The German Economy Impact of Stimulus Programmes on Construction. Timo Klein Senior Economist 6 October 2009

Transcription

1 The German Economy Impact of Stimulus Programmes on Construction Timo Klein Senior Economist 6 October 2009

2 The Sheer Magnitude: Peak-to-Trough Real GDP Declines During Past Recessions (Percent change, based on quarterly data starting in 1970*) ** * Recessions in West Germany prior to 1991 reunification ** Forecast by IHS Global Insight

3 The German Economy and Construction After Unification Some Lessons Economy grew cumulative 29% in real terms since 1991, investment in construction declined by 2% GDP share of investment in construction dropped from 12.3% in 1991 to 9.4% in 2008, building sector employment halved Growth pattern shows marked divergences between overall economy and construction sector during Impact of unification and immigration Impact of tax decisions (abolition of homeowner subsidy; VAT hike) Bottom line: Construction spending in Germany is mainly determined by structural trends and fiscal decisions sensitivity to the economic cycle is less pronounced than in other countries

4 GDP and Construction Investment Growth % (percent) 8% 4% 0% -4% -8% GDP, real (2000) Investment in construction, real (2000)

5 Share of Public Construction Investment (share) 100% 80% 60% 40% Public Commercial Residential 20% 0%

6 Stimulus Programmes of Two programmes launched in November 2008 and January 2009 Key features: Overall magnitude 85 billion euros (31+54), direct impact % of GDP in both 2009 and 2010 Measures combine discretionary public investment (26 billion, or 0.5% of GDP, 6% of total construction investment, and 13% of non-residential investment in ) with support for consumer and corporate demand Package I included 8 billion directly boosting construction (building renovations, infrastructure, transport) plus higher tax allowances for house repairs and special depreciation options for small firms Package II included 18 billion in public (mostly construction) investment, 9 billion in tax relief, cut in health insurance contributions, 5 billion for car scrappage scheme Large array of different measures complicate assessment of total stimulus impact

7 Distribution of Stimulus Spending Amounts in euro billions Corporate Relief Measures, 9.0 Investment (central government), 12.9 Investment (local governments), 13.3 Tax/Social Security Relief, 49.3

8 Split of Incremental Investment of Local Governments Schools Kindergartens Urban Development Roads Sports Facilities, Pools Rural Infrastructure Fire Departments Cultural Facilities Administrative Buildings Amounts in euro billions

9 Effectiveness of Stimulus Measures for Construction Spending Different aspects: Magnitude, capacity constraints, and timing Magnitude: Estimated 6% direct boost per year is sizeable but not huge, although indeterminate effects of support for private demand come on top Capacity: Sub-average utilization will limit any bottlenecks, also as many foreign construction markets in recession Timing: Lengthy planning processes (coordination between different public sector levels!) have delayed first major impact to autumn 2009 despite acceleration of tender procedures Anticipated relapse of overall economic recovery in H may match well with implementation of many infrastructure projects More than two-thirds of public investment is in education and R&D sectors, entails beneficial structural knock-on effects

10 How Does the Boost to Construction Fit Into the General Recovery Picture? GDP growth, q/q Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1

11 Lingering Weakness of Private Sector Construction Demand Caps Price Risks Ongoing stimulus from additional public construction projects during 2010 will not boost inflation rather than output because: Residential building activity stays weak as rising unemployment dampens consumer demand Overhang of office space and dearth of equipment investment ahead of 2011 will weigh on commercial building activity Existence of far bigger construction sector problems among several European neighbors suggest availability of labor will not be an issue The risk of another economic relapse during 2010 globally and in Germany remains significant

12 IHS Global Insight Forecasts GDP Net exports (growth contribution) Domestic demand Private consumption Gross capital formation Investment in construction

13 Thank you Timo Klein Senior Economist