German labour market sends first gentle sign of warning

German unemployment increased by a non-seasonally adjusted 5,000 in November, bringing the total number of unemployed to 2.806 million. In seasonally-adjusted terms, unemployment increased by 10,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.9%. The Fall revival of the German labour market turned out to be softer than normal. In fact, the November numbers are the worst November performance of the German labour market since 2004. Clear signs of a bottoming out of the labour market. For the time being, the German labour market will remain an important growth driver. Record high employment combined with yet another increase in real wages (+1% YoY since the beginning of the year) bodes well for private consumption. And, indeed, German consumers seem to get into some kind of shopping frenzy, or at least some anticipation of Christmas shopping. Yesterday’s GfK index showed that the willingness to buy has reached its highest level since December 2006. The new coalition deal on a minimum wage as of 2015 should increase disposable incomes, thereby supporting private consumption. At least in the short run. Currently, more than 5 million Germans could see a wage increase from the introduction of a minimum wage. The longer run impact on jobs remains unclear. Historical evidence from other countries is unfortunately not straight-forward on whether minimum wages lead to job shedding or not. This historical evidence provides arguments for both opponents and supporters. Economics is not an exact science. In our view, however, one thing is clear: after the introduction of a minimum wage, it will be hard to squeeze additional positive effects out of the labour market. Today’s numbers send a clear warning that the labour market has reached its natural rate of unemployment. To continue the current job market miracle or start a new one, a minimum wage should be flanked by additional measures to create new jobs. Even children know that only redistributing the pie eventually leads to an empty plate.

Germany (almost) has a new government

Germany is preparing for a grand coalition. After weeks of negotiations, the parties agreed on a coalition deal. Now, the SPD members will have to give the final green light. More than two months after the elections, Germany finally has a coalition deal. Early yesterday morning, the two Christian-democratic parties (CDU and CSU) and the socialdemocratic SPD reached a final coalition deal. The final deal is a 185-page package with lots of good descriptive analysis but also many meaningless words. Stripping down the coalition deal to the essentials, a couple of tangible issues and measures remain. The most remarkable measures are probably the introduction of a minimum wage of €8.50 starting in 2015 but with a transition period until 2017, the reduction of the retirement age to 63 years for persons with a work life of more than 45 years, a pension increase for mothers with children born before 1992, a principal agreement on a highway toll and changes to dual citizenships. In addition, the coalition deal includes several expenditure increases to build or renovate schools and childcare facilities, to modernize highways and to reintegrate long-term unemployed but also higher expenditures into development aid. These measures could amount to around €40bn (1.6% GDP). Interestingly, the coalition partners want to finance these additional expenditures without tax increases. In fact, the goal of a balanced fiscal balance remains unchanged. These calculations might work at the current juncture with strong economic growth and record high tax revenues. However, it is doubtful that the new expenditure plans could survive an economic downturn without higher taxes and/or increasing the fiscal deficit. While the announced measures for the domestic economy clearly reflect a socialdemocratic stamp combined with several presents, Germany’s European and Eurozone policies will not change with the new coalition. The coalition deal confirms the well-known approach of solidarity against solidity, meaning weaker Eurozone countries can be rescued but only if they implement structural reforms. Moreover, the coalition deal underlined Germany’s “no” to debt mutualisation, common Eurobonds, a debt redemption fund and a common deposit guarantee scheme. Fiscal consolidation will also remain a red thread. As regards to further Eurozone integration, the coalition deal remains rather vague. The big vision thing is still missing. Instead, the new government looks set to pursue the idea of reform contracts to create additional incentives for structural reforms, will push to exclude costs of future bank recapitalisations from fiscal deficit calculations and will rather slow down than accelerate the speed towards a banking union. Interestingly, the new coalition seems to add a new condition to direct bank recapitalisation through the ESM. The EU summit in the summer of 2012 agreed to allow for direct ESM bank recapitalization (after a bail-in cascade and national contributions) once the ECB has taken up its new role as bank supervisor in late-2014. The new German coalition only wants to agree to direct bank recapitalisation once the Eurozone has also agreed on a bank resolution mechanism. While Germany continues to commit to further Eurozone integration, it remains striking that every time concrete steps and measures have to be taken, it is often Germany which slows down the process. All in all, the coalition deal is what it was expected to be: a compromise. Whether the coalition will last, now depends on the ballot of SPD members, with the results expected in mid-December. As regards to the economic aspects of the coalition deal, it looks as if the new government’s focus is on redistributing the harvest of earlier economic reforms, rather than using the economic good times for new structural reforms. The short-term impact on the economy should be positive. However, in the longer term, the coalition deal could turn out to have been a missed opportunity.

