underlying momentum. ..3 Construction investment: Sharp increase expected, but focus on downside risks ............5 The view from Berlin. German politics: Quarrel among friends and families............... 10 DB German Macro Surprise Index ................ 11 Event calendar .............................................. 12 Data calendar ............................................... 13 Financial forecasts ........................................ 14 Data monitor ................................................. 15 June 1, 2015 Focus Germany Lower GDP forecast – but domestic demand alive and kicking Focus Germany 2 | June 1, 2015 Current Issues Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F 2014F 2015F 2016F Euroland 0.9 1.4 1.6 0.4 0.0 1.4 2.4 3.3 2.6 - 2.4 - 2.1 - 1.7 Germany 1.6 1.6 1.7 0.9 0.3 1.5 7.6 8.0 7.8 0.6 0.6 0.7 France 0.2 1.1 1.6 0.6 0.1 1.1 - 1.0 - 0.5 - 0.8 - 4.0 - 4.0 - 3.4 Italy - 0.4 0.6 1.3 0.2 0.1 1.1 1.9 2.5 2.7 - 3.0 - 2.7 - 2.2 Spain 1.4 2.8 2.4 - 0.2 - 0.6 1.5 0.8 1.4 1.0 - 5.8 - 4.5 - 3.9 Netherlands 0.9 1.7 1.1 0.3 0.0 1.3 10.9 11.4 11.5 - 2.3 - 2.0 - 1.9 Belgium 1.1 1.3 1.6 0.5 0.2 1.6 1.0 1.5 1.2 - 3.2 - 2.7 - 2.2 Austria 0.3 1.2 1.8 1.5 0.7 1.7 0.7 1.2 1.5 - 2.4 - 1.6 - 1.2 Finland - 0.1 0.8 1.4 1.2 0.1 1.3 - 1.9 - 1.5 - 1.3 - 3.2 - 3.3 - 2.8 Greece 0.7 0.8 3.2 - 1.4 - 1.6 1.0 1.0 1.5 1.2 - 3.5 - 0.7 - 0.7 Portugal 0.9 1.6 1.6 - 0.2 0.1 1.3 0.5 1.0 0.7 - 4.5 - 3.1 - 2.5 Ireland 4.8 3.7 3.5 0.3 0.1 1.8 6.2 5.0 4.5 - 4.1 - 2.8 - 2.5 UK 2.8 2.4 2.3 1.5 0.4 1.9 - 5.3 - 4.1 - 2.9 - 5.0 - 4.0 - 2.0 Denmark 1.1 1.7 1.8 0.6 1.0 1.5 6.2 6.0 6.0 - 1.0 - 2.5 - 2.5 Norway 2.3 2.0 2.2 2.0 2.0 2.0 8.5 8.0 7.5 9.1 9.0 8.5 Sweden 2.3 2.8 2.8 - 0.2 0.5 1.5 6.3 5.5 5.0 - 1.9 - 1.2 - 0.6 Switzerland 2.0 1.0 1.0 0.0 - 0.8 - 0.4 8.0 8.5 8.5 0.2 0.5 0.5 Czech Republic 2.0 2.7 2.5 0.4 0.5 2.0 0.6 0.2 0.0 - 1.9 - 1.8 - 1.6 Hungary 3.6 2.7 2.4 - 0.2 - 0.1 2.6 3.9 3.0 3.1 - 2.6 - 2.7 - 2.4 Poland 3.3 3.4 3.5 0.0 - 0.6 1.4 - 1.4 - 1.6 - 1.7 - 3.4 - 2.9 - 2.7 United States 2.4 2.4 3.0 1.6 0.2 2.5 - 2.6 - 3.0 - 3.6 - 2.8 - 2.7 - 2.4 Japan - 0.1 0.8 1.8 2.7 0.8 0.9 0.5 2.8 2.6 - 5.9 - 5.4 - 4.5 China 7.4 7.0 6.7 2.0 1.8 2.7 3.1 3.4 3.3 - 2.1 - 3.0 - 3.0 World 3.4 3.3 3.8 3.6 3.3 3.8 *Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepanc ies compared to other DB publications. Sources: National Authorities, Deutsche Bank Forecasts: German GDP growth by components, % qoq, annual data % yoy DX 2014 2015 2012 2013 2014 2015F 2016F Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F Real GDP 0.4 0.1 1.6 1.6 1.7 0.8 - 0.1 0.1 0.7 0.3 0.4 0.5 0.3 Private consumption 0.7 0.8 1.1 2.1 1.0 0.8 0.0 0.7 0.7 0.6 0.3 0.4 0.3 Gov't expenditure 1.2 0.7 1.2 1.7 0.4 0.0 0.7 0.6 0.3 0.7 0.1 0.3 0.2 Fixed investment - 0.7 - 0.6 3.3 2.8 2.7 3.0 - 1.7 - 1.2 0.8 1.5 0.0 1.5 0.8 Investment in M&E - 3.1 - 2.4 4.3 3.9 3.7 2.0 0.6 - 1.4 0.4 1.5 0.5 2.0 1.0 Construction 0.6 - 0.1 3.4 2.7 3.1 4.5 - 3.7 - 1.5 1.3 1.7 - 0.4 1.8 0.9 Inventories, pp - 1.4 0.2 - 0.3 - 0.2 0.1 - 0.2 - 0.1 - 0.5 0.4 - 0.3 0.1 0.1 0.0 Exports 2.8 1.6 3.8 4.7 5.0 0.1 1.0 1.5 1.0 0.8 1.0 1.0 1.2 Imports 0.0 3.1 3.5 5.8 4.4 0.2 0.7 0.8 1.9 1.5 0.9 1.5 1.5 Net exports, pp 1.3 - 0.5 0.4 0.0 0.4 - 0.1 0.2 0.4 - 0.3 - 0.2 0.1 - 0.1 - 0.1 Consumer prices* 2.0 1.5 0.9 0.3 1.5 1.2 1.1 0.8 0.5 0.0 0.2 0.5 0.8 Unemployment rate, % 6.8 6.9 6.7 6.5 6.5 6.8 6.7 6.7 6.6 6.5 6.4 6.4 6.5 Industrial production - 0.4 0.1 1.5 1.7 2.2 Budget balance, % GDP 0.1 0.1 0.6 0.6 0.7 Public debt, % GDP 79.0 76.9 73.3 69.6 66.0 Balance on current account, % GDP 6.8 6.5 7.6 8.0 7.8 Balance on current account, EUR bn 187 182 220 239 244 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research Focus Germany 3 | June 1, 2015 Current Issues Germany: 2015 GDP forecast revised to 1.6% despite robust underlying momentum — The Q1 GDP details provide some comfort relative to the disappointing 0.3% qoq headline number. Final domestic demand was up 0.8% qoq and net-exports as well as inventories both provided a drag. Thus, our 2015 story of GDP growth driven by strong domestic demand remains intact. — Despite this, we lower our 2015 GDP forecast from 2.0% to 1.6%. This is primarily due to the weaker-than-expected Q1 GDP growth that provides a lower starting base for 2015. However, we stwill expect quarterly growth rates to average a healthy 0.4% qoq in 2015. — Despite softening in April and May ifo expectations and the composite PMI still point to 0.4%-0.5% qoq GDP growth for Q2. The details of the ifo report broadly confirm the domestic strength vs. lack of external traction story. For now, we still expect global developments to provide a bit more momentum in H2, but the most recent business cycle data out of Germany have generally disappointed, raising question marks over the (external) momentum going into H2. Q1 GDP data: Domestic cycle remained strong The Q1 GDP data provide some comfort relative to the disappointing headline GDP reading and continue to support our 2015 story of GDP growth driven by strong domestic demand. Headline GDP growth slowed to a disappointing +0.3% qoq (vs +0.7% qoq