COVID causes dip in migration: Higher wage pressure likely

Another "COVID winter". GDP growth failed to accelerate further in Q3, as the supply shortages provided an increasing drag on industrial output. The supply chain issues will prevail throughout the winter half and only taper off very gradually during 2022. While private consumption was the growth engine in summer, the recent strong increase in the number of new COVID-19 infections will slow consumer spending during winter. Absent Q3 details we now expect GDP to stagnate in the winter half, but acknowledge the increasing risks of negative quarters. Given the upward revisions to H1 (published with the Q3 GDP flash) this would still result in an average growth rate of 2.5% yoy for 2021. Further upside surprises at all stages of inflation have, despite an increasing tightness in the labour market, not (yet) started a price-wage spiral. Also in this issue: The next German government is in the making. [more]

During the coming years, Germany’s potential growth rate will come under increasing pressure from demographic developments, it looks set to slow to just below ¾%. Shrinking potential growth will dampen cyclical resilience and tend to reduce debt sustainability. The new government should focus even more on potential growth. After all, it would be the great binding theme between the efficient and at the same time climate-friendly economy, demographics and the megatrend of digitalization. In the short term, rising energy expenses and the regulatory shortening of the useful life of machinery and equipment have a similar effect to a negative supply shock. If efforts to seize the opportunity for new investment and the installation of adequate replacements fail, the production-relevant capital stock would shrink, thus reducing potential growth. [more]

In terms of housing policy concepts in Germany, there are only minor overlaps between the plans of left-wing and right-wing parties. The CDU/CSU, the FDP, and the AfD continue to support supply-oriented housing policies. The SPD, the Greens, and the Left prefer demand-oriented approaches. The CDU and the FDP promise to reduce price and rent pressure by providing additional supply and to offer incentives for renovation and retrofitting. People who are living in a rented home and do not want to move will probably find the plans of the SPD, the Left or the Greens attractive. Private households might see the ancillary costs of buying a home decline after the elections, as opposed to large-scale investors. Overall, none of the parties has prepared a comprehensive concept. And none of them has paid attention to what their demands may mean in terms of necessary labour, funds, space, etc. [more]

The consequences of the COVID-19 pandemic, ambitious climate policies, persistently negative interest rates, and large-scale security purchases by the ECB are increasingly raising the issue of a fair distribution. Policymakers tend to focus on the symptoms in order to appease their voters – and in doing so, they often neglect the root causes. [more]

With less than three weeks to go until the German federal election, we put together a succinct presentation to address the following questions:

#1: Is the SPD boom yet another spike in voter preferences – that is going to mean-revert?
#2: How do policy platforms compare and where are the parties’ red lines?
#3: Which coalition option is most likely to materialize?
#4: Is a leftish red-red-green coalition a possibility at all?
#5: Are there any procedural stumbling blocks? How long might the Merkel government act as a caretaker government?
#6: What could fiscal, climate, distribution, and housing policies look like in a new three-way coalition?
#7: What is the likely impact on Germany’s potential growth?

In addition to summarizing our election outlook, we include snapshots of recently published research on how key policy areas like climate, energy, EU, distribution, and fiscal policy might be shaped by the next government. [more]

Demand for electric vehicles has recently surged. Two key drivers are behind this gain in market share: Tight caps on vehicle CO2 emissions combined with the classification of electric cars as zero-emission vehicles and subsidies to buyers of electric cars. The transition to e-mobility helps to protect the climate. The contribution to climate protection will rise over time due to technological progress and scale effects in production. However, it is small and expensive for now. For every one million electric cars sold in Germany in the next few years, the total fiscal effect amounts to at least EUR 15 bn over the twelve years after the sale. Carbon abatement costs may amount to more than EUR 1,000 per ton. The current regulatory regime is obviously neither efficient from an economic vantage point nor effective in environmental protection terms. [more]

Germany has weathered the COVID-19 crisis better than most other EMU partners. With a much smaller output gap and additional headwinds from several structural trends it is more prone to experience higher inflation, in fact, it already has. Given that the ECB will aim its policy towards the EMU average inflation, German inflation could exceed the 2% mark for several years, without triggering an ECB policy response. The ECB's new strategy with the increased 2% symmetric inflation target - implying the acceptance of inflation overshoots - and its announced preparedness to wait until it is fully convinced that its policy has worked before adjusting its policy, make such a scenario even more likely. [more]

All eyes are on the next government’s EU fiscal stance. The Greens are advocating looser debt rules and turning the NGEU into a permanent fiscal capacity. However, in the two most plausible coalition scenarios, the Greens have to find common ground with either the Conservatives (black-green coalition) or the Liberals (traffic light coalition). Both call for re-instating the debt rules in the post-pandemic world and emphasize the one-off nature of the NGEU. Thus, we do not expect any significant shift of Germany’s EU fiscal policy course. The odds of an election surprise contributing to a stronger EUR remain low. The autumn debate about the reform of the SGP will be the first proof of this new/old fiscal stance. Beyond the immediate focus of financial markets, we also sketch which impulses we expect from the next German government in the areas of EU climate, trade, foreign policies and institutional reform. With respect to putting the Green Deal to work, we expect Germany to role-model green transformation at measured pace. The German response to this week’s “Fit for 55” legislative proposals is likely to be mixed. [more]

Climate change is one of the most important global challenges of the century. The issue essentially involves developing energy sources that are as efficient, cost-effective and low-carbon as possible. These should enable climate-friendly growth while also being politically acceptable. The transformation will entail significant limitations in terms of freedom of choice, and politics therefore needs to address social tensions. [more]

Since the start of the COVID-19 pandemic the US has launched fiscal packages worth USD 5.3 trillion (25.5% of GDP). With new fiscal plans in the pipeline the total stimulus could even exceed USD 9 trillion (or 40% of 2020 GDP). Although the success of this bold US experiment is far from certain, it has started a new trend in fiscal policies. As low interest rates have depressed governments’ interest bills – despite surging debt – many observers advocate to make greater use of deficit spending for funding a public investment campaign over the next decade. Given weak growth prospects, restoring debt sustainability seems a Herculean task for high debt countries. But even some “fiscally prudent” countries like Germany face severe fiscal challenges due to rapid population ageing. [more]

The demand for office space will be largely shaped by the development of home office over the decade. There is no doubt that remote work has the potential to reduce demand for office space substantially and uncertainty remains unusually high. But our projections show that even with a strong expansion of home office, demand for office space could remain high. We continue to expect that the traditional office will remain the hub of economic life. [more]

What is corporate Germany’s view on key election topics? A conservative-green government would be a novelty in German coalition history. Ahead of this critical political and economic juncture a lot is at stake for German corporates (e.g. energy prices in the context of climate policies, exit from state support, active industrial policy). Our proprietary survey offers unique insights into what 200 German companies are thinking. [more]