Struggling with the historic watershed

German economy: Out in the cold. The real income and confidence shock resulting from the NS1 shutoff as well as the negative real wealth shock of some EUR 1.5 tn will likely send private consumption into a tailspin in 2023. Surging uncertainty and the energy shock causing a slump in competitiveness and profits will put a brake on corporate investment spending, in our opinion. The three fiscal packages and a probable additional one will likely not prevent a GDP slump. Together with a weaker global outlook, we expect the loss in final domestic demand to result in a GDP drop of 3% to 4% in 2023, after an increase of around 1% in 2022. [more]

On July 21, the ECB announced that it would raise the interest rate on the deposit facility from -0.5% to 0%, effective July 27. By the end of that very month, banks in Germany had reduced their stock of banknotes and coins by a record EUR 11 billion. There is much to suggest that they will continue to reduce their non-interest-bearing cash holdings, as the ECB interest rate will rise further to 0.75% in mid-September. [more]

The German labour market held up well during the pandemic and even gained momentum from 2021 onwards. In the meantime, a shift in the employment structure took place that brings the shortage of skilled labour back into focus. [more]

Germany's current account is in flux. Currently, the "terms of trade" shock is reducing the surplus in the goods balance. But structural factors such as the reduced importance of industry and demographics also point to lower surpluses. In addition, we expect a further narrowing of the deficits in the services balance. The surpluses from the primary and secondary balance, on the other hand, are likely to increase further. In total, the current account ratio will fall sharply in 2022, especially measured in terms of GDP, and will also tend to be significantly lower than in the past thereafter. Accordingly, criticism of Germany's surpluses is likely to become increasingly muted. [more]

Moving into recession. A likely further decline in Russian gas supply after the maintenance of NS1 will necessitate additional savings. While we do not expect a full rationing, we believe the economic consequences will together with a US recession and other headwinds push Germany into a recession in H2 2022. Given that prospects for Russian gas deliveries have darkened since February, this energy shock will not hit Germany by surprise or unprepared. Hence, we expect a modest but rather drawn-out GDP decline, as the economy gradually adjusts. After a 1 ¼% expansion in 2022, German GDP will shrink by around 1% in 2023, largely because consumers will not be able to offset the real income loss by further dissaving. In a “tap remains turned off” scenario, we expect a rationing of gas leading to a GDP slump between 5% and 6% in 2023. [more]

From 2035, only climate-neutral passenger cars will be allowed to be registered in the EU. In principle, the course is being set in the direction of battery-electric mobility. However, the option of using e-fuels is not completely off the table. The market shares of electric cars in total new registrations currently vary widely within the EU. Southern and Eastern European countries are lagging behind. To increase the acceptance of e-mobility, the expansion of the charging infrastructure must be widely accelerated. This is a major challenge that also requires the support of the state. The trend towards electric mobility has already triggered a noticeable structural change in Germany as an automotive location. The net impact of this structural change on value creation and employment in Germany is likely to be negative. [more]

In the last months the strong headwinds for the construction industry are expected to ease as commodity prices fall and material and labor shortages begin to decline. [more]

After two years in the virtual world Deutsche Bank Research returned to Paris to host another highly successful Global Consumer Conference. Around 700 people and including 90 companies, attended over the three days of the conference. Company and investor engagement was extremely high with more than 7,000 meeting requests. Tom Sykes, Head of European Consumer Staples and Stephen Powers, Head of US Consumer Staples, co-hosts of the event, said: “Feedback has been very positive from the companies and investment communities and we look forward to seeing everybody again in Paris in 2023 for our celebratory 20th year!” [more]

Deutsche Bank Research last week hosted its annual dbAccess German Corporate Conference for the 25th time. Joining the event this year were 300 participants, 70 of them attendees from top German blue-chip companies, representing around two thirds of the DAX index. There were more than 1,000 meeting requests between corporates and investors at the conference. [more]

We expect the German residential property market cycle to come to an end during the current decade. A combination of our different approaches suggests that, despite the uncertainties, the cycle will probably end in 2024. Prices will not necessarily undergo a massive correction from their peak, our baseline scenario foresees an isolated ending of the cycle. As migration inflows were low and new construction activity has been dynamic during the pandemic, fundamental supply shortages are a thing of the past for many German cities. The current refugee wave will only temporarily weigh on the market. [more]

In 2021, global sales in the semiconductor industry reached an all-time high of USD 556 bn. Despite this record figure, the industry currently faces severe challenges as the present semiconductor cycle is characterized by a triple whammy: Huge demand due to a boost for digitalization, COVID-related and non-COVID related supply shortages and geopolitical tensions. Due to the sharp rise in chip demand, new chip factories are currently being built in the US, Asia and Europe to meet rising demand over the next decade. We think, the present sales cycle will be extraordinary long. [more]

Despite many years of expansion of renewable energies, Germany is – as most other industrialised countries in the world are – still dependent on fossil fuels. Germany imports close to 70% of its energy resources with Russia currently the most important supplier of fossil fuels. Germany aims to reduce its dependency on energy imports from Russia as fast as possible and plans to massively expand renewable energies but will also invest in LNG infrastructure to diversify gas supply. The short-term risk of being cut off from Russian gas and oil supply is more pronounced in the heating market and less severe in the electricity sector. A faster expansion of renewables is a consequence of the current energy crisis, but no short-term solution given limitations on the supply side. [more]