German consumption day

Spending the crisis away? German consumers remain the silent helpers of the economy. Retails sales dropped in March by 0.3% MoM, from a downwardly revised -0.6% in February. At the same time, consumer confidence increased. The GfK index increased to 6.2 in May, its highest level in almost six years. Finally, German unemployment increased only slightly in April in seasonally-adjusted terms, indicating that the German labour market is the last island of euro crisis resistance.

This morning’s data confirm that the often written-off German consumers have become an important, though not strong, growth driver. Despite today’s drop in retail sales, the overall performance in the first quarter was still stronger than in the last quarter of 2012.

Looking ahead, all ingredients are in place to see a continuation of solid consumption. The labour market remains stable. Contrary to the rest of the Eurozone, German unemployment has hardly increased (yet) and remains close to its record lows. In addition, the increase in real wages, which started last year, should accelerate this year, driven by nominal wage increases of around 3% and low inflation. Just remember that in April, headline inflation dropped to 1.2% YoY.

All in all, Germans are still unlikely to become a bunch of shopaholics. Consumption is far away from being a spending spree and consumption will not be strong enough to spend the euro crisis away. However, gradual and decent consumer spending should continue supporting economic growth.

Eurozone rebalancing or race to the bottom?

Ifo drops sharply in April

Sharp correction. The full impact of the Cyprus bailout and new concerns about global growth have led to a clear downward revision of German business expectations. Germany’s most prominent leading indicator, the Ifo index, recorded the sharpest monthly decline since May 2012, dropping to 104.4 in April, from 106.7. Both, the current assessment and the expectation component decreased sharply. While the current assessment component dropped to 107.2, from 109.9, expectations fell to 101.6, from 103.6. Despite today’s drop, the absolute level of all components still points to growth in the second quarter.


The start of the New Year has been positive, though a bit choppy. Available hard data basically sends two messages: i) the economy recovered from the fourth quarter contraction; and ii) the often called for rebalancing of the German economy is materialising as both private consumption and net exports should have been growth drivers in the first quarter. The big unknown is the weather impact on construction and industrial production. Against the background of still very harsh weather conditions in March, the jury on whether or not the economy left contractionary territory in the first quarter is still out. In our view, it should have.

Looking ahead, it almost requires a fog lamp to predict the future path of the German economy. Available hard and soft data send a huddle of indications. Order books are gradually filling and inventory reductions have come to an end, while at the same time confidence indicators have started to fall again. In the first months of the second quarter, the dichotomy between soft and hard data could continue, though with a bit of a twist. A weather-inflicted catching up of industrial activity could go hand in hand with weaker confidence indicators.

However, looking beyond this weather-driven catching up, today’s Ifo (and yesterday’s PMIs) signal trouble ahead for the Eurozone’s biggest economy. If this trend continues, pressure could build on the German government to consider fiscal stimulus. This time not so much for the sake of any Eurozone rebalancing but for the sake of pure economic selfishness. However, this is highly hypothetical and will, in our view, definitely not happen before the elections. Why? Because any political decision would hardly have a tangible impact on the economy before the elections. In the short run, worsening prospects for the German economy could at least increase the silent support for more ECB action. A rate cut and more non-standard measures will not kick-start economies but weaken the euro exchange rate. Particularly a weaker euro could be a welcome relief for German exporters. Bundesbank president Weidmann’s silent blessing of a ECB rate cut could become louder.

All in all, this week’s confidence indicators send a warning signal that 2013 is not 2009. Any rebound of the German economy after the contraction will be much bumpier and weaker than four years ago.

Eurozone - Much ado about nothing?

Latest comments by EU policymakers have given rise to speculation about a possible u-turn of the Eurozone’s crisis strategy. The next weeks and months should bring an officially endorsed smoothing for fiscal policies but not a reversal.

Since the IMF meetings, the old discussion on growth versus austerity has flared up again. The obvious focus of interest in this discussion is the Eurozone. In the follow-up of the IMF meetings, latest comments by Commissioner Rehn and Commission President Barroso gave the impression that the Eurozone’s crisis management was about to change dramatically. Comments like “austerity is reaching its limits” were interpreted by many observers as a clear hint of a reversal of the current crisis-fighting strategy.