German Ifo points to growth acceleration

The return of the island of happiness. Germany’s most prominent leading indicator, the Ifo, just beat even the wildest expectations by increasing to its highest level since April 2012. The headline Ifo reached 109.3 in November, from 107.4 in October. Both current assessment and expectations improved. The expectations component spurred to its highest level since April 2011. The German economy is cruising along smoothly. Growth in the last two quarters was partly affected by one-offs and the economy’s real strength is probably somewhere in between. Latest confidence indicators confirm that the economy should continue growing at around its potential growth rate in the coming futures. Particularly the near term outlook for industrial production has brightened again. Since the start of the year, order books have increased by more than 7% and there are encouraging signs that industrial production should rather accelerate than decelerate in the coming months. Production plans are at the highest level in more than two years and inventories just dropped to the lowest level since September 2011, boding well for future industrial production. Moreover, the increase of recruitment plans to the highest level since June 2012 indicates that the industrial sector is also returning as a source of future employment growth. All in all, German economic growth is clearly the last thing we have to worry about. A comfortable position for the next government. Contrary to most other governments in the Eurozone, the next German government will not have to start domestic crisis management but could and should use the good economic times to prepare the economy for the future.

Historical day with no one noticing

Eurozone finance ministers have started to see each other almost as often as during the peak of the crisis. After last week’s meeting on bank resolution, they come together this afternoon in Brussels to discuss the European Commission’s latest fiscal assessments. In fact, today’s meeting is a historical meeting. Unfortunately, hardly anyone realises it. For the first time, the Commission has issued opinions on countries’ draft fiscal plans. Contrary to past policies, these opinions were made in parallel with governments sending the draft plans to their respective parliaments. This new set-up is part of the new fiscal surveillance framework, strengthening the role of the Commission. It gives the Commission the opportunity to influence and intervene in fiscal plans while they are still in the making. That’s at least the theory. In practice, the European Commission put on its velvet gloves for the first exercise under the new rules. In fact, the Commission has developed a sophisticated system of verbal categories for their assessments. No single government will be sent to the drawing table to revise its budget. In European slang, this reads as “no Draft Budgetary Plan has been found to be in serious non-compliance with the obligations of the SGP and that it is not necessary to request revised budgetary plans”. The Commission’s categories range from “compliant with the rules of the Stability and Growth Pact”, “broadly compliant”, “compliant with no margins” and “risk of non-compliance”. Using our EU dictionary, this translates into: Germany and Estonia are the only two countries without any fiscal problems, while all other countries need to stick to their plans as closely as possible; additional measures cannot be excluded.  For European insiders, today’s Eurogroup meeting is historical as it marks the next step of the first implementation of the Eurozone’s new fiscal surveillance framework. For this first exercise, however, the European Commission has put on its velvet gloves and left the fiscal axe at home. The Commission remains very cautious in using its newly won powers. Cautious or not, one thing is clear: fiscal policies in the Eurozone continue to point in one direction; and the direction is not towards loosening.

German ZEW improves again

Full speed ahead? The German ZEW index increased in November to the highest level since October 2009. The ZEW index, which measures investors’ confidence, increased for the fourth consecutive month and now stands at 54.6, from 52.8 in October. At the same time, investors have become slightly less positive on the current economic situation. The current assessment component dropped to 28.7, from 29.7 in October. The end of the US government shutdown blues, the Eurozone stabilisation, the ECB’s rate cut and the latest stock market rally seem to have heeded analysts’ optimism. The ZEW index has not the best track record when it comes to predicting German economic activity. In fact, since 2006, the index had a tendency to “miss” the periods of strong growth. Since mid-2011, however, the components of the ZEW and the Ifo have broadly stayed in tune. With this in mind, we could see another strong Ifo reading at the end of this week. The German economy continues to benefit from low interest rates, the strong labour market, solid domestic demand and the improved outlook for external demand. With the US leaving its government shutdown blues behind, at least until the end of the year, peripheral Eurozone countries stabilising further and China rebalancing its growth model, the recently criticized export sector should flourish again. As a consequence, the German economy should cruise along rather smoothly to the end of the year.