prev., Reuters Consensus range +0.4% - +0.9%). Net exports weighed on growth (-0.2% percentage points). This was the second consecutive quarter bringing a drag from this side (Q4 2014: -0.3% pp) as imports (+1.5% qoq) rose again by about double the pace of exports (+0.8% qoq). Overall, while exports are rising by less than in past cycles they were still up by 4.3% yoy in Q1 – on track to meet our full year forecast. Export growth is limited by weak global trade and marked by a divergence between demand from developed markets (strength in the US and improvement in EMU) and developing markets (Russia in recession, China weakening). Imports were up a stronger 5.0% yoy – a sign of the domestic strength especially in consumption. The drop in oil prices provided an additional fillip to real imports. This effect should dissipate over the rest of the year. In our view, the main surprise was the ongoing drag from inventories. They lowered growth by 0.3 pp. Inventories were negative in all but one of the last 5 readings. We are always cautious about over-interpreting this component since – in contrast to the US – it is not based on data, but is the residual item between the production and expenditure side of national accounts and is often heavily revised. For instance, the negative Q4 reading was revised from -0.2 pp to +0.4 pp. One could argue that businesses still remain cautious with regard to future demand and are keeping inventories lean. This explanation is somewhat unsatisfactory, though, given domestic strength and the overall robust pace of foreign demand. The ifo and PMI data on inventories, in our view, do not suggest that companies see a big problem with inventories in either direction. By contrast, domestic demand remained very healthy. Final domestic demand was up 0.8% qoq in Q1 and averaged +0.6% qoq over the last three quarters and +0.5% qoq over the last five quarters. In Q1 domestic demand growth was broadly based with private consumption barely losing any momentum (+0.6% vs +0.7% prev.). While nominal disposable incomes stagnated after substantial growth in previous quarters, the savings rate declined again in Q1 (9.4%) after it had risen strongly in Q4 (9.8%) likely on the back of surprising savings due to - 3.0 - 2.0 - 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 10 11 12 13 14 15 Real GDP 2014 avg. 2015F avg. % yoy (right) Real GDP, % qoq Quarterly GDP growth in 2015 same as 2014 1 Sources: Federal Statistical Office, Deutsche Bank Research - 1.5 - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 11 12 13 14 15 Priv. consumption Machinery & equipment Construction Net exports Rest Real GDP (% qoq) Contribution to real GDP growth, qoq, pp Sources: Federal Statistical Office, Deutsche Bank Research Private consumption boosted growth lately 2 - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 - 4 - 2 0 2 4 6 8 10 11 12 13 14 15 Net exports (contr. in pp, right) Exports (left) Imports (left) Imports outpaced exports lately 3 Real, sa, % qoq Source: Federal Statistical Office Focus Germany 4 | June 1, 2015 Current Issues the oil price decline. This suggests that this stimulus to real disposable income has now largely found its way into consumption spending. Government consumption accelerated (+0.7% qoq vs +0.3% prev.). Construction investment was up somewhat less (+1.7% qoq vs +1.3%) than monthly indicators had suggested. The two consecutive strong readings still provide a very solid starting base for full-year construction growth, although it was somewhat overstated due to the mild winter. Investment in machinery & equipment (+1.5% vs +0.4% prev.) was robust, achieving the highest rate of the last four quarters. It is unlikely to point to the start of a strong investment cycle as domestic investment goods orders have slowed again lately as demand for German industrial goods is not strong enough to bring capacity utilisation substantially above its historical average. 2015 GDP revised to 1.6%, but healthy quarterly growth We lower our 2015 GDP forecast from 2.0% to 1.6%. This is primarily due to the weaker-than-expected Q1 GDP growth that provides a lower starting base for 2015. However, we still expect quarterly growth rates to average a healthy 0.4% qoq in 2015 – this is about the same average that we had expected when increasing our GDP forecast to 2% in February and this was also the average in 2014. We expect GDP growth to pick up slightly to +0.4% in Q2F as net exports and inventories stop being a drag and other components continue their solid growth, which would be about in line with the ifo and PMI levels in Apr./May. The downward revision should not distract from the underlying story of strong domestic demand that remains unchanged in our view. From a growth composition perspective our forecast is now even further tilted toward domestic demand as we now see net exports making a neutral contribution to growth as imports (2015F: +5.8%) outpace exports (+4.7%) even more than previously forecast. This is in line with DB’s global 2015 GDP growth forecast, which has now been lowered from 3.4% to 3.3%, and global trade that has remained lacklustre. Otherwise we continue to expect private consumption to grow at over 2% (2.1%; government consumption: +1.7%). Investment should also be healthy with machinery & equipment expanding by 3.9% helped by a base effect. Construction might grow by 2.7% in 2015 (for details see the following article). Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Stefan Schneider (+49 69 910-31790, stefan-b.schneider@db.com) -20 -15 -10 -5 0 5 10 15 07 08 09 10 11 12 13 14 15 Investment in machinery and equipment (nat. acc.) Domestic investment goods orders ex airplanes, 1 - quarter lead Slower equipment investment in Q2 likely 4 Source: Federal Statistical Office Real, % qoq 8 9 10 11 12 13 14 91 95 99 03 07 11 15 Savings rate: Down again from high Q4 level 5 %, sa Source: Federal Statistical Office Focus Germany 5 | June 1, 2015 Current Issues Construction investment: Sharp increase expected, but focus on downside risks — With leading indicators having reached record highs investment in construction should climb by 2.7% yoy in 2015 and 3.1% yoy in 2016 (in the wake of a 3.4% increase in 2014). Residential construction should remain the growth engine, expanding by over 3% in each of these two years, while commercial construction grows moderately. Given the plans for government spending programmes, to upgrade Germany's infrastructure in particular, we look for strong impetus from public construction. — Some leading indicators point to a slowdown in construction growth. This might be partly driven by changes in the regulatory environment, particularly the introduction of the "Mietpreisbremse" (rent control), as well as capacity restrictions. If this trend continues, our baseline forecast could prove overly optimistic. — The housing shortage in Germany's major cities and metropolitan regions is still the main feature of the German property market. A strong boost to construction investment would be needed to prevent further price increases. If the downside risks to investment in residential construction materialise there is a danger of the price pressure intensifying on account of an even larger supply bottleneck. Despite the unbroken upswing in the real estate market since 2009, construction investment has grown only moderately at around 3% per year. This corresponds to a relatively low price elasticity of only about ½, since prices have climbed by roughly 6% per year. This expansion of construction investment started from a low level. As a percentage of gross domestic product, German construction investment is relatively low both by historical and international standards. The modest expansion of supply has exacerbated the housing scarcity in Germany's major cities and metropolitan regions. Since the demand for real estate is set to continue to grow dynamically for the time being, a pronounced jump in construction investment will be needed to alleviate the supply bottleneck. Accordingly, construction investment is also of key importance to future price trends in the property market. Our investment forecasts are based on the following main arguments: 1. the continuation of the current real estate cycle, 2. the leading indicators and 3. capacity restrictions on building output and the change in the regulatory environment. Demand overhang in current property upswing buoys construction investment Real estate cycles often last several years, and very long cycles can persist for several decades in fact. Correspondingly, with a duration of six years the upswing in the cycle that began in Germany in 2009 is nearly spot on the historical international average. The fact that there are very strong incentives for tenants to purchase real estate in the current low interest rate environment suggests the cycle will continue for a long time. For many tenants the interest and repayment charges currently incurred on the purchase of a home are lower than the rent. Especially Germany, with its very low home-ownership ratio, could see the current cycle continue for several more years. As a result, Germany's home-ownership ratio could skyrocket. This possibility is also backed by the fact that house prices started to return to normal over the past six years. They climbed by nearly 50% in the major cities and 30% country-wide, while office prices picked up by over 20%. By -8.0 -4.0 0.0 4.0 8.0 96 98 00 02 04 06 08 10 12 14 16 GDP ex construction Construction investment %yoy Sources: Destatis, Deutsche Bank Research GDP growth & construction investment 1 Focus Germany 6 | June 1, 2015 Current Issues international standards, this may be regarded as an average property upswing. Besides, it started from pretty low levels. In its last quarterly report the central bank of Austria said it continued to view the German housing market as being undervalued. 