In our view, the bottom line of this discussion will probably be “much ado about nothing”. It is no coincidence that, yesterday, the European Commission published the verbatim minutes of Commission President Barroso’s comments on the austerity vs growth debate. A quick look behind the headlines shows that Barroso is not preparing a u-turn of the current austerity strategy. Comments like “growth based on unsustainable public or private debt is artificial growth” or “we need sound fiscal policy” are anything else but a disjuncture from current policies.

Barroso admitted the need for growth. However, Barroso stressed that growth should not come from new spending but through investment and structural reforms for competitiveness. In fact, contrary to what is often heard, structural reforms have been an important part of all bailout adjustment programmes so far. The prescribed adjustment medicine in the Eurozone goes already beyond one-dimensional fiscal austerity.

What will probably happen in the coming weeks and months is a flexible application of the existing fiscal rules. The Commission has already suggested on several occasions that it will focus more on structural deficits than on nominal deficits when assessing austerity measures in the individual countries. We have talked about this probable shift already back in February in our note "Watchdog finally unchained?" This shift should come in May and June, when first the European Commission presents its assessments of the individual countries’ budget plans, which are later discussed by European leaders. The EU Summit in June should bring the official endorsement of the more flexible approach.

The shift away from nominal targets to structural fiscal efforts is not a reversal of the current crisis policies but only a pragmatic shift to avoid a worsening of the negative interplay between austerity and growth. It will smoothen out the fiscal adjustment process. Nothing more and nothing less.

ZEW drops in April

Correction but no collapse. The German ZEW index dropped in April after four consecutive increases. The ZEW index which measures investors’ confidence now stands at 36.3, from 48.5 in March; still above its historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 9.2, from 13.6 in March. New uncertainty stemming from the euro crisis and doubts about the strength of Chinese economy seem to have dented analysts’ optimism. However, it only looks like a correction at a level still consistent with modest growth. The big confidence collapse some had expected after the Cypriot bailout has so far failed to appear.


In the coming months, economic developments in Germany could take a back seat, making room for politics. As springtime has finally started, the economy should leave any weather-inflicted problems behind, finally starting the recovery. However, the economy will not experience the same sharp rebound as after the last contraction in 2009, but should rather recover gradually on the back of solid domestic demand and continued but fragile improvement of the global economy. Unless tail risks materialise, the recovery should neither be weak enough to unsettle, nor strong enough to create new excitement. It could become the economic incarnation of muddling through.

As regards politics, the campaign for the federal elections in September is gaining momentum. Even if there does not seem to be the single, decisive election topic, it is obvious that the euro crisis will be part of the campaigns and discussions. It might not be a winning issue between chancellor Merkel and her social-democratic challenger Steinbrück as the two biggest German parties hardly have substantially differing views on the crisis management. However, the emergence of a new, anti-euro party, the Alternative for Germany, could cost both parties important votes, even if Germans normally think more than twice before they choose political experiments in federal elections. Interestingly, according to latest opinion polls, there are more potential voters of the current opposition parties sympathising with the Alternative for Germany than voters of Merkel’s coalition.

With anti-euro and a return to the D-Mark ideas finally having a voice in Germany’s political arena, chancellor Merkel and her government are most likely to continue their strict stance of conditional integration, rather than easing it. In our view, Merkel will avoid making any concessions in the coming months. To the contrary, Merkel is likely to guard German taxpayers’ money even more than before. In this respect, expect the German government to continue pushing for the concept of bail-ins, even if it is not a template, to become a permanent feature of the crisis management’s toolkit.

Hyperinflation, here it is...

Eurozone - Formal decisions from informal Ecofin

At their informal meeting in Dublin, Eurozone finance ministers agreed to extend the maturity of the loans to Portugal and Ireland but showed little progress on fundamental issues.


In the good old days of the EU and the Eurozone, so-called informal Ecofin meetings were really informal. Finance ministers brought their spouses and left their ties at home and combined bigger picture discussions with the pleasure to get to know some interesting places of the hosting country. Informal Ecofin meetings are always organized in the country holding the rotating EU presidency. Last week’s informal Ecofin meeting in Dublin was yet another sign that the good old days are definitely over.