Rugwind in een glas water

De Duitsers hebben het weer gedaan. De eurocrisis, het zwakke economische herstel, de Franse hervormingsachterstand, deflatie. Allemaal het gevolg van te grote Duitse handelsoverschotten. Wat begon met een bericht van het Amerikaanse ministerie van Financiën werd dankbaar overgenomen door analisten en commentatoren en vindt nu zijn hoogtepunt in een officieel onderzoek van de Europese Commissie. Duitslandbashers hopen stiekem dat het slimste jongetje van de klas eindelijk een pak slaag krijgt. Duitse patriotten hoeven zich niet boos te maken, het is maar een storm in een glas water. De kritiek op de Duitse handelsoverschotten is natuurlijk grote onzin. De Duitsers manipuleren de wisselkoers niet en hebben ook geen importbarrières. De export is de afgelopen jaren minder hard gegroeid dan die van Spanje en de handelsbalans is nu al in evenwicht met de rest van de eurozone. Het overschot komt door de exportsuccessen in verschillende opkomende landen en in de VS. De Duitsers minder laten exporteren, wordt dan ook moeilijk. De UEFA vraagt Bayern München ook niet met een speler minder te spelen omdat het elke wedstrijd wint. Bovendien doet de kritiek op de zwakke particuliere consumptie op dit moment niet ter zake. Van alle eurolanden groeide de consumptie sinds 2009 alleen in Luxemburg harder dan in Duitsland. En zelfs al vindt de Commissie het Duitse handelsoverschot te hoog, wat moet Duitsland dan doen? De fabrieken in november al sluiten voor de rest van het jaar? Minder concurrerende bedrijven zouden hoogstens landen helpen die in directe concurrentie staan met Duitsland op de internationale markten. Dat zijn Frankrijk en Italië, maar niet de Zuid-Europese landen. Die profiteren juist van de Duitse export omdat ze vaak een onderdeel zijn van de Duitse productieketen. De Duitsers zullen dus blijven exporteren. De huidige kritiek snijdt alleen hout als het gaat om de binnenlandse investeringen. Die zijn de afgelopen jaren namelijk sterk achtergebleven. Meer Duitse investeringen zijn goed voor Duitsland, maar slechts in zeer beperkte mate voor de rest van Europa. Om het handelsoverschot te verlagen met 1 procent van het bruto binnenlands product (bbp) moet het begrotingstekort volgens berekeningen van de Commissie met meer dan 2 procent van het bbp oplopen. Weinig kans dat de hoeder van de Europese begrotingsregels een land met een schuldgraad boven 80 procent van het bbp zal oproepen nieuwe schulden te maken. Waarschijnlijk zal de Commissie Duitsland alleen voorzichtig vragen iets meer te doen voor de binnenlandse investeringen. En dat wordt tijdens de coalitieonderhandelingen sowieso al besproken. Zo bezien is de storm van de afgelopen week alleen rugwind voor de nieuwe regering. Rugwind in een glas water. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

German growth normalisation

Back to normal. After a strong second quarter, the German economy has returned to its potential growth rate in the third quarter. According to the first estimate of the German statistical office, the economy grew by 0.3% QoQ, from 0.7% QoQ in 2Q. On the year, German GDP is up by 1.1%, from 0.9% in 2Q. The individual growth components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that growth was driven by domestic demand. Private consumption, investments and construction increased, while net exports weighed on growth. Interestingly, German private consumption growth since 2009 has been the strongest of all Eurozone countries, except for Luxembourg. In fact, the German economy is already in a longer process of rebalancing, just out if its own.

The German economy remains the stronghold of the Eurozone. Looking ahead, there is little reason to doubt the stability of the German economy. The positive mix of record high employment, wage increases and strong external demand for German products should remain in place for a while. Latest soft indicators confirm this bright picture. Since the start of the year, order books have increased by more than 7% and there are encouraging signs that industrial production should rather accelerate than decelerate in the coming months. Production plans are at the highest level in more than two years and inventories just dropped to the lowest level since September 2011, boding well for future industrial production. 

If anything, the next government should further boost growth. At least in the short run. Just think of the minimum wage and possibly some tax relief. As regards the medium term outlook, however, the impact from the next government is still uncertain, given the lack of decisions taken so far. Two factors clearly call for new reforms: i) the fact that the labour market is close to its natural rate of unemployment; and ii) the wide investment gap. To improve Germany’s growth potential, it will be important that the new government will not only reap and redistribute the harvest of earlier economic reforms but actually also seeds new reforms.

