Election Pledges Bode Well For Increased Infrastructure Investment

BMI View: German elections in September 2017 raise the prospect of increased infrastructure spending in the coming years as the leaders of the CDU and SPD parties both have pledged to boost investment, adding upside to our currently muted construction sector outlook.

Campaign rhetoric emanating from the major parties in the run up to Germany's federal elections in September 2017 bodes well for increased infrastructure investment, with both Martin Schulz of the Social Democrats (SPD) and incumbent Angela Merkel of the Christian Democratic Union (CDU) each pledging to boost spending in light of a growing need for investment and robust public support for it. This adds a measure of upside to our construction sector forecast in Germany, where we currently project a real growth average of 1.8% over the next five years. However, we will hold off on upgrading our forecast until we have greater clarity surrounding the eventual scale of the planned investment and the degree to which campaign rhetoric will be translated into extra spending beyond the current level.

Both Major Parties Pledging Investment Boost

Lack Of Investment Informing Muted Growth Forecast
Construction Industry Value, EURbn & Real Growth, % y-o-y
f = BMI forecast. Source: Federal Office of Statistics, BMI

Election Pledges Bode Well For Increased Infrastructure Investment

BMI View: German elections in September 2017 raise the prospect of increased infrastructure spending in the coming years as the leaders of the CDU and SPD parties both have pledged to boost investment, adding upside to our currently muted construction sector outlook.

Campaign rhetoric emanating from the major parties in the run up to Germany's federal elections in September 2017 bodes well for increased infrastructure investment, with both Martin Schulz of the Social Democrats (SPD) and incumbent Angela Merkel of the Christian Democratic Union (CDU) each pledging to boost spending in light of a growing need for investment and robust public support for it. This adds a measure of upside to our construction sector forecast in Germany, where we currently project a real growth average of 1.8% over the next five years. However, we will hold off on upgrading our forecast until we have greater clarity surrounding the eventual scale of the planned investment and the degree to which campaign rhetoric will be translated into extra spending beyond the current level.

Lack Of Investment Informing Muted Growth Forecast
Construction Industry Value, EURbn & Real Growth, % y-o-y
f = BMI forecast. Source: Federal Office of Statistics, BMI

Both Major Parties Pledging Investment Boost

Our core scenario for the election outcome remains that the CDU will garner the largest voting share in the upcoming elections and that a continuation of the current grand coalition between the CDU and SPD (as well as the Greens and the Left) is likely.

Infrastructure has recently emerged as key campaign issue, with the SPD's Schulz in July calling for an enforcement mechanism that would oblige Germany to spend a set amount on infrastructure per year. Such a policy would mark a significant departure from the current and long-standing policy of Angela Merkel and the majority CDU, which has instead advocated that proceeds from Germany's budgetary surplus be used to pay down the country's debt.

Grand Coalition Likely Election Result
Germany: Composite Public Opinion Polling
Source: Various Polling Agencies

In response, Merkel has also indicated that her party will emphasize investment in infrastructure going forward, though she will place greater emphasis on easing the regulatory burdens and planning bottlenecks currently in place that prevent the government from effectively disbursing the money it has already allocated to infrastructure projects. More broadly, we see evidence of an emerging political consensus in Germany that the country has prioritised debt reduction at the expense of public investment, with 60% of the German public favouring spending the country's budget surplus on infrastructure investment, versus 17% who would prefer it allocated to debt reduction according to a recent survey.

Stars Aligning For Increased Investment

The bi-partisan pledge to boost investment is set against a backdrop of slowing public sector expenditure into infrastructure. We note that in 2016 it was announced that as part of its national infrastructure plan, the government will allocate EUR265bn to the sector out to 2030, a figure which marks a significant decline relative to the country's national infrastructure plan announced in 2003, which pledged EUR355bn from 2003 and 2017. Furthermore, the higher levels of spending from 2003 to 2017 were not enough prevent a broad deterioration of in the quality of Germany's transport infrastructure, with the country declining from third place in 2006 to 11 th in 2016 on the World Economic Forum's Global Competitiveness Index.

Infrastructure Quality On Downward Trend
Germany: Quality Of Transport Infrastructure Scores
7 = Best Score, 1 = Worst. Source: World Economic Forum, BMI

We see little scope for a significant expansion in private sector funding beyond Germany's highway Public Private Partnerships to emerge as a viable alternative to government spending, as proposed schemes such as the country's highway privatisation plan are likely to prove politically unpalatable ( see, 'Road-Toll Initiative No Game Changer,' May 3, 2017). Given the ailing state of Germany's infrastructure base, the centrality of public investment in fuelling infrastructure growth, and the broad political consensus favouring increased investment, we expect that infrastructure investment pledges in the run up to the election have an excellent chance of becoming legislative reality.

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