Contrary to earlier traditions, Eurozone finance ministers actually took decisions at their meetings in Dublin. First of all, finance ministers gave their final agreement on the €10bn bailout for Cyprus. The IMF will contribute €1bn, the ESM the rest. Ahead of last week’s meeting, there had been news reports that Cyprus would need an additional €6bn euro, ie a total of €23bn and not the currently decided €17bn. Apparently, the Cypriot president had asked for more support; either as direct aid or support from the EU’s structural funds. However, Eurozone finance ministers denied increasing the bailout package. Furthermore, finance ministers agreed to extend the maturity date of loans to Ireland and Portugal by seven years. The extension would smooth the debt redemption profile of both countries and lower their refinancing needs in the post‐programme period. This decision can be seen as a symbolic gesture to reward the countries, which up to now have been implementing austerity and structural measures without creating troubles with their Eurozone peers.

One of the bigger-picture topics at the informal Ecofin was the discussion on a possible future bank resolution mechanism. This bank resolution mechanism is supposed to be the next cornerstone towards a full banking union. The discussion since the Cypriot bailout with a bail-in has clearly shown that Eurozone countries are pushing hard to have bail-ins as part of a future bank resolution mechanism. The European Commission confirmed its earlier view on the possible sequencing of future bail-ins: first stock holders, then bond holders and eventually even unsecured depositors (above 100.000 euro). If this is not sufficient, a still-to-be-built rescue funds funded by the banking sector should step in, while the ESM could be the final lender of last resort. According to the European Commission, another new institution, a so-called European Resolution Authority should be entitled to intervene as a kind of counterpart to the new single supervisor.

The bank resolution scheme is the next big thing in the total make-over of the Eurozone. However, it is clear that an agreement will not be as easy as on the ECB’s role as bank supervisor. An agreement looks possible on the sequencing of any future bail-ins, even if the role of bank depositors still seems controversial. The establishment of another new institution, however, seems to be more disputed. German finance minister Schäuble said that there was not enough of a basis in the EU Treaties for building a common authority and fund for bank failures. It looks as if many more meetings are needed to get to a final agreement.

Some relief for the crisis-hit countries but slow and cumbersome progress on the fundamental issues. At least in this regard, last week’s informal Ecofin was a bit like in the good old days.

Het catenaccio van Angela

Wat hebben Angela Merkel en ik gemeen? We houden allebei van voetbal. Wie herinnert zich niet het beeld van de juichende Angela Merkel live in het stadion bij belangrijke wedstrijden van die Mannschaft. Haar liefde voor de sport gaat echter nog niet zo ver dat zij met haar politieke strategie het spel van die Mannschaft kopieert.

In het Duitse politieke landschap hebben de tegenstanders van de euro eindelijk een stem gekregen. De nieuwe partij Alternative für Deutschland (AfD) is een vergaarbak van oude tegenstanders van de monetaire unie, vooral hoogleraren en populisten. Het programma is duidelijk: Duitsland moet terugkeren naar de D-Mark.

Zie je, hoor je nu veel international commentatoren zeggen, de Duitsers hebben ook genoeg van de eindeloze reddingsacties. Ik heb er mijn twijfels bij. Volgens recente peilingen is nog 27 procent van de Duitsers voor een terugkeer naar de D-Mark. Twee jaar geleden was dat nog meer dan 50 procent. Natuurlijk kijken veel Duitsers met buikpijn naar de Europese reddingsacties, maar zolang ze het niet in de eigen broekzak voelen, zal de wrevel niet verder gaan dan de borreltafel in de kroeg. Bovenal zijn Duitsers, anders dan bijvoorbeeld de Nederlanders in de afgelopen tien jaar, geen protest- of impulskiezers. Zeker niet op landelijk niveau.

