Thursday, March 29, 2012

No soft patch on German labour market (yet)

German unemployment dropped by a non-seasonally adjusted 82,000 in March, bringing the number of unemployment down to close to 3 million again. In seasonally-adjusted terms, unemployment dropped by 18,000, bringing the seasonally-adjusted unemployment rate down to 6.7%, a new all-time low.

The German labour remains rather resilient to the soft patch of the economy at the end of last year. The mild March weather and almost unshattered business optimism seem be the most important drivers behind today’s drop in unemployment. The resilience of the German labour market bodes well for private consumption in the first half of the year.

Even if the soft patch has not (yet) reached the labour market, the economic tailwind from the last two years is clearly fading away. Looking ahead, the labour market should soon enter a period of stabilisation but not stagnation. Recruitment plans have become a bit more cautious but are still positive. Moreover, the vacancy index, BA-X, is still close to its all-time high from January and anecdotal evidence of a lack of qualified workers is increasing. However, as the business cycle impact is weakening, structural measures would be required to bring unemployment further down significantly. Practice what you preach?

Monday, March 26, 2012

German Ifo - Is sky the limit?

Still optimistic. Today’s Ifo index shows that German businesses have not lost their overwhelming optimism. In March, the Ifo index increased to 109.8, from 109.7 in February. While the current assessment component was unchanged at 117.4, expectations continued their upward trend and increased to 102.7, from 102.4.

After the first growth contraction since the end of the recession, soft indicators of the first two months of the year had alleviated fears of a technical recession in Germany. Both the Ifo index and the European Commission’s economic sentiment index for Germany had reached a seven-month high in February, while the ZEW index this month even spurred to the highest level in almost two years. Hard data had also confirmed the economic rebound, even if the rebound was not yet sufficient to fully offset the December falls. Today’s Ifo index gives hope that this catching up should take place in the coming months.

Despite the steadfast optimism, the German economy is facing a couple of new challenges. High oil prices, austerity measures in almost all other Eurozone countries and the slowdown of the Chinese economy are eroding both domestic and external demand. The latest developments, both at the global and the Eurozone level, show that the German economy might sometimes be an island of happiness but will clearly not remain an economic island

Today’s Ifo index illustrates once again the sound economic fundamentals. The strong labour market, filled order books and low inventories still bode well for growth in the coming months, albeit at a low level. Even at a slower pace, the German economy should remain the Eurozone growth show case of this year. It might not be Champions League quality anymore, but with today’s Ifo index it should probably be enough to win the Europa League.

Thursday, March 15, 2012

Germany: Election cycle starts earlier than expected

With the surprise fall of the minority government in Germany’s most populous state, the election cycle starts earlier than expected. This time around, however, the impact on the debt crisis should be very limited.

Normally, there are around four state elections per year in Germany, making election campaign an important factor in actual policymaking. This year, however, was supposed to be different, with only one planned election in May. This has definitely changed with this week’s fall of North Rhine Westphalia’s minority government due to some protocoloic negligence. Instead of one, there will now be three state elections in May as, already a couple of weeks ago, the fall of the government of the state Saarland also required new elections. The election cycle has started again.

Most focus will probably be on the elections in North Rhine Westphalia, the state where most Germans live. Could there be any impact from the elections on the German stance in the Eurozone debt crisis? Remember that back in 2010, Chancellor Merkel was very hesitant to agree to the first Greek bailout as she feared losing the elections in North Rhine Westphalia. As she had lost the elections anyway, things look differently now. Chancellor Merkel seems to be in a much better starting position as she has almost nothing to lose. Given the fact that the current minority government of North Rhine Westphalia was formed by the two biggest federal opposition parties already, the Green Party and the Social-democrats, even an absolute majority for these two would not change the current majority situations in national parliaments, neither in the upper nor in the lower house. Probably only a landslide defeat for Chancellor Merkel’s Christian-democrats could have an impact on Merkel’s position within her own party. Maybe to avoid such a scenario, Angela Merkel already stated that the work of the national government was totally independent from results of state elections.

The biggest unknown in the current gambling in German politics is Merkel’s junior coalition partner, the liberal party. Since the party has failed to reach the election threshold in almost every state election since the impressive performance at the 2009 national elections, it got caught in a kind of identity crisis and is now desperately trying to win back electorate support. Further defeats could lead to new unrest in the party, consequently posing a problem for Chancellor Merkel’s coalition. This, of course, would look like be bad news for Merkel but it would meet her anything but unprepared. Angela Merkel is still the most popular German politicians and her party is leading in the national opinion polls with a comfortable margin. In fact, Angela Merkel could even be suspected of having a Teflon layer as even the resignation of two German presidents and several high-profile politicians of her own party has not damaged her popularity. In a worst case scenario in which her own coalition gets paralysed or even falls, it currently looks as if Merkel would have the Social-democrats as fall-back option. Already now, or at the latest at next year’s federal elections. A revival of the so-called grand coalition of Christian and Social democrats would at least on the Eurozone debt crisis not bring any change as the Social-democrats have often supported Merkel’s current strategy. Looking ahead, it looks as if Angela Merkel’s best strategy going to next year’s federal elections will be to sustain her own high popularity and prevent an absolute majority for the green Party and the Social-democrats.