1 This supports the argument that German real estate prices are still cheap in an international comparison and the normalisation process should continue. Another reason the cycle should continue is that the macroeconomic environment provides positive stimuli. The increase in employment is set to continue thanks to immigration, and we look for GDP growth of 1.6% for 2015 and 1.7% for 2016. As in 2014, this market and macroeconomic environment ought to be reflected in higher construction investment. Construction indicators: High levels, but slowing growth Construction indicators such as new orders, order books, building permits, sales per year, employment and the ifo construction index have picked up noticeably over the past six years and are now at high levels (charts 5-12). The sizeable order backlog and pronounced increase at end-2014 in particular continue to imply rising construction investment in 2015. True, some indicators point to easing growth, but given in some cases long lead times and the high indicator levels we expect a 2.7% expansion of construction investment in 2015 and 3.1% in 2016, in the wake of a 3.4% increase in 2014 (chart 2). Following the weather-induced surge in Q1 2015 (1.7% qoq), we expect to see a compensatory effect in Q2 (-0.5%). This forecast is partly based on the slowing momentum of the ifo indicators. For the year as a whole, construction investment growth should continue to be driven by the residential segment, which should pick up by over 3% in each of these two years. Because of a pronounced negative growth overhang from 2014 commercial construction performance is likely to be below average with expansion of 1.4% yoy, and only 1.1% in the following year. The weaker growth in the commercial segment is also reflected in a modest increase in office workers relative to the number of employees required to pay social security contributions. Accordingly, the supply overhang and vacancy rates in the office market that have existed for years are falling only slowly. In 2014, the office vacancy rates in the major cities fell to roughly 7%, while they still hovered around 10.4% in 2010. By comparison: the vacancy rates in the housing market are often far below 2% (charts 3 and 4). 1 "Calculating this indicator with data for Germany we see an undervaluation of 7% in Q3/14". MONETARY POLICY & THE ECONOMY. Quarterly Review of Economic Policy. Q1/15. Housing Markets in Austria, Germany and Switzerland. Martin Schneider and Karin Wagner. Forecast: Construction investment 2 % yoy 2014 2015 2016 Residential 3.8 3.3 4.4 Commercial 2.2 1.4 1.1 Public 4.0 0.0 3.0 Total 3.4 2.7 3.1 Source: Deutsche Bank Research 0 2 4 6 8 10 12 90 94 98 02 06 10 14 Germany Major cities (A - cities) % of total office stock Sources: BulwienGesa, Deutsche Bank Research Office market: Vacancy rate 3 0 1 2 Berlin Dusseldorf Cologne Stuttgart Frankfurt Hamburg Munich % of total building stock per city Sources: CBRE, Deutsche Bank Research Dwellings: Marketable vacancy rate 4 Focus Germany 7 | June 1, 2015 Current Issues We expect public construction to stage a strong recovery in the course of 2015 following a significant decline in the first quarter (-3% qoq). Nonetheless, the Q1 downturn neutralises the sizeable growth overhang from the previous year along with the extremely positive new order trend at the start of the year in our forecast, meaning that investment in public construction will be flat for the year as a whole. In 2016 it is likely to increase by 3%. This forecast is not based on a model estimate, though, but on the assumption that the current debate over deficiencies in German infrastructure will lead to additional investment. In March, the federal government announced the main points of an investment initiative that will channel an additional EUR 10 bn into public transport infrastructure and measures to boost energy efficiency, digital infrastructure, climate protection and urban development from 2016 to 2018. Ultimately, the price pressure in the current real estate cycle will not ease until the supply bottleneck is alleviated via a very strong expansion of construction investment. Even in the baseline scenario with a substantial increase in investment as depicted here this imbalance is likely to be run down only slowly over a period of several years. The current cycle should continue, with real estate prices climbing further, rental yields far outstripping the financing costs and thus also sending the price signals that will lead to further investment in construction. 60 65 70 75 80 700 720 740 760 780 07 08 09 10 11 12 13 14 15 Employment Capacity utilisation Employment 5 Left axis: employed persons in '000, 12M mov. avg. Right axis: capacity utilisation in % Sources: Destatis, Deutsche Bank Research 70 100 130 160 05 07 09 11 13 15 Residential Commercial Public New orders 6 Sources: Destatis, Deutsche Bank Research 2010=100 working - day and seasonally adjusted 75 100 125 150 05 07 09 11 13 15 Civil engineering ex road construction Road construction Sources: Destatis, Deutsche Bank Research 2010=100 working - day and seasonally adjusted New orders: Public 7 75 100 125 150 05 06 07 08 09 10 11 12 13 14 Residential Commercial Public Order book 8 2010=100 working - day and seasonally adjusted Sources: Destatis, Deutsche Bank Research 0 10 20 30 40 50 60 00 02 04 06 08 10 12 14 