In this regards, the controversially discussed European Commission announcement to investigate Germany’s trade surplus could eventually bring some tailwind for the coalition talks. To be clear, strictly speaking, the EC is not investigating Germany’s trade surplus but a long list of 11 indicators, intended to signal macro-economic imbalances. Germany breaches the thresholds for the current account surplus, government debt and the loss of market shares. Obviously, no one will seriously ask the Germans to export less or to close their factories for a long “Eurozone rebalancing vacation”. Neither will the Commission ask German companies to become less competitive. Interestingly, Germany’s trade surplus stems from strong demand from outside the Eurozone. With the rest of the Eurozone, Germany’s trade balance is already in balance. In our view, it is not about the exports as such but about what the Germans do with these surpluses. Investing it abroad has not been a successful strategy. Therefore, stimulating domestic investments could be the missing link, pleasing both the Germans and the European Commission. As such, the European Commission could provide the next German government with some welcomed tailwind. Even if it is tailwind in a tea cup.

Carsten Brzeski


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Another big-bang-pulling-out-all-the-stops day in Frankfurt

Never a dull moment. The ECB surprised most analysts, including us, by cutting its refi rate by 25bp to now 0.25%. At the same time, the ECB left the interest rate on the deposit rate unchanged at zero, while cutting the rate on the marginal lending facility also by 25bp. In addition, the ECB announced to keep the liquidity tap open at least until mid-2015. It is all about inflation. While the ECB has been concerned about the economic outlook for a long while, today’s rate cut was purely motivated by what ECB president Draghi called a changed outlook for inflation. According to the introductory statement, the ECB is now expecting that “we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on”. Back in October, the ECB said that its forward guidance was conditional to “an unchanged overall subdued outlook for inflation”. According to Draghi, the outlook for inflation had changed over the last four weeks, thereby justifying today’s rate cut. The decision was not unanimous, at least not on the timing. Finding the changes to the inflation outlook, however, is not easy. The latest business and consumer survey from the European Commission actually showed an increase of inflation expectations. At the same time, the latest Commission forecasts, released on Tuesday, showed a stable forecast for Eurozone headline inflation around 1.4% until 4Q15. Remarkably, even if the ECB today noted that “inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% later on. The only thing which really has changed over the last four weeks is actual headline inflation. It looks as if the headline inflation drop in October to 0.7% YoY had a stronger impact on the ECB than we had anticipated. Interestingly, the euro exchange rate did not play a role in today’s decision. At least not officially. The exchange rate does not appear in the introductory statement, neither as a risk to the economic outlook nor as a risk to inflation. As regards the regular assessment of economic developments, the ECB still expects a gradual recovery with risks to the downside. These risks continue to be developments in global money and financial markets, but also higher commodity prices and “slow or insufficient implementation of structural reforms”. Maybe as an effort to strengthen the impact of today’s rate cut, the ECB also announced to extend all refinancing operations with full allotment at least until mid-2015. All in all, it looks as if many professional ECB watchers have to look for some freshening-up training. The ECB under Mario Draghi has become much more pragmatic and pro-active than under any of Draghi’s predecessors. Contrary to past experiences, the ECB now seems to follow the motto of “even if it does not help, it does not hurt either”. However, the long-term consequences of today’s decisions remain unclear. On the one hand, it increases the ECB’s reputation as the Eurozone’s pro-active fire fighter, while on the other hand it is a hit to the ECB’s predictability, eventually making future forward-guidance and market expectation management more complicated. It is doubtful that today’s decisions are really a crucial strike against deflationary trends in the Eurozone. Even the weakening of the euro exchange rate could turn out to be short-lived in the absence of further action. In fact, on-going deleveraging in both the private and the public sector should exert further deflationary pressure which will be hard to tackle by monetary policy. Let’s not forget that there have been more of these pulling-out-all-the-stops days at the ECB over the last years with cheerful reactions on financial markets but limited impact on the real economy. Even if Draghi reiterated that the zero bound for interest rates had not been reached, we are doubtful that the ECB can still offer many of these big-bang days in the future.

