harder times

Construction, growth figures head south

Construction Continues On Europacity, Berlin’s New Business District
A boom boom. Source: Bloomberg

Look out across the roofs of Berlin or Munich nowadays and one feature tends to dominate the skyline: cranes. More numerous than the usual spires and high-rises, they have come to symbolize Germany’s construction boom.

But not for much longer. Economists no longer expect a major growth spurt for the construction industry this year. “Developments have been rather weak since mid-2017. The signs are pointing to a slowdown, especially in new residential construction,” said Claus Michelsen, an industry expert at the German Institute for Economic Research (DIW). Although the sector as a whole will grow in 2018, he added, it will only do so because real estate prices are rising.

The German Council of Economic Experts, a panel that advises the government, also sees the construction industry reaching its limits, with capacity bottlenecks and a shortage of skilled workers putting the brakes on growth. Surprisingly, construction investment has declined slightly since mid-2017, the panel noted. Unsurprisingly, the construction industry association (ZDB) does not expect the boom to end, citing positive noises from the new coalition government on tax breaks and investment.

Increased exports have been the driver for the nine-year period of growth.

The Council and five economic research institutes published their spring forecasts on Wednesday. They held or slightly raised previous predictions, on average forecasting that growth in Germany will remain flat at around 2.5 percent this year. Individual forecasts ranged between 2.3 percent (Council of Economic Experts) and 2.6 percent (Ifo Institute for Economic Research). The federal government raised its forecast to 2.4 percent in February. Calendar-adjusted growth in 2017 was 2.5 percent.

To be sure, Germany’s nearly unprecedented period of growth since 2008 won’t be coming to an end any time soon. But, for the first time, economists are unanimous in their opinion that the pace of that growth may finally be slowing, with more and more sectors likely to follow the construction industry. Production capacities are at their limit, and the shortage of skilled workers will curb the rate of growth unless there is an increase in investments. This leads economists to unanimously expect growth of just under 2 percent for 2019, with forecasts ranging between 1.8 and 2.3 percent.

Increased exports have been the driver for nine years of growth in Europe’s largest economy. This year, the Council expects Germany’s current account surplus to rise from 7.9 percent to 8.2 percent of GDP, while the Ifo expects 8.4 percent. The reason for the export boom is “a synchronous upswing” in all regions of the world, which is increasing demand for German machines and cars, for example. However, if the conflict between US President Donald Trump and the EU escalates into a trade war, the German upswing could end quickly.

Donata Riedel covers economic policy for Handelsblatt. To contact the author: riedel@handelsblatt.com

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