Will it be a case of “it’s the economy stupid” for Germany?

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by Shaun Richards

Over the past couple of months we have been monitoring and noting the increasing signs of a slow down in the economy of Germany. This has also come with rising inflation hence the stagflation theme. This morning has brought another feature of my work into play in that I have argued for many years that house prices are kept out of inflation measures so that they can pump them up and claim them as growth in the next crisis.

WIESBADEN – The prices for residential real estate (house price index) in Germany rose by an average of 10.9% in the 2nd quarter of 2021 compared to the same quarter of the previous year. This is the largest price increase in residential property transactions since the start of the time series in 2000. As the Federal Statistical Office (Destatis) also reports, apartments and one- and two-family houses are on average 3.7% more expensive than in the previous quarter.

As you can see the issues just pour out of that release. If an annual rate of 10.9% is not enough and it is the fastest this century then a quarterly rate of 3.7% represents an acceleration and quite a one at that. Perhaps the present government is trying to give homeowners a UK style bribe. I suppose you could argue that just worked to some extent in Canada.

The catch with that argument which is the central banking “wealth effects” in another set of clothes is the impact on first-time buyers and those trading up which face inflation. Over the past year they have faced quite a lot of it. This is on top of previous rises which the Bundesbank analysed last year.

As of roughly 2015, steep upward pressure on residential property prices became broadly based
across regions. According to Bundesbank calculations based on data from bulwiengesa AG,
residential property prices in Germany as a
whole have since risen by an average of 7¾%
per year, whereas they rose by just 4¼% per
year in the first half of the boom period.

This is on top of what it warned about back in 2014.

Urban properties are now overpriced by 10-20 percent, the bank said, adding that “in major cities the prices for residential property deviate by about 25 percent.” It added that apartment prices have gone up by 9 percent in Germany’s seven largest cities. ( CNBC)

We get an idea of what it has done since from the index which was 95.5 in 2014 and 151.1 in the latest reading. So if they were overvalued then? Well I think you get the idea.

As to the pattern it seems pretty broad based.

Prices rose significantly in both cities and rural areas. A particularly strong increase was again observed in the top 7 metropolises (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf): The prices for single and two-family houses in the seven metropolises rose by 14.7% compared to the same quarter of the previous year , Condominiums rose by 12.9%. In the other urban districts, the prices for single and two-family houses rose by 11.9%, condominiums cost 10.5% more than in the 2nd quarter of 2020.

The Causes

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The economy has done nothing like that. Gross Domestic Product ended 2014 at 99.5 and is now 103.9. I will let that sink in for newer readers because it is includes the period that has been presented and broadcast as the “Euro Boom”. In fact there were later downwards revisions to the German data starting with the opening of 2018. So there was growth of about 8% to the end of 2019 or pre pandemic. So house prices were already surging way beyond economic growth and were of course being driven by the negative interest-rates ( 6 years of them now) and the QE bond buying of the ECB. The latter has meant that Germany has been paid to borrow and even after the rises in bond yields this week the ten-year yield is -0.25%.

This has consequences for the mortgage market which Fitch Ratings looked at in June.

German mortgage loans generally carry a fixed rate, which is reset at a predefined date. This was traditionally five to 10 years after origination, but the proportion of borrowers with fixed interest periods of 10 or more years has risen in recent years. About half of new borrowers now have a fixed rate for over 10 years, up around 15pp since 2010.

Leading to this.

German 10-year fixed mortgage rates have increased to about 0.75%, from about 0.45% at the start of 2021, as bund yields have risen on increased inflation expectations

It is hard not to laugh at 0.3% being considered to be inflation expectations. But anyway even at 0.75% that is very cheap.

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The Economic Outlook

This has been deteriorating as the summer has moved to autumn. The official data series started the month badly.

WIESBADEN – According to provisional results from the Federal Statistical Office (Destatis), retailers in Germany had calendar and seasonally adjusted sales in real (price-adjusted) 5.1% less in July 2021 than in June 2021……..Compared to July 2020, sales in July 2021 fell by 0.3% in real terms and rose by 1.7% in nominal terms.

There was also this.

COLOGNE / WIESBADEN – As reported by the Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis), the mileage of toll trucks with at least four axles on federal motorways, calendar and seasonally adjusted, decreased by 2.2% in August 2021 compared to July 2021.

Of course with the driver shortages this “faster indicator” is telling us more than it intended to.

There was also this.

BERLIN, Sept 16 (Reuters) – The German economy will grow slower than expected this year as supply chain problems and shortages of raw materials keep a lid on the industrial recovery, but it should rebound strongly next year, the DIW economic institute said on Thursday.

The DIW trimmed its growth forecast for this year to 2.1% from a previous 3.2%, but predicted a jump of 4.9% in 2022 assuming production constraints lift towards the end of the year. It sees growth normalising at 1.5% in 2023.

So quite a reduction for this year and such forecasts are usually behind the times. For newer readers I would not worry too much about next year’s suggested rise as forecasters love to take out an each way bet in such circumstances. But also note the 1.5% for 2023 which is hardly stellar. Indeed we people suggested on here that due to the way the numbers are calculated anything below 2% per annum is in fact going backwards.

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I am no great fan of the Markit PMI business surveys so please only take them as a general hint but they seem to be picking it up as well.

“September’s flash PMI survey showed a notable
slowdown in the rate of growth of the German
economy, in a sign that activity is beginning to level
off after rebounding sharply over the summer.”


There are two factors in play at the moment. Firstly the economy is slowing noticeably and secondly there is a cost of living crisis. The inflation rate is 3.4% on the Euro measure and if we put in house prices is 4.2%. So it is likely that real wages are falling in spite of the official measures claiming otherwise. Let me give you an example of the German collective wages series.

Changes in actually paid working hours are not included in the tariff index.

Some of you might think that actual wages are quite important. Anyway that is a generic issue true in so many places.

The trade wars morphed into the pandemic and now the recovery has the supply shortages. We seem to be in permanent crisis which raises two issues. The first is the slow down right now and the second is what will economic growth be once it is over? That assumes that we will not be kept/told we are in permanent crisis as there is also this ongoing issue.

As reported by the Federal Statistical Office (Destatis), electricity generation from conventional energy increased by 20.9% compared to the first half of 2020 and accounted for 56.0% of total electricity generation. Due to the lack of wind in spring, the most important energy source was coal,


With an increase of 35.5%, electricity from coal-fired power plants recorded the highest increase compared to the same period in the previous year. Coal thus made up 27.1% of the total amount of electricity fed into the grid.



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