German IP disappoints in September

Temporary slowdown? German industrial production lost some momentum in September, dropping by 0.9% MoM, from an upwardly revised 1.6% increase in August. On the year, industrial production is now up by 1.0%. The drop was broadly-based, driven by all sectors except for energy, with the sharpest drops in the production of capital goods (-2.1% MoM) and in the construction sector (-1.8%). Despite today’s drop, German industrial production is still up compared with the second quarter, pointing to a GDP growth rate of around 0.3% QoQ in 3Q. Looking ahead, today’s drop should be a one-off, rather than the start of a new trend. To the contrary, the short-term outlook for industrial production has actually brightened. Since the start of the year, order books have increased by more than 7% and there are encouraging signs that industrial production should rather accelerate than decelerate in the coming months. Production plans are at the highest level in more than two years and inventories just dropped to the lowest level since September 2011, boding well for future industrial production. Moreover, the increase of recruitment plans to the highest level since June 2012 indicates that the industrial sector is also returning as a source of future employment growth. Despite our positive take on the German industry, some stains on the white shirt remain. Since the beginning of the year, foreign new orders have increased faster than domestic orders; new grist for the mills of critics of Germany’s export-orientation. In our view, this criticism is unjustified, at least when it comes to the export part of the story. The German export success is mainly driven by external demand, which has often proven to be rather price-insensitive, and not by manipulative economic policies. At the same time, however, it is undisputed that domestic demand has been sluggish for too long. Just more consumption will not do the trick. What the German economy, in our view, needs is more domestic investment. In this regards, the fact that industrial capacity utilisation remains below its historical average indicates that new investment will probably not come from traditional capacity investment but rather from investments in other areas like innovation, energy transition, infrastructure and education. Earlier this year, there still had been doubts about the strength of the German industry and its waning role as a growth driver. Despite today’s setback, these doubts have been unjustified. In the coming months, the industry should continue its comeback as the backbone of the German economy.

Prelude to new tensions?

The European Commission’s economic Autumn Forecast could give rise to new political tensions. Under the surface of a gradual but rather anemic recovery, hide several test cases to prove that the Eurozone’s new rules really bite. Yesterday, the European Commission published its so-called Autumn forecasts. These forecasts are broadly in line with our own predictions of a gradual but rather anemic recovery of the Eurozone in the coming two years. According to the Commission, economic growth should return in all Eurozone countries next year, except for Cyprus and Slovenia. However, the fact that even in 2015, the Commission still forecasts an output gap of 1.4% of potential GDP for the entire Eurozone, illustrates that the afterpains of the crisis will stay for a long while. A day ahead of the next ECB meeting, the European Commission also presented the first 2015 inflation forecasts of any international institution. The expected 1.4% should in our view not be enough to make the ECB afraid of deflation. At least not already this week. The most important elements of European Commission forecasts are probably not the growth and inflation figures but the forecasts for public finances and current account balances. Let’s not forget that the Commission forecasts form an essential basis for the tightened fiscal and macro-economic surveillance procedures in the Eurozone. In this regard, it was noteworthy that for the Eurozone as a whole the fiscal deficit forecast worsened for this year but was revised upwards for next year. Looking at the individual countries shows that the discussion about growth vs austerity is far from being over. France, for example, which has promised to get its fiscal deficit below the 3% GDP threshold in 2015, is now forecast to miss this target, with the Commission expecting a deficit of 3.7%. Moreover, Spain, which over the last years has been granted already two postponements to bring the deficit below 3% GDP, is now projected to reach a deficit of 5.9% in 2014 and 6.6% in 2015. An additional problem for both Spain and France is that the structural fiscal deficit (the so-called cyclically-adjusted deficit) is forecast to worsen instead of improving in 2014. Playing it according to the rules would now mean for the European Commission that it would have to demand additional austerity measures. Against the background of the recent IMF and US criticism of German current account surpluses, the European Commission forecasts received additional attention. According to the Commission, Germany’s current account surplus should diminish only somewhat, dropping from 7% of GDP in 2013 to 6.4% of GDP in 2014 and 2015. Interestingly, German import growth next year is forecast to be the strongest of all Eurozone countries. Next to Germany, there is another country recording high current account surpluses: the Netherlands, with an expected surplus of 11% in 2015. According to the so-called macro-economic imbalance procedure, a current account surplus of more than 6% of GDP for a period of three years is one of the criteria to eventually start an official procedure. All in all, yesterday’s European Commission forecasts reflect the sad truth about the Eurozone recovery. It is a very slow, fragile and anemic recovery. The still high fiscal deficits in many peripheral countries, plus France, and the high current account surpluses in several core countries offer many test cases for the European Commission to prove that the new fiscal and macro-economic surveillance rules and frameworks really bite.