Public investment in Germany continues long-term downward trend

• Public investment fell again in the first half of the year
• Approved additional government expenditure gives reason to hope for tangible increases next year
• Refugee influx causes investment needs to rise further

Public investment in Germany is down again. In the second quarter of 2015 it dropped by 2.4% on the previous quarter, after already falling slightly by 0.1% in the first quarter. The expansion of public investment approved in the course of the year by the Federal Government in particular is not yet reflected in the figures and should appear in the second half of the year at the earliest. Whether this will be sufficient to bring the result for 2015 as a whole into positive territory, following the weak first half-year, is doubtful. In the current KfW Investment Barometer, KfW Research expects the negative trend in public investment to reverse next year at the earliest, recording the first tangible increase since 2011.

The multi-year decline in public investment activity is particularly pronounced in the construction sector. Adjusted for prices, public sector construction, which accounts for more than half of public investment, is a good 15% lower than in the year 2000. This is primarily caused by the long-term decline in investment by municipalities, which bear a large portion of infrastructure investment. Within 15 years the municipalities’ share in public investment in construction has dropped by 7.5 percentage points to now 55% – just slightly above the low of 5 2% recorded for all of Germany in 2012.

“Policymakers have recognised the need for action. The EUR 10 billion programme announced by the Federal Government for additional investment in transport infrastructure, energy efficiency, high-speed internet and urban renewal and development is a step in the right direction”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “The announced financial support for municipalities, such as for child daycare or social housing, can free up funds for investment.” Sustainable state and municipal finances are important in order to operate and maintain the new or modernised infrastructure in the long term, he commented. Zeuner added that the reform of the fiscal relations between the Federal Government and the state governments, which is to be completed by the end of 2019, can make a valuable contribution to achieving this.

“The investment needs for housing and integrating those refugees who remain in Germany will further increase, especially in the municipalities”, Zeuner said. The local administrations, particularly the local building authorities, must have the capacity to meet this challenge. “This is where further action is needed because the planning capacity of municipalities, measured by the number of personnel assigned to construction and housing, has fallen by almost 10 per cent in the past three years.”

The latest KfW Investment Barometer is available for download at www.kfw.de/investbarometer.