Economy

Key Takeaways 

• Only moderate economic recovery 
  Weak economic growth is likely to make 2024 a challenging year for the real estate markets. A countertrend will, however, emanate from falling interest rates that will fuel growth and lead to a rebound in investments and the capital markets.
• Labor market remains robust
  The stable labor market, a sharp increase in wages and salaries, coupled with declining inflation, are encouraging private households to spend more on consumption again.
• Inflation in a downtrend
  Overall inflation continues to slow, and the inflation rate could probably move in the direction of the 2% target again over the course of 2024. Inflation dropping below this threshold is only anticipated in the first quarter of 2025, however.
• No interest rate cuts before mid-year
  The ECB’s next moves will probably be to lower interest rates. We do not expect the first cut before mid-year, however.
• Capital market rates returning to normal levels
  The yields of 10-year government bonds have already peaked, and we assume that they will gradually decline in 2024 and beyond, while nevertheless remaining significantly higher than the extremely low level of 2015-2021.

Economic growth remains muted – gradual recovery as from mid-2024, with inflation trending down

Multifactorial challenges
The German economy has lost impetus and is treading water. According to the initial calculations of the Federal Statistical Office (Destatis), the price-adjusted gross domestic product (GDP) shed 0.3% in 2023 compared with the previous year. Adjusted for calendar effects, the decline in economic output stood at 0.1%. Intransigently high prices at all economic levels, the energy crisis, geopolitical tensions, paired with slower momentum from global trade and unfavourable financing costs, ensured that the German economy’s recovery from the massive slump in the 2020 Covid-19 year faltered. Compared with 2019, the year prior to the outbreak of the coronavirus pandemic, GDP gained 0.7% in 2023. By contrast, the entire euro area grew by 3.5%. Germany has therefore fallen short of its potential in an international comparison.

The outlook for 2024 also remains modest, and the first half of the year is likely to be characterized by a perpetuation of the current stagnation. As from mid-year, Germany’s economy is likely to return to its growth trajectory and gradually pick up steam. Greater momentum should then set in in 2025 again. The reasons for the only gradual recovery in 2024 are to be found in the delayed effects of higher interest rates that negatively impact consumer spending as well as investments. In view of the heightened default risk, the banks are also being more cautious in lending and refinancing loans due to expire. Against the backdrop of a robust labor market, private households are also gradually replenishing their savings on the back of higher real wages and salaries after having used their funds to cover higher energy and food bills in 2022 and 2023. 

Gross domestic product (price- and calendar-adjusted, y/y change)

Source: CBRE Research 

Labor market development

Souce: CBRE Research 

The German government remains under pressure to claw back some of the previously subsidized energy costs. Tax increases and cuts, or even the discontinuation of necessary funding measures, including new housing construction, have been planned or already implemented. The tough negotiations concerning the 2024 federal budget bear testimony to the weaknesses of the current “traffic light” (red-yellow-green) coalition in setting the course for more relief at the level of companies and households and thereby ensuring more growth and prosperity, along with sustainable location and energy policies.

Weaker economic growth directly affects occupiers in the real estate market with a time lag. Office employment in the large office markets is expected to grow more slowly than in previous years, which in itself will already put a damper on the demand for office space. 

By contrast, only moderate growth in retail take-up and a slow increase in consumer spending will impact the demand for retail, logistics and leisure real estate. Although, according to information from the GfK, the per-capita purchasing power of the Germans will rise to €27,848, or a nominal 2.8%, thereby compensating for predicted inflation, significantly higher rents and financing costs will curb the affordability of housing and home ownership, particularly in Germany’s major cities and influx regions.

Slowing inflation suggests the prospect of potential key rate cuts, but not before mid-year

Falling inflation
A combination of exogenous factors, such as disruptions in the global supply chains as a result of the pandemic and the war in Ukraine, drove inflation in 2021 and 2022 to a very high level. Lower energy and commodity prices, along with stabilizing food prices, brought inflation down sharply in 2023. Higher nominal wage growth of more than 6% on average in the first three quarters of 2023 in response to increasing inflation has nevertheless resulted in stubborn core inflation. There are, however, growing signs that the rate of inflation is slowing, and there is a possibility of it moving in the direction of the 2% target over the course of 2024. Inflation dropping below this threshold is only anticipated in the first quarter of 2025, however.

Lower interest rates anticipated in 2024 
Lower inflation and the anaemic economy have prompted most central banks, including the ECB, to steer away from their course of interest rate hikes earlier than expected. If inflation falls further, as we expect, rate cuts are probable in 2024 – the ECB could signal a change in the direction of its monetary policy at mid-year.

Yields of government bonds are past their peak
Despite the flattening of interest rates, the yields of 10-year government bonds and other long-term debt instruments hit new highs in the autumn of 2023, comparable with levels seen on quote panels in the wake of the financial crisis. A downtrend has nevertheless been in evidence since the autumn. The long-term interest rates are likely past their peak. A repeat of the levels seen in the years 2015 through 2021 is, however, highly unlikely. Together with lower inflation, this signifies that we can look forward to a gradual decline in long-term interest rates, which will bring the alleviation on the real estate investment markets so urgently needed.

Inflation rate (y/y change) and yields of 10-year Bunds

Soucre: CBRE Research