19 August, 2019

Last week’s data release showed a fall in German GDP in the second quarter. The contraction was small (0.1%) but is was one of the factors contributing to the recent sharp fall in government bond yields globally and heightened recession fears. It was also the second quarterly fall in German GDP since the middle of last year. Many commentators have started to talk about the end of Germany’s Golden Decade.

From a property market perspective, Germany has been very popular with investors pushing yields down to all-time lows. Is there a possibility that an economic contraction will reverse the tide for German property too? The chart below shows that this concern is currently unfounded.

Chart 1: Germany: GDP Growth By Sector
Source: DESTATIS, CBRE calculations

Chart 2: Germany: Contributions to GDP Growth in 2019 Q2

German Economy Graph 2 GDP growth
Source: DESTATIS, CBRE calculations

The two charts show that quarterly German GDP growth and contributions to GDP growth broken down by broad sector respectively. The conclusions are simple, Germany’s problems are almost entirely driven by a down-turn in manufacturing. Construction was also weak in Q2, but quarter-to-quarter movements are erratic and it does not make that much difference to the headline GDP numbers anyway. What is remarkable about Germany is the strength of services. Further, it looks like service sector growth has actually accelerated so far in 2019. These figures imply that German services are growing at around 3% at an annualised rate, which is probably on a par with the USA and better than in many other countries.

This is important for commercial property. The occupiers of commercial property are predominantly from the service sector. In addition, when services are doing well, they are generally doing particularly well in the biggest cities. This goes a long way to explaining why, in the big German cities, office vacancy rates have continued to fall and office rents have continued to increase at much the same rate so far in 2019 as they did over 2018. The contraction of German GDP has touched neither German services growth or the German office market.

What we are seeing in Germany is the same two-speed economy that we have observed in many other countries (US, most of Europe, Japan, South Korea and China, to name a few). Where Germany stands out is that manufacturing is big (22% of value added in 2018 compared to 11% in the USA) and this has dragged down the overall GDP numbers.

This confirms that there is a global manufacturing problem not a specific German issue. The world economy will slip into recession if services follow manufacturing, but there is no evidence of it doing so yet. The strength of consumer demand and the presence of many high growth tech companies in today’s service sector gives us some reason to believe that services may escape the dip. In addition, the German government has plenty of dry powder in the shape of a healthy budget balance and low debt to further stave off manufacturing headwinds.