All in all, the elections in North-Rhine Westphalia should hardly have any direct impact on Merkel's euro crisis management. However, the indirect fallout of the elections and the election campaign will at least give us an unexpected early flavour of next year's federal elections and might even start shaping the contours of the next federal government.

Tuesday, March 13, 2012

Eurozone: Undramatic evening in Brussels

Last night, the Eurogoup gave the political green light for the second Greek bailout package. The final all-clear should come on Wednesday.

An undramatic Eurogroup meeting yesterday night brought Greece again a step closer to the second bailout package. In yesterday’s wording, the Eurogroup “has politically adopted” the second Greek bailout package. The final green light should be given by the deputies of the finance ministers which will meet tomorrow. Now the real work can start. Let’s not forget, the debt restructuring is no substitute for structural reforms and austerity measures. In this context, the growth assumptions underlying the Greek debt sustainability analysis (which brings Greek debt to below 120% of GDP by 2020) remain probably too positive. An average GDP growth rate of 2.5% over a period of six years would make a lot of other Eurozone countries jealous. After the meeting, ECB president Juncker said that Greece would now get a second chance. Will it be the last one?

The Eurogroup also discussed the fiscal situation in Spain. After signing the new fiscal compact, the Spanish government had announced that it would exceed this year’s deficit target. Instead of the official target of 4.4% of GDP, the Spanish government had suggested a new target of 5.8% of GDP. The higher deficit for 2012 was, partly, due to overruns in 2011. Yesterday, the Eurogroup asked for another, front-loaded, fiscal consolidation effort of 0.5% of GDP. Even if this might look like a compromise, Spain still has to bring back its deficit to 3% next year. However, yesterday’s decision shows that the Eurozone is increasingly being torn between the strict-austerity-and-rules-based approach and a more growth-oriented approach.

The undramatic Eurogroup meeting can be seen as a relief but will not be the new reality. The next challenges for Eurozone politicians should be the discussion on how to increase the ESM, whether and when Portugal would need a second bailout package and the next quarterly assessments of Greek austerity measures and structural reforms. Moreover, the discussion on Spain was probably only the tip of the iceberg. In fact, the big institutional litmus test for the Eurozone will come next year when eight Eurozone countries officially have to bring their fiscal deficits back under the 3%-threshold. Except for Germany, most other countries are still far off from reaching this target. So far, only bailout countries had received more time to bring their deficits back in line with the Maastricht-norm. Does this mean more bailouts or softer rules? Stay tuned.

Thursday, March 8, 2012

ECB meeting - Lip service for German hawks?

At today’s meeting, the ECB left interest rates unchanged. According to ECB president Draghi rate changes were not even discussed. While there was not much news from the ECB on the sovereign debt crisis and Greek PSI, the ECB’s brought back some gentle anti-inflation rhetorics.

It looks as if the ECB has lost this fearing feeling. The macro-economic assessment changed quite significantly compared with the February meeting. The very cautious language has been replaced by a moderately cautious language. Words like “tentative” and “high uncertainty” disappeared from the ECB’s introductory statement. The recent improvement of confidence indicators seems to have comforted the ECB, while at the same time still stressing downside risks. The recovery should at best be moderate. In more detail, the ECB has registered a stabilisation of economic activity, “albeit at a low level”. Despite this cautious optimism, the latest ECB staff projections for GDP growth were revised downwards. ECB staff now expects GDP growth of -0.1% this year (from +0.3% in December) and 1.1% in 2013 (from 1.3%).

The biggest change in the ECB’s macro assessment, however, was on inflation. In fact, inflation has returned as a prominent risk factor. The ECB does not any longer expect inflation to drop below 2% this year. This new assessment is also reflected in the ECB staff projections which show an upward revision of the inflation forecast to 2.4% for this year (from 2.0% in December) and 1.6% next year (from 1.5%). Risks to price stability are still balanced and the ECB expects “price developments to remain in line with price stability over the policy relevant horizon”. However, the phrase “with upside risks prevailing” indicates that inflation has not left the ECB’s one-needled compass.

There were more signs that the inflation alarm bells are gently sounding again in Frankfurt. The previous phrase which came closest to a code word for an easing bias “a very thorough analysis of all incoming data and developments over the period ahead is warranted” disappeared from the ECB’s introductory statement. Moreover, hawkish statements like “we are firmly committed to maintaining price stability” and “firm anchoring of inflation expectations…is of the essence” were added into the official communication.

Ahead of today’s meeting there was a lot of fuzz about a potential controversy between the Bundesbank president Weidmann and ECB president Draghi. In a leaked letter, Weidmann wrote about imbalances in the Eurozone's payment system, TARGET2, and the resulting risks for the Bundesbank, which would be exposed in the unlikely event of the Eurozone breaking up. During the press conference, ECB Draghi downplayed this discussion. He even proved to be a good charmer, explicitly praising the Bundesbank saying that “I cherish the culture and tradition of the Bundesbank of preserving price stability” and laudatorily referring to former Bundesbank president Tietmeyer. Bundesbank praise and anti-inflation rhetorics. Shamed be who thinks evil of it.