Public Commercial Residential Reported costs, EUR bn Sources: Destatis, Deutsche Bank Research Building permits per year 9 0 1000 2000 3000 4000 5000 05 06 07 08 09 10 11 12 13 14 15 Public Commercial Residential Building permits per month 10 Reported costs, EUR m Sources: Destatis, Deutsche Bank Research Focus Germany 8 | June 1, 2015 Current Issues Downside risks due to regulatory environment and capacity restrictions The growth momentum of several leading indicators has eased over the past few months. One example worth mentioning in particular is building permits, which are trending sideways in the residential and commercial segments after having at times shown double-digit percentage growth in previous years. The ifo construction index, sales in the public segment and new order intake in the commercial segment are slightly decreasing in fact. Potential reasons for the muted construction growth are the regulatory environment and capacity restrictions on building output. Capacity utilisation in the sector has hit record highs, meaning that a further expansion of supply would be linked with high costs and therefore no action is being taking. Moreover, the ifo Institute says a relatively large number of building firms report a shortage of workers, and the Federal Employment Agency a shortage of skilled tradespeople in the plumbing and sanitary fittings sector in particular. The number of vacancies for this group of workers that is obliged to pay social security contributions continues to surge and the number of job vacancies far exceeds the number of jobseekers. Bottlenecks in subsectors could curb building activity as a whole. Since the apprenticeship figures in construction are in fact declining slightly, the shortage of skilled workers could become chronic. Furthermore, the large number of applications to draw a pension at 63 (roughly 280,000 at the end of March) may further exacerbate the shortage in the sector. The change in the regulatory environment could be another cause of the limited momentum seen with some leading indicators. The debate about "affordable housing" that began with the federal election campaign in mid-2013 presumably heightened investor uncertainty about the future regulatory environment. It remained unclear until recently just how the new law would regulate newbuild housing and the modernisation of existing stock. Construction-sector investors may have postponed some projects in order to await the impact of the new rules on their investment models. Also, the possibility looms that constitutional complaints may be filed against rent control. Equally, the lack of legal underpinning for the calculation of “usual local rent levels” could lead to legal squabbles – according to the new law, the rent charged when re-letting existing stock must not exceed 10% of the usual local level at the maximum. In May 2015, a district court in Berlin classified the local rent index ("Mietspiegel") as unscientific and thus questioned its use as a basis for legislation. These uncertainties surrounding the issue of rent control could also dampen capital- 22 27 32 37 05 06 07 08 09 10 11 12 13 14 15 Commercial Residential Public Sales per year 11 EUR bn, 12M moving average Sources: Destatis, Deutsche Bank Research - 70.0 - 50.0 - 30.0 - 10.0 10.0 91 95 99 03 07 11 15 Climate Situation Expectations ifo construction index 12 Net percentage balance, sa Sources: ifo, Deutsche Bank Research Focus Germany 9 | June 1, 2015 Current Issues intensive expansion investment in cranes, building machinery and construction vehicles. Given the introduction of rent control – in a market that is already heavily regulated anyway – and the possibility of capacity restrictions it follows that our construction investment forecasts are faced with downside risks. Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) Focus Germany 10 | June 1, 2015 Current Issues The View from Berlin German politics: Quarrels among friends and families In Germany an increase in bickering among political actors and parties has attracted growing public attention. In Chancellor Merkel’s governing coalition a debate on the cooperation between the German intelligence service BND and its US counterpart, the NSA, has escalated. Some commentators are already wondering if the coalition will hold. The populist AfD, last year’s political shooting star, has its divergent political wings quarrelling over the party’s course. The liberal FDP, by contrast, seems to be emerging from its crisis in new harmony. The hefty debate among the government parties is astonishing, given that according to a recent survey 70% of the Germans think they are not affected by the BND’s activities. Thus, the debate is seen as a sign of deterioration in Berlin’s political climate. In fact, business-friendly CDU/CSU MEPs feel that the coalition’s work has hitherto been biased, with the government mainly implementing the SPD’s favourite projects, such as the minimum wage and the pension at 63, while their calls, e.g. income tax cuts, have not yet been heeded. The SPD is unhappy with its weak approval