Eric Heymann

German wage growth slowed in H1 2016 and there is a range of factors that are likely to also put a lid on the pick-up in 2017. The impact of labour shortage is limited by material mismatch between the qualifications of the unemployed and those sought by employers as well as substantial immigration flows. High real wage gains have pushed up unit labour costs and weighed on corporate profitability, which is further undermined by low productivity growth. Cautious wage agreements in 2016 on average stipulate only 2% wage increases in 2017. Despite a 4% increase in the statutory minimum wage, aggregate wages should increase by only around 2 ½%. According to our forecasts, next year could see the growth rate for industrial production in Germany drop to 0.5% in real terms. Regarding output in Germany’s large industrial sectors we do not expect major outliers. Also in this issue: “The View from Berlin. All lights on the debates about personalities and tactical gambits.” [more]

The Climate Action Plan 2050 is intended to show how Germany can meet its climate change targets; it is currently out for consultation with Federal German government departments. There was intense public criticism when individual passages of an earlier draft of the plan were diluted at the instigation of the German Chancellery. In this political discussion, long-term political ideals are confronted by cautious (more realistic?) recent assessments of technological progress, the economies of scale achievable by climate-friendly technologies, and adoption by consumers. The Climate Action Plan remains vague in many important aspects, such as the technologies to be used to meet climate change targets, the approximate absolute costs that can be expected, the restrictions on consumer sovereignty and commercial freedom of choice that politicians are considering and the future infringement of ownership rights and vested interests. [more]

Nearly four years ago, the European Commission set its sights on increasing the share of manufacturing in total gross value added from 15.5% at that time to 20% by 2020. This target will probably not be met. After all, in 2015 the share of manufacturing was only around 15.6% and thus scarcely higher than in 2012. However, industry's contribution to EU output has at least stopped decreasing since 2012. Furthermore, industrial gross value added has picked up (slightly) in the EU in recent years in both nominal and real terms. In a few member states, there have been highly contrasting developments in the significance of manufacturing in the economy. It is striking that the industry share in the three large Eastern Europe member states has increased sharply since 2012. Spain and Italy have reported modest gains. Germany has seen its industry share decline slightly in 2015; however, at 22.8% it still far outstrips the EU average. [more]

The manufacturing sector is one of Germany's biggest employers. On average, more than 5.2 million people were working in manufacturing in the first half of 2016. This represents an increase of 6.3% compared with the beginning of 2005 – and comes in spite of the deep recession of 2008/2009. In the period under review, job growth was particularly strong in mechanical engineering, the food industry, the rubber and plastics industry, and the metals industry. Expansion of employment in German industry has slowed recently, however. Because of the low rate of global growth and muted investment activity, employment in the industrial sector is likely to stagnate up to 2017 – albeit at a high level. [more]

There is a high level of excess demand in the housing market and it has grown in recent years. Demand for credit is also growing at a correspondingly rapid pace. The supply of credit could be boosted by further monetary stimulus. In the medium term, more buoyant lending is likely to increase interest rate risk. However, if lending growth remains low, there will be increased risk of overvaluations and a house price bubble. This is particularly true when little new housing is financed and lending is largely for existing property. Given the high level of excess demand in the housing market and the fact that office buildings are being converted to residential buildings, office space is also likely to be in short supply in the coming years. As a result, rents in the office market can be expected to rise more strongly, and could – for a time – outstrip the rise in rents in the housing market. Since Chancellor Merkel assumed office in 2005 her term has been dominated by crisis management, which often required leadership and moderation of differing interests in Europe. Managing the UK’s departure from the EU will have top priority for the time being. Nonetheless, Merkel is likely to focus her attention on domestic topics as much as on European ones in the upcoming months given the looming federal elections in autumn 2017. Also in this issue: Fewer insolvencies in German industry. [more]

The 2008/2009 economic and financial crisis caused the number of insolvency proceedings instituted to increase by 48% in 2009 alone. However, the number of insolvencies has been following a downward trend since then. As a result, fewer proceedings were instituted in 2015 than in 2008 across nearly all sectors of industry. The prospects for this trend continuing in 2016 are good. Over the past few years, the number of insolvencies in any given industry has been significantly influenced by the prevailing economic conditions in that industry and – related to this – the value of the euro against the currencies of major trading partners. [more]

Following the UK referendum, Brexit will also leave traces on German industry. After all, 7.5% of all German exports went to the UK in 2015, making it Germany’s third most important export market after the United States and France. The automotive and pharmaceutical industries are likely to be hit the hardest by Brexit. This is because the UK accounts for 12.8% and 10.5%, respectively, of these two industries’ total exports. In addition, they both generally have an above-average export ratio. The UK referendum is likely to have an impact on individual companies’ investment decisions and German companies’ UK pricing structures in the short term. [more]

Many of the environmental-performance targets of the German ‘Energiewende’ are in fact falling behind the time scale that is actually required – some of them are significantly behind schedule. Progress is largely achieved where major subsidies are provided via some form of support programme. Where there is no such support, or subsidies and incentives are small, or too small, targets are starting to be missed. One criticism is that no quantifiable targets have been drawn up in the areas of economics/efficiency and security of supply. If the current status of the ‘Energiewende’ had to be described in one sentence, it might be that Germany has probably taken on too much in too short a time. We believe there are four main limiting factors: cost, physical limits, the available time budget and political feasibility. [more]

Following a strong increase in manufacturing output in Q1 2016, we have raised our forecast for the entire year 2016 to 1% (previously, a marginal increase). Hardly anything has changed in our forecast of generally moderate performance in the manufacturing sector for 2016 as a whole. However, the strong start to the year requires upward adjustments to our forecasts, also at sector level. These are particularly noticeable in the automotive and plastics industries as well as among producers of building materials. [more]

Last year, the proportion of diesel cars among new car registrations in the EU-15 dropped by 1.5 percentage points to just over 52%. This was the fourth decline in a row. The fall in the diesel share was especially pronounced in France, where the government wants to reduce the tax advantage for diesel over petrol. By contrast, in Germany the diesel share increased slightly last year, due among other things to the large number of commercial car registrations. We expect a further decline in the diesel share in the European car market over the next few years. The higher costs for diesel technology play a role here. However, for high-mileage drivers in particular, the lower consumption and long range of diesel cars as well as lower fuel prices remain convincing sales arguments. Therefore, provided governments do not introduce any serious surcharges for diesel cars, the diesel share of the European car market is unlikely to crash. [more]

According to our and consensus expectations Germany will record 4 years (2014-2017) of above potential GDP growth in an extremely narrow range of 1.5% to 1.7%, despite substantial shocks and massive swings in growth drivers. If growth breaks out, a downside move seems more likely than higher growth. The economic slowdown in the oil-producing countries due to the falling oil price also carries implications for the German economy in terms of its foreign trade. Although the overall effect is positive for the German economy, German exports to oil-producing countries remain under pressure. Capital spending on residential construction has been growing sluggishly in recent years. The main reasons are: a shortage of building land, increased regulatory hurdles in virtually all construction sectors, high construction costs and a lack of skilled workers in the construction industry. [more]

In 2015, exports of German goods to the oil states declined by 7.4%. This was the third fall in a row. Growing exports to the United Arab Emirates (primarily aircraft) and Saudi Arabia prevented an even worse result. As oil prices will initially remain low, German exports to the oil-producing countries are expected to fall again in 2016. Our export indicator points to a decline of approximately 5%. Among the major German industrial sectors, mechanical engineering is likely to be hardest hit by falling demand from the oil states, as was the case in 2015. Overall, the significance of the oil producers as a market for German industry will continue to decline in 2016. [more]