The new anti-inflation rhetorics are probably rather a lip service to soothe the Bundesbank, than a serious intention to hike rates anytime soon. However, after today’s ECB meeting at least further rate cuts seem to be off the table. With the stabilisation of the economy and inflation above 2% for longer-than-expected, another use of the LTRO bazooka to avoid a credit crunch looks currently more likely than a rate cut.

German IP picks up steam again

Still alive. German industrial production increased by 1.6% MoM in January, providing first evidence of a tender rebound of the German economy. On the year, industrial production is up by 1.8%. The increase was mainly driven by the production of capital goods, durable consumer goods and the construction sector (+4.3% MoM).

Financial market turmoil, the Eurozone debt crisis and the winter weather have made it a bit more complicated to identify the future path of the German economy. In fact, latest hard economic data often stood in stark contrast to an almost imperturbable optimism by both companies and consumers. While new orders and retail sales disappointed, most confidence indicators actually increased and production expectations just recently returned to last summer’s levels. Have German companies become a bunch of happy-go-luckies and will there soon be a rude awakening or should recent hard data simply be filed away under “statistical noise”?

With today’s industrial production data, a technical recession (i.e. another quarter of economic contraction) can still not entirely be ruled out. January production has only offset the losses of the fourth quarter. Nothing more and nothing less. Moreover, the February freeze will probably also take a toll on the construction sector.

Nevertheless, once the February freeze is behind, there are still enough reasons to expect a rebound of the German economy. With the often-mentioned solid fundamentals with the absence of any significant domestic imbalances; inventory reduction of companies over the last months, wage increases and the US recovery, the German economy should be able to offset the negative impact from higher oil prices and weaker demand from other Eurozone countries.

After two weak months, the German industry is picking up steam again. More is needed to ban recession fears for good.

Wednesday, March 7, 2012

De streber berispt

Mijn collega's grijnsden van oor tot oor. Na maanden van plagerijen en flauwe grappen, verhalen over de economische superman en de toekomstige Europese kampioen voetbal, kwam het uur der gerechtigheid. Payback time! Hoe beleefd mijn collega's normaal zijn, bij de nabespreking van de voetbalwedstrijd Duitsland-Frankrijk was het leedvermaak groot. Mijn nieuwe Franse collega glansde. Het was maar een voetbalwedstrijd, toch was het balsem op de wonden van de Franse ziel.

Frustratie uitleven op de Duitsers? En als de Europese regeringsleiders de afgelopen week beter hadden opgelet, was het ook voor hen payback time geweest. Met barsten in de dominantie van de Duitse bondskanselier Angela Merkel tot gevolg. Er was een berisping voor het ijverigste jongetje in de euroklas. In een rapport van de OESO over structurele hervormingen kwam Duitsland er belabberd uit. Volgens de OESO is Duitsland zelfs een hekkensluiter bij de implementatie van nieuwe structurele hervormingen. Koplopers zijn, ik durf het nauwelijks te zeggen, Griekenland, Portugal en Spanje. De OESO constateerde dat de Duitse regering op dat vlak sinds 2008 stil heeft gestaan. Ja, diezelfde Duitse regering die bezuinigingen en structurele hervormingen tot de nieuwe Europese religie heeft gemaakt.

Na de voetbalwedstrijd was mijn reactie op de collega's nog luchtig. Het was een vriendschappelijke wedstrijd, die niet zo veel voorstelde. Er waren basisspelers geblesseerd en je kan niet altijd winnen. Mijn ego was geenszins gedeukt. Het OESO-rapport zal in Berlijn een gelijkaardige reactie hebben uitgelokt. Voor de andere landen waren de hervormingen broodnodig, maar toch niet voor Duitsland? Het was maar een OESO-rapport en bovendien sprak de goede economische prestatie van het afgelopen jaar voor zich. Toch? Dat OESO-rapport kan rustig het archief in.

Niet te snel. In de schaduw van de Duitse hegemonie en het permanente crisismanagement ontstaat namelijk alweer een kleine hervormingsachterstand. De jongste economische hervormingen dateren nog van de regering-Schröder. Vergeleken met andere OESO-landen loopt Duitsland nog steeds achter wat betreft onderwijs en het wegnemen van belemmeringen voor ondernemingen. Tegelijk zijn de directe belastingen en de belastingen op arbeid hoger dan het gemiddelde van de OESO.

Hoogmoed komt voor de val. Op dit moment blijft de Duitse economie het beste dat Europa te bieden heeft. Maar Duitsland mag niet op zijn lauweren rusten. Niet economisch, maar ook niet bij het voetballen. Nog meer glimmende collega's bij de koffie kan mijn ego niet verdragen. Te beginnen in juni.

Dit stuk verscheen vandaag in het Belgische dagblad "De Tijd"