ratings of 25-26%, while the CDU/CSU frequently polls about 41%, due largely to Mrs. Merkel’s popularity. Countering the SPD leader Gabriel’s demand that chancellor Merkel should demonstrate more political “backbone” in the BND/NSA issue, a vice-chairman of the CDU’s parliamentary group has now even hinted at the possibility of a snap election. At present, however, none of Germany’s major parties are likely to be interested in early elections. Markets were therefore right not to react to the statement from the CDU MP. The coalition still has important projects pending, especially the energy transition and the reform of the tax revenue equalisation scheme. To pass the respective legislation a consensus between the CDU/CSU and the SPD would be imperative, even if they were not coalition partners. Furthermore, at present, there is no prospect of a fundamental shift in the distribution of power in favour of one of the two camps. Recently, new uncertainty has resulted from the unclear fate of the AfD. The party’s liberal conservative wing and its right wing are involved in a power struggle. Economics professor Lucke, who founded the party 2½ years ago as a club of critics of the EU’s euro bailout policy, has already asked his followers to join a new movement. Although the latter does not (yet) have the status of a political party, a break-up of the AfD is looming. But neither Lucke’s decimated eurosceptics nor a presumably right-wing and primarily Eastern Germany-based rump AfD would be a force to be reckoned with at the federal level. By contrast, the FDP is recovering from the heavy election defeats it suffered in the past few years. At its recent party conference the FDP celebrated its new leadership team as well as respectable results at two recent Länder elections in Hamburg and Bremen and demonstrated new harmony. But despite improvements in recent polls, too, it is still very doubtful whether the FDP will be able to clear the 5% threshold at the next general election, be it in autumn 2017 – as scheduled – or in the unlikely event of an earlier election. A continuing recovery of the FDP would provide the CDU/CSU with a further option to form a new coalition in autumn 2017. The SPD lacks an alternative to the present coalition as long as its popularity rating together with that of the Greens and the Left party remain below 45% in total. Although these two smaller parties have not produced negative headlines recently, their approval ratings are hovering around 10% and 9%, respectively. Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) 0 5 10 15 20 25 30 35 40 45 CDU/CSU SPD Greens Left Party AfD FDP Others Source: IfD Allensbach Popularity of major parties in DE, according to the Allensbach survey 1 As of mid-May, % 20 25 30 35 40 45 2013/9* 2014/1 5 9 2015/1 5 CDU/CSU SPD * Result of the federal election on September 22 % Lasting difference in the popularity of the CDU/CSU and the SPD 2 Sources: Wahlrecht.de; IfD Allensbach 3 4 5 6 7 8 9 10 11 2013/9* 2014/1 5 9 2015/1 5 FDP Greens Left Party AfD % * Result of the federal election on September 22 Sources: Wahlrecht.de; IfD Allensbach Smaller parties' popularity over time 3 Focus Germany 11 | June 1, 2015 Current Issues DB German Macro Surprise Index The DB German Macro Surprise Index compares published economic data with market forecasts and thus provides clues as to the direction of future forecast revisions. 2 Heiko Peters (+49 69 910-21548, heiko.peters@db.com) 2 See for details Focus Germany. August, 4 2014. Last 20 published economic data for Germany DX Bloomberg TickersIndicator Reporting month Publication date Current value Bloomberg consensus Surprise Standardised surprise Quantile rank GRZEWI IndexZEW Survey Expectations4 201521.04.1553.355.3-2.0-0.20.4 GRZECURR IndexZEW Survey Current Situation4 201521.04.1570.256.513.71.81.0 GRIFPBUS IndexIFO Business Climate4 201524.04.15108.6108.40.20.00.5 GRIMP95Y IndexImport Price Index (% yoy)3 201527.04.15-1.4-2.00.60.80.9 GRFRIAMM IndexRetail Sales (% mom)3 201530.04.15-1.40.5-1.9-1.20.1 GRUECHNG IndexUnemployment Change (000's mom)4 201530.04.15-8.0-15.0-7.0-0.50.3 MPMIDEMA IndexMarkit Manufacturing PMI4 201504.05.1552.151.90.20.20.6 MPMIDESA IndexMarkit Services PMI4 201506.05.1554.054.4-0.4-0.40.3 GRIORTMM IndexFactory Orders (% mom)3 201507.05.150.91.5-0.6-0.30.4 GRIPIMOM IndexIndustrial production (% mom)3 201508.05.15-0.50.4-0.9-0.70.2 GRCAEU IndexCurrent Account Balance (EUR bn)3 201508.05.1527.920.07.92.01.0 GRCP20YY IndexCPI (% yoy)4 201513.05.150.50.40.10.80.8 GRZEWI IndexZEW Survey Expectations5 201519.05.1541.949.0-7.1-0.80.2 GRZECURR IndexZEW Survey Current Situation5 201519.05.1565.768.0-2.3-0.40.3 MPMIDESA IndexMarkit Services PMI5 201521.05.1552.952.90.00.00.5 MPMIDEMA IndexMarkit Manufacturing PMI5 201521.05.1551.451.40.00.00.5 GRGDPPGQ IndexGDP (% qoq)3 201522.05.150.30.30.0-0.10.3 GRIFPBUS IndexIFO Business Climate5 201522.05.15108.5108.30.20.00.5 GRIMP95Y IndexImport Price Index (% yoy)4 201528.05.15-0.6-0.70.10.40.7 GRFRIAMM IndexRetail Sales (% mom)4 201529.05.151.71.00.70.80.8 Sources: Bloomberg Finance LP, Deutsche Bank Research -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 14 15 DB Marko - Überraschungsindex +/ - 1 Standardabweichung DB German Macro Surprise Index Average of last 20 z-scores of data surprises Values above (below) 0 indicate the data came in better (worse) than expected Sources: Bloomberg Finance LP, Deutsche Bank Research -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 05 06 07 08 09 10 11 12 13 14 15 Cons. Ec. forecasts, pp mom DB German Macro Surprise Index (3M lead) Monthly revisions of Consensus Economic Forecasts (pp); Average of previous 20 z-scores Sources: Consensus Economics Inc., Deutsche Bank Research DB German Macro Surprise Index and revisions of Consensus GDP forecasts Focus Germany 12 | June 1, 2015 Current Issues Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Nicolaus Heinen (+49 69 910-31713, nicolaus.heinen@db.com) Germany: Events of economic-, fiscal- and euro-politics DX Date Event Remarks 3 June ECB Governing Council meeting, press conference The Council is fully committed to the QE programme to purchase EUR 60 bn of securities per month until September 2016 and possibly beyond. 7 to 8 June G7 leaders summit, Kruen/Elmau (Bavaria) Global economy, foreign, security and development policy, climate protection, energy security among others. 16 June European Court of Justice (ECJ), Luxembourg ECJ judges over the ECB's OMT programme. In principle, the judgment will be binding for the G erman Constitutional Court (GCC) and its future judgment on pending constitutional complaints against OMT. The ECJ will most likely hold that OMT complies with the European Treaties. However, it remains to be seen whether the German Court will thoroughly f ollow the ECJ's judgment. Even if OMT was limited in scope , the ECB will be able to calm sovereign bond markets with QE action. 18 to 19 June Eurogroup and ECOFIN meeting, Brussels Among others European semester – discussion on SCPs and euro area specific recommendations, Greece, Eurogroup work programme for H2 2012. 25 to 26 June European Council meeting, Brussels Debate on the nature and structure of the euro area on the basis of the Four Presidents' Report, and on the EU’s strategy for foreign and security policy and possibly on the situation in Greece. 13 to 14 July Eurogroup and ECOFIN meeting, Brussels Possib ly Greece and the situation in the euro area among others. 16 July ECB Governing Council meeting, press conference The risk of an early reconsideration of the QE programme is low. Source: Deutsche Bank Research Focus Germany 13 | June 1, 2015 Current Issues Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Germany: Data calendar DX Date Time Data Reporting period DB forecast Last value 1 Jun e 2015 14:00 Consumer prices preliminary (Index, sa), pch mom (yoy) May 0.1 (0.7) 0.0 (0.5) 2 Jun e 2015 10:00 Unemployment rate (%, sa) May 6.4 6.4 5 Jun e 2015 8:00 New orders manufacturing (Index, sa), pch mom April 0.5 0.9 8 Jun e 2015 8:00 Industrial production (Index, sa), pch mom April 0.2 - 0.5 8 Jun e 2015 8:00 Trade balance (EUR bn, sa) April 18.7 19.4 8 Jun e 2015 8:00 Merchandise exports (EUR bn, sa), pch mom (yoy) April 0.2 (5.7) 1.3 (8.4) 8 Jun e 2015 8:00 Merchandise imports (EUR bn, sa), pch mom (yoy) April 1.1 (5.4) 2.4 (4.7) 23 Jun e 2015 9:30 Manufacturing PMI (Flash) June 51.2 51.4 23 Jun e 2015 9:30 Services PMI (Flash) June 53.2 52.9 24 Jun e 2015 10:30 ifo business climate (Index, sa) June 108.5 108.5 29 Jun e 2015 8:00 Import prices (Index, sa) pch mom (yoy) May 0.2 ( - 0.4) 0.6 ( - 0.6) 2 Jul y 2015 8:00 Retail sales (Index, sa), pch mom May - 0.5 1.7 14 Aug 2015 8:00 Real GDP (Index, sa ), % qoq Q2 2015 0.4 0.3 Sources: Deutsche Bank Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit Focus Germany 14 | June 1, 2015 Current Issues Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Financial Forecasts DX US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 0.120 0.10 0.05 0.50 - 1.25 - 0.25 0.05 1.25 1.50 1.65 0.05 Jun 15 0.125 0.10 0.05 0.50 - 0.75 - 0.25 0.05 1.25 1.50 1.50 0.05 Dec 15 0.625 0.10 0.05 0.50 - 0.75 - 0.25 0.05 1.00 1.50 1.50 0.05 Mar 16 0.875 0.10 0.05 0.50 - 0.75 - 0.25 0.05 1.00 1.50 1.60 0.05 3M interest rates, % Current 0.26 0.20 - 0.01 0.57 Jun 15 0.26 0.15 0.00 0.58 Dec 15 0.75 0.15 - 0.10 0.59 Mar 16 1.18 0.15 - 0.10 0.60 10Y government bonds yields, % Current 2.12 0.53 0.54 1.84 Jun 15 2.00 0.40 0.60 1.85 Dec 15 2.45 0.55 0.70 2.15 Mar 16 3.35 0.60 0.80 2.35 Exchange rates EUR/USD USD/JPY EUR/GBP GBP/USD EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK Current 1.09 123.70 0.71 0.65 1.03 9.25 7.46 8.49 4.13 308.65 27.46 Jun 15 1.04 121.00 0.72 1.44 1.07 9.20 7.46 8.90 3.97 292.56 27.50 Dec 15 1.00 125.00 0.74 1.36 1.10 8.90 7.46 9.00 4.08 285.00 27.50 Mar 16 0.98 126.25 0.74 1.33 1.10 8.86 7.46 8.95 4.06 300.00 27.50 Sources: Bloomberg, Deutsche Bank Focus Germany 15 | June 1, 2015 Current Issues German data monitor DX Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Dec 2014 Jan 2015 Feb 2015 Mar 2015 Apr 2015 May 2015 Business surveys and output Aggregate Ifo business climate 110.0 106.7 104.7 107.1 105.6 106.7 106.8 107.9 108.6 108.5 Ifo business expectations 105.4 101.9 100.3 102.8 101.4 101.9 102.5 103.9 103.4 103.0 Industry Ifo manufacturing 106.2 102.8 99.9 102.8 101.2 102.2 102.3 103.8 104.5 104.3 Headline IP (% pop) - 1.1 0.0 0.8 0.5 1.0 - 0.1 0.0 - 0.5 Orders (% pop) - 1.0 1.3 1.4 - 1.6 3.3 - 2.7 - 0.9 0.9 Capacity Utilisation 84.0 83.8 84.1 84.5 84.9 Construction Output (% pop) - 4.9 0.4 1.4 1.9 1.4 1.1 - 2.6 4.5 Orders (% pop) - 4.5 - 2.4 - 0.1 8.6 1.0 9.8 - 1.6 - 2.2 Ifo construction 119.8 120.4 120.4 118.8 119.6 119.3 119.2 118.0 119.5 119.7 Co nsumer demand EC consumer survey 4.3 1.0 - 1.2 1.0 - 1.4 0.0 - 0.1 3.2 3.3 3.0 Retail sales (% pop) 0.0 0.0 1.7 1.0 0.9 0.8 - 0.2 - 1.4 1.7 New car reg. (% yoy) - 0.3 4.1 2.7 6.4 6.7 2.6 6.6 9.0 6.3 Foreign sector Foreign orders (% pop) - 1.0 3.4 0.9 - 3.3 3.0 - 3.4 - 1.7 - 1.6 Exports (% pop) 0.5 2.4 1.4 0.6 2.8 - 2.1 1.4 1.3 Imports (% pop) - 0.9 0.6 0.5 1.4 - 0.7 - 0.2 1.3 2.4 Net trade (sa EUR bn) 52.2 57.5 60.3 59.0 21.5 19.7 20.0 19.4 Labour market Unemployment rate (%) 6.7 6.7 6.6 6.5 6.5 6.5 6.5 6.4 6.4 Change in unemployment (k) - 20.0 - 0.7 - 37.3 - 48.0 - 25.0 - 9.0 - 19.0 - 14.0 - 8.0 Employment (% yoy) 0.9 0.8 0.9 0.7 0.9 0.8 0.6 0.6 Ifo employment barometer 106.8 106.5 106.4 107.7 106.7 108.1 106.8 108.1 108.1 108.2 Pr ices, wages and costs Prices Harmonised CPI (% yoy) 0.9 0.8 0.4 - 0.2 0.1 - 0.5 - 0.1 0.1 0.3 Core HICP (% yoy) 1.1 1.2 1.1 1.0 1.2 0.9 1.1 1.0 1.1 Harmonised PPI (% yoy) - 0.8 - 0.8 - 1.2 - 2.0 - 1.7 - 2.2 - 2.1 - 1.7 - 1.5 Commodities, ex. Energy (% yoy) - 4.9 - 1.8 0.9 2.3 0.1 2.3 1.4 3.4 0.5 Oil price (USD) 109.7 102.0 76.4 55.1 63.1 49.7 58.9 56.8 61.6 Inflation expectations EC household survey 16.9 13.4 8.6 0.5 6.2 0.5 - 0.7 1.7 2.1 8.3 EC industrial survey 2.3 4.2 2.1 - 0.4 - 1.5 - 1.2 - 0.1 0.1 0.4 0.9 Unit labour cost (% yoy) Unit labour cost 2.0 2.0 1.8 1.8 Compensation 2.6 2.5 2.6 2.4 Hourly labour costs 2.4 2.1 1.7 2.5 Mo ney (% yoy) M3 4.5 4.7 4.7 7.1 4.7 5.9 6.3 7.1 M3 trend (3m cma) 5.2 5.6 6.4 Credit - private - 3.5 1.4 1.7 2.6 1.7 2.1 2.5 2.6 Credit - public 9.7 5.9 12.6 32.3 12.6 19.0 15.5 32.3 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HW WI, ifo, Markit Focus Germany Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E - mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Mai n Fax: +49 69 910 - 31877 E - m ail: marketing.dbr@db.com Available faster by E - mail: marketing.dbr@db.com Focus Germany is part of the Current Issues series and deals with macroeconomic and economic policy issues in Germany. Each issue also contains a timet able of financial and economic policy events as well as a detaile d data m onitor of German economic indicators. Focus Germany is a monthly publication.  German savers challenged by QE ................................ .... A pril 30, 2015  German exporters facing strong headwind despite softer euro ................................ ......... March 30, 2015  Stronger growth and wages – little reaction from saver s ................................ ................. March 2, 2015  German growth after oil, EUR and EC B ..................... February 2, 2015  Outlook 2015: Recovery with risks attached ................. January 6, 2015  Structural downshift in global trade burdens growth outlook ................................ ............. December 2, 2014  Further disappointments ................................ ........... November 5, 2014  Heightened risks ................................ .................... September 30, 2014  Ice bucket challenge and structural investment gap ................................ ......... September 2, 2014  Weaker recovery in H2 ................................ .................... August 4, 2014  Solid growth, low inflation (despite ECB) ......................... June 30, 2014  So far, so good ................................ ................................ .... May 2, 2014  2% GDP growth in 2015 despite adverse employment policy ................................ ....... February 28, 2014  Onward and upward ................................ .................... January 27, 2014  Launchpad to the past ................................ ............. November 29, 2013  Exuberance and fear ................................ ................... October 31, 2013  Germany after the elections ................................ .......... October 1, 2013  German GDP up 0.5% in 2013 – despite slowdown in H2 ................................ ........... September 3, 2013  Structural growth limitations ................................ .............. July 31, 2013  Structural improvements support exceptional position ....... July 1, 2013  The brave new world of monetary policy ........................... June 4, 2013  The worst is (probably) over ................................ ............. March 1, 2013  Gradual improvement in 2013 ................................ ..... January 28, 2013 © Copyright 2015. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. 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