German economy ends year with high hopes

Nothing can ruin German business optimism. The December Ifo just increased to the highest level since February 2012 and stands at 109.5, from 109.3 in November. While the current assessment component dropped to 111.6, from 112.2, the expectations component increased to 107.4, from 106.3; its highest level since March 2011. With today’s Ifo, another exciting year for the German economy draws to a close. It was another growth rollercoaster ride as the heavy winter weather distorted economic data for several months. It took until the third quarter before the economy probably showed its true face, posting GDP growth of 0.3%. The start to the fourth quarter showed an interesting dichotomy. While soft indicators remain buoyant and are often still on an upward trend, hard indicators have failed to meet expectations. Industrial production dropped in October already for the second month in a row and the trade surplus has narrowed. Even retail sales disappointed. The economy is struggling to shift up a gear. Nevertheless, we still expect growth to pick up in the remainder of the year. Filled order books and the low level of inventories still bode well for industrial activity. Moreover, the levels of all available confidence indicators correspond with a much higher GDP growth rate than the latest monthly data indicate. The crucial question for the German economy in the coming months will now be whether soft or hard indicators will start to adjust. In our view, unless German businesses have slowly lost touch with reality, the economy should pick up steam again and cruise smoothly into the next year. With today’s Ifo, the German economy starts an early but well-deserved Christmas break. The next important macro data will only be released next year. The Ifo and other confidence indicators have created a crackling anticipation of the economy’s growth prospects going into 2014. Let’s hope that there won’t be a rude awakening after the holidays.

And finally...Merkel's third term in office

Almost three months after the federal elections, Angela Merkel can officially begin her third term in office on Tuesday. It was an exciting news weekend in Germany. The grand coalition has finally received the green light from the SPD grassroots. According to the SPD, 76% of its grassroots members taking part in a postal ballot voted in favour of joining a coalition with the Christian-democrats. Almost 80% of all SPD members participated in the vote. After this final green light, the new government will officially be sworn in on Tuesday and can finally start work. Yesterday evening, all government parties named their ministers. The most interesting nominations are another term as finance minister for Wolfgang Schaeuble; the first-ever cabinet member with Turkish origin, Aydan Özoğuz, as Under Secretary for immigration, refugees and integration; the first-ever female defence minister, Ursula von der Leyen and, finally, Jörg Asmussen’s nomination as new Under Secretary in the labour ministry. The move from ECB executive board member Jörg Asmussen came as a big surprise. With Asmussen’s exit, out of all German members of the ECB’s Governing Council, only Otmar Issing has ended his official term. The other four – Welteke, Stark, Weber and Asmussen – all left earlier (due to different reasons). It seems as if Asmussen’s move to Berlin is not driven by any monetary policy conflicts but rather by his private life. With Asmussen’s exit, the ECB will lose an important connection to both the German government and the German public. In the public debate on the ECB’s monetary policy, Asmussen has been an important counterweight to Bundesbank president Weidmann. Although legally speaking no single country has a permanent seat in the ECB’s executive board, it seems impossible that Asmussen will not be replaced by another German. Yesterday, three names were already being mentioned: current Bundesbank vicepresident Lautenschläger, chief financial supervisor König and a member of the Council of Economic Advisers, Buch. Interestingly, all three possible candidates are women. European heads of state are responsible for the nomination. In our view, the nomination could take until the next Spring summit of European leaders. In theory, other countries could also put forward a candidate for the succession of Asmussen but this looks highly unlikely. Back to the new German government. The nomination of all ministers shows that two of the most important policy topics for the coming years will be highly influenced by the social-democrats: the introduction of a minimum wage and the energy transition. The social democrats received the ministries for labour and a new “super-ministry” combining the economy and energy. Angela Merkel as chancellor and Wolfgang Schäuble as finance will remain in the driving seat of the other well-known “hot topics: fiscal and European policies, including the Eurozone crisis management. All in all, the composition of the next German government shows that the socialdemocrats have negotiated well. The next government will be a coalition of two parties almost at eye level. Some might see this as a problem as it does not fully reflect the results of the elections. In our view, however, this distribution of power could eventually turn out to be a blessing, at least if it leads to a more stable coalition.

Kerstwensen

De verlanglijst van mijn zoon voor Kerstmis is dit jaar heel kort, maar krachtig. Er staan maar twee cadeaus op. Helaas geen teken van nieuwe bescheidenheid. Een hond of - liever én - een smartphone. Jammer dat het hem net zo zal vergaan als de meeste Europeanen: niet alle wensen worden werkelijkheid. Net als mijn zoon kijkt ook de eurozone dezer dagen reikhalzend uit naar pakjesavond. De verwachtingen zijn hoog. Ligt er - gezien de recente stabilisatie van de economie - eindelijk een aanhoudend herstel in het verschiet? En, valt eindelijk de grote doorbraak op de weg naar meer integratie van de monetaire unie? Zo'n anderhalf jaar geleden leek het eventjes dat de stoutste wensen van alle Europeanen werkelijkheid werden. Het was bijna alsof Sinterklaas, de Kerstman en de paashaas gelijktijdig kwamen opdraven toen Herman Van Rompuy, José Manuel Barroso en Mario Draghi de eurozone eindelijk de lang verwachte visie voor de toekomst van de monetaire unie brachten. De monetaire unie moest worden voltooid met een bankenunie, een begrotingsunie, een economische unie en uiteindelijk een politieke unie. De jackpot leek binnen! De drie benadrukten alleen maar wat alle historici al lang weten: tot nog toe heeft geen enkel monetaire unie overleefd zonder een politieke unie. Eind 2013 is de vonk in de ogen van overtuigde Europeanen gedoofd. In plaats van een onafhankelijke begrotingsautoriteit met een uitgebreide centrale begroting is de begrotingsunie een verzameling geworden van twopacks, sixpacks en fiscal compacts. Een ondoorzichtige constructie, die langzamerhand de macht moet verschuiven van het nationale naar het Europese niveau, maar dan zonder dat iemand het merkt. De bankenunie bestaat tot nog toe alleen uit een Europees bankentoezicht. In plaats van een Europese bankenafwikkelingsautoriteit komt er slechts een ingewikkelde constructie tussen nationale en Europese verantwoordelijkheden. Van Rompuy, Barroso en Draghi bleken dus toch geen trojka van Kerstmannen met lange baarden. Veeleer de Drie Koningen, die de Europese ster volgen. Een ster die door de regeringsleiders wordt gestuurd. De realisaties inzake de begrotingsunie en de bankenunie vallen bescheiden uit. Over alle andere plannen wordt nauwelijks nog gesproken. De herstelwerken aan de monetaire unie zijn stroperiger dan gehoopt. Mondjesmaat gaat het de goede kant op, maar kort voor kerstavond moet de Europeaan zich eerder met een knuffelhond tevreden stellen dan met het gezelschap van een aanhankelijke golden retriever. Mijn zoon zal, zoet gehouden met een Xbox-spelletje in plaats van met een smartphone, zijn teleurstelling na kerst waarschijnlijk snel verwerken. Hij heeft nog tijd om zijn wensen te realiseren. Intussen blijft zijn vader toch stiekem hopen dat de Europese regeringsleiders hem zo kort voor Kerstmis onverwacht zullen verrassen. Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

German economy still struggling to shift up one gear

Mixed start of the fourth quarter. This morning’s data cast new