De kans is groot dat het AfD hetzelfde lot gaat lijden als de Piraten: een tijdelijk mediafenomeen dat snel weer in de onbeduidendheid verdwijnt. Angela Merkel zal de opkomst van deze anti-europartij echter toch met argusogen volgen. Merkel weet dat er met Europa en de eurozone geen verkiezingen in Duitsland te winnen zijn. Wel te verliezen. Zo lang de Duitsers maar het idee hebben dat Angie goed over hun centjes waakt en de Zuid-Europese uitvreters iets doen in ruil voor de financiële hulp, is alles goed. Een beetje solidariteit mag dan ook wel. De redding van Cyprus en de lopende discussie over toekomstige bail-in's passen precies in die strategie en zal elk anti-eurosentiment in de kiem smoren. Het hoort bij de politieke strategie van Merkel om fouten te vermijden en de politieke tegenstander geen ruimte voor aanvallen te bieden. Met die strategie heeft Merkel succesvol de sociaaldemocratische uitdager geneutraliseerd en de verkiezingscampagne tot nog toe gereduceerd tot een pure sympathiewedstrijd. Een wedstrijd, die zij duidelijk gaat winnen.

Merkel staat 1-0 voor, maar durft niet voor de 2-0 te gaan. Natuurlijk heeft zij ook getalenteerde aanvallers op de bank zitten. Wat te denken van thema's zoals de gevolgen van de vergrijzing of hoe Duitsland zich voorbereidt op de tijd waarin de Chinese bedrijven Duitse producten daadwerkelijk kunnen namaken? Innovatie, onderwijs en work-lifebalans zijn onderwerpen, die het tweede doelpunt kunnen maken, maar die ook de verdediging blootleggen. In de politiek houdt Merkel duidelijk meer van een potje ouderwetse Italiaanse catenaccio dan van het flitsende en aanvallende spel van die Mannschaft. Eigenlijk jammer.

Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

German economy still suffers from winter weather

German industrial production increased by 0.5% MoM in February, from a sharply downward revised drop of 0.6% in January. On the year, industrial production is down by 1.8%. Production in the manufacturing sector increased by 0.5%, masking sharp declines in the production of consumer goods and strong increases in the production of capital goods. Production in the construction sector fell by 2.7% MoM. Today’s data is not as positive as it looks at first glance. Due to the January downward revisions, industrial production in the first two months of the year was now weaker than in Q4 2012.


After a period of deflating in the second half of last, the German industry has stabilised again. The stabilisation, however, is not automatically followed by a sharp rebound of industrial activity. Recently, there even has been a kind of dichotomy between producers’ expectations and sentiment and actual data. While confidence indicators are still far above their historical averages, actual industrial activity has remained subdued. The inventory reduction of the second half of 2012 came to a halt in the first months of the new year.

To find the main reason for the tempered industrial recovery, a simple glance through a German window during the last months would have been sufficient. It is the weather. The harsh winter weather has not only affected the construction sector but the entire industry. Interestingly, the German economy has been hit much harder from the winter weather than the rest of the Eurozone. Some might consider this a meteorological-inflicted rebalancing.

Looking ahead, evidence is increasing that industrial production should soon join private consumption as an important growth driver in 2013. Production expectations just reached their highest level since April 2012 and new orders were up by 2.3% MoM in February.

The winter has left its marks in Germany. On both the economy and the people. Hopefully, the joys of spring should return soon.

One chart - one message: Draghi's positive contagion has still not reached the real economy

Latest ECB data on MFI interest rates shows that fragmentation remains high.

German new orders point to continuing decoupling from rest of Eurozone

Some rays of sunshine. German new orders increased by 2.3% MoM in February, more than offsetting January’s drop of 1.6%. On the year, new orders have finally left the territory of negative growth rates for the first time since December 2011. The February increase was widely-spread across all sectors. Orders of capital goods increased by 3.5% MoM. Interestingly, the strongest increase came from domestic (+2.2% MoM) and non-Eurozone (+2.7% MoM). Orders from other Eurozone countries increased at a slower pace and are still down by almost 2% on the year.


German new orders have been on a zig-zag trend for almost one year. The last time new orders increased for two consecutive months was in February and March last year. Therefore, today’s increase is good news, as it shows that the industrial backbone is not running out of steam, but it is no reason to become overly cheerful.

Looking ahead, with the solid labour market and surprisingly strong retail sales, domestic demand should be an important growth driver this year. In addition, the pick-up in non-Eurozone demand shows that the German economy benefits from the gradual recovery of the global economy. In this context, today’s new order data add to the evidence that the German economy’s decoupling from the rest of the Eurozone is continuing.

Clueless in Frankfurt

At today’s meeting, the ECB kept interest rates on hold. During the press conference, ECB president sent dovish signals without substantiating possible next steps.


Despite a weak batch of confidence indicators in March, the ECB’s tone on the economic outlook remained rather unchanged. The ECB still expects the improvements in financial markets since last summer to “work their way through to the real economy” and still foresees a gradual recovery in the second half of the year. Risks to the economic outlook remain to the downside. As regards inflation, the ECB still sees risks being broadly balanced. As in March, the euro exchange rate is not any longer considered to be a risk to price stability.

Although the ECB seems to stick to its earlier macro-economic assessment and has, at least for the time being, filed the latest disappointing sentiment indicators under “one-off fluctuation”, ECB president Draghi sounded slightly more dovish than in March. The promise that the ECB’s monetary policy stance will remain accommodative “for as long as needed” and that liquidity operations will be continued with full allotment “for as long as necessary” was already given last month but received a more prominent position in today’s introductory statement. Combined with the only real new phrase of “in the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability”, this normally could that a rate cut has come closer. However, during the Q&A session, Draghi explicitly said that the current Governing Council’s consensus was not to look at rates for the time being.

Ahead of today’s meeting, there had been a lot of speculation about possible ECB action to ease financing access for SMEs. Despite some defragmentation in financial markets, Draghi’s earlier whatever-it-takes has not (yet) reached the real economy. One of the reasons for this failure is that defragmentation in sovereign bond markets did not translate into defragmentation of bank lending rates. Re-establishing the monetary transmission mechanism so that credit will flow to the real economy seems to be the ECB’s number one priority. However, judging from today’s press conference, the ECB looks rather clueless on how to tackle the problem.

Draghi acknowledged the problem, saying that the ECB was still looking into the issue. Draghi said that the ECB had discussed several possible measures. However, the studying of other countries’ experiences and measures will continue. What the exact measures could be remains unclear. Draghi just mentioned difficulties and the fact that boosting SME financing was not only an ECB task but could require the involvement of more actors like governments, the EIBs and alikes, and national central banks. Whether this hints at collateral easing or fully-fledged asset purchases remains unclear. In our view, the crucial question of any future SME lending programme will be “who will take the risk”.

Once again, despite new dangers of refragmentation and signs of economic weakening, the ECB has decided to stay inactive. It is obviously not the result of a misjudgment of the current situation but rather the awareness that rate cuts would hardly be effective and that any SME lending bazooka is technically and politically very hard to construct. The fact that Draghi stressed the OMT – up to now a pure psychological measure – as the ECB’s most powerful monetary policy tool illustrates the ECB’s frustration to find further measures. It looks as if the ECB has also realized that there is no bazooka to tackle the economic fragmentation.

If the recovery fails to materialize, the ECB will have to choose one of the two options. But for the time being, the ECB just looks a bit clueless (and so are we).

ECB preview

The latest drop in confidence indicators, the aftermath of the Cyprus crisis and lower inflationary risks could provide the ECB with an excellent justification to cut rates this week. However, in our view, the ECB will again resist the temptation and keep rates on hold on Thursday. The ECB’s main concern is not the absolute level of its policy rate but the continued fragmentation of bank lending rates, particularly for SMEs. However, up to now, the ECB has not been able to come up with a technically – and politically – acceptable bazooka to boost lending to SMEs. In fact, when assessing possible policy options to stimulate the economy, the ECB faces a new dilemma: choosing a rather ineffective but politically acceptable rate cut or an effective but politically controversial lending bazooka.

Read here ING's ECB preview:
http://pull.xmr3.com/cgi-bin/pull/DocPull/315-172966-5D23/38157617/2013030210005251_E.pdf