The risks for the German and international economy have grown since the spring. In particular, the rise of protectionism threatens the economy, as does any further escalation of the trade conflict between the US and China. Relations between the US and the EU have now eased in comparative terms. Thanks to the closely interconnected nature of added value chains, however, higher trade barriers between the US and China would push up production costs across the globe and would also impact German companies. This year has also shown that the US protectionist foreign trade policy does not merely consist of empty words. Another source of danger are the crises in Argentina and Turkey, especially if they trigger a loss of confidence in other emerging economies, leading to a significant deterioration in financing conditions.

Special risks for the European economy stem from the possibility of Britain‘s disorderly exit from the EU and the greater risk of a debt crisis in Italy. In the case of Britain, this forecast assumes that it an orderly exit from the EU in March 2019 will be agreed upon including a transition period that prevents barriers to trade with the EU-27 until the end of the forecasting horizon. Little progress, however, can currently be seen in negotiations, meaning that a disorderly, “No-deal” Brexit without a transition period remains a possibility. With the United Kingdom being Germany’s third biggest export market, this scenario would hit the German economy particularly hard. In the case of Italy conflicts with the European Union’s fiscal rules are to be feared if the Italian government implements its expansionary fiscal policy plans on a large scale. This could strengthen doubts over Italy’s fiscal stability and potentially reignite the euro crisis.

In their assessment of economic policy the institutes have focused on housing market policies. Although rents are rising in Germany, these increases are hardly any faster than those in the cost of living on average. There are, however, significant regional differences, and especially large differences between existing and new rental agreements. The latter are rising sharply in many regions of Germany, making it hard for some income groups to find affordable accommodation. Politics has responded to this problem with a wide range of measures.

One of the former German government’s responses to sharp regional increases in rents was the cap on rents. Experience to date shows that this did effectively dampen price increases in the regulated branch somewhat, and that the negative impact feared on new construction was small. This only applies, however, because new builds and extensive modernisation projects were initially completely excluded from the rental cap. The design of this rent cap should also ensure that the share of the housing market regulated by it should shrink over time compared to the unregulated share, since the rent cap creates incentives to pull down cheap housing prematurely and replace it with new buildings.

Some of the German federal government’s initiatives to promote housing are designed in such a way that they run the risk of exacerbating price increases and reducing its impact on construction activity. The family home-owner allowance, for example, can only be applied for within a short period of three years. This short duration is prone to lead to large subsidies being requested for projects that are already at an advanced planning, creating a considerable windfall effect. On the other hand, higher demand is concentrated over a short period of time, increasing the likelihood of cost-driving effects.

In the current economic situation a housing policy is called for that is geared towards continuity and improves the outlook for raising long-term capacity utilisation in the construction industry. This could also favour capacity expansion in the industry. Government policy should also be more targeted towards supply conditions. One starting point would be providing more building plots, another would be to take measures to reduce construction and real estate transaction costs.