Germany

The Conservatives’ beauty contest for Merkel’s potential succession is finally coming to a climax. On Sunday, CSU leader Söder threw his hat into the ring to compete with CDU leader Laschet in the race for the conservatives’ chancellor candidacy. With the CDU’s (the bigger sister party) executive body fully united behind Laschet on Monday, the scale has tilted in favour of Laschet. Söder is shying away of calling for all CDU/CSU members’ to cast their vote for the candidacy. This would be a highly confrontational move which would also unduly delay the election campaign entry of the candidate. We expect the final announcement within the course of this week, i.e. before the Greens present their candidate on April 19th. [more]

Merkel’s Conservatives currently face major problems. Approval rates are in free fall as trust in the government’s crisis management has eroded. The CDU/CSU is polling at pre-crisis levels of below 30% fuelling speculation that not only Merkel but the Conservatives in total might not be part of the next government. The announcement of their chancellor candidate is unlikely to turn the tide for the Conservatives. A bold election manifesto on how to bring Germany forward after the deficiencies revealed by the crisis combined with convincing core personal are needed. Coalition options are back in focus with the Greens being the kingmakers in all scenarios. The political talk of the day is a Green-led traffic light coalition also at the federal level. Still, a conservative-green government remains our baseline scenario, but it is not a foregone conclusion anymore. [more]

Single-family homes have recently been drawn into the discussion about suitable climate-policy measures in Germany. However, arguing about whether and to what extent single-family homes contribute to climate change or consume more resources than multi-family homes simply draws away the attention from the real energy and climate-policy challenges in the building sector. Moreover, the discussion underlines once again that calls for certain climate-policy measures often clash with how millions of people live or would prefer to live. [more]

Our analysis suggests that the nationwide price cycle will come to an end this decade. Despite all the uncertainty, we believe the cycle is likely to end in 2024. The fundamental supply shortage should ease off in the coming years. The lower level of immigration during the pandemic is also a contributing factor. If the cycle does in fact end in 2024, we expect nominal house prices to decline for a short period of time based on comparable historical data. If house prices rise again at the historical average of approximately 2.5% per year following the correction phase, we could see an increase of around 24% over the decade, despite the interim price dip. This outlook also includes a look at the eleven German metropolitan regions. [more]

The federal government will present a supplementary budget for 2021, which would be the third supplementary budget over the past year. The volume could reach as much as EUR 60 bn (1.7% of GDP). As a result, 2021 net federal borrowing could possibly rise to as much as EUR 240 bn (6.8% of GDP), an all-time high in German history. We still stick with our 5.9% headline deficit forecast for the general government level as we doubt that all the money will be spent. This implies a structural deficit of nearly 5% of GDP this year (2020: -1.8% of GDP). [more]

In yesterday’s regional elections in Baden-Wuerttemberg (BW) and Rhineland-Palatinate (RP), the CDU achieved disappointing results and thus faces a dismal start into this election year. The CDU was up against two extremely popular prime ministers who appeal to voters across the political camps. However, nondescript CDU candidates, allegations around mask procurement deals and growing discontent about pandemic management are behind the heavy defeats. The new CDU party leader Armin Laschet was not able to change the party’s fortunes. Nevertheless, Laschet’s chances for Merkel’s succession remain intact, in our view. While another six months until federal elections is a long time in politics, the state elections serve as a reminder that a conservative-green coalition which is the consensus so far, is not a foregone conclusion. With Merkel’s bonus for the CDU/CSU fading, vaccine problems continuing and the surprising revival of the Liberals, other coalition options for the Greens might open up. [more]

On March 14, regional elections in Baden-Württemberg (BW) and Rhineland-Palatinate (RP) will provide the first electoral test for the parties in the run-up to the federal elections. Polls see the ruling Greens in BW, respectively the SPD in RP in the lead, but uncertainty about the polls is higher this time given the fallout from the pandemic. Additional headwinds for the CDU result from a current political outrage over questionable procurement deals of two CDU/CSU Bundestag MPs. The new CDU party leader Laschet is not up for election but the performance of the CDU will of course be (partly) attributed to him. However, as long as the CDU is not experiencing a severe setback compared to its 2016 results, Laschet’s chances of being nominated as the CDU/CSU chancellor candidate remains intact in our view. [more]

At the onset of this decisive election year, Germany finds itself confronted with an increasingly multipolar world, a weakened liberal, rule-based world order and rapid technological change. By applying the concept of a SWOT analysis, we aim at kicking off a debate about possible trajectories for the German economy in the post-Merkel era. As key threats to Germany’s "business model" (export-driven with a strong innovative industrial base), we identify (i) a continued erosion of the liberal rule-based trading and investment order and (ii) the falling behind in the global tech race with respect to Green-tech, AI and IoT. By plotting these two threats on separate axes, we then develop four scenarios and identify key drivers that will define Germany‘s position on these axes. For the new government complacency or reactive policies are no options – "High-Tech Made in Germany" might turn out to be an upside scenario. Strong reform effort of both the government and corporate sector is needed in order to secure Germany’s place in the "best-of-all-worlds" scenario. This requires a proper allocation of R&D investments, reaping the benefits of industrial data and an accelerated diffusion of cross-sectoral technologies like AI. [more]

The COVID-19-related restrictions on German public life in the winter half of 2020/21 have again noticeably limited the consumption possibilities of private households. Large parts of brick and mortar retail trade as well as service businesses relying on personal interaction had to close, tourism and most of the hospitality industry lie fallow. The unwinding of this pent-up demand will be key to a post-lockdown recovery. But how much momentum can be expected from a meltdown of additional savings induced by the COVID-19 restrictions? To quantify an answer to this question, we present two scenarios. A conservative scenario assumes that about 30% of additional savings will flow back into private consumption in 2021, while almost 70% would remain in household deposits or assets. In an upside scenario with 40% of the additional savings flowing back into spending in 2021 already, our private consumption forecast would be lifted by a good 1pp providing a ½ pp upside for German GDP in 2021. [more]

The Jan print of 1% yoy surprised massively to the upside, in part due to one-offs. But the strong rise in core goods prices begs the question whether the Jan readings could herald stronger underlying inflation dynamics. There are still strong arguments for a continuation of structurally low inflation dynamics. However, we see risk that price dynamics could strengthen more strongly through impaired supply conditions. Overall, we now project the inflation rate to average 2.0% in 2021. Towards the end of 2021 the headline rate could spike to as much as 3% before easing to 1 ½% in Q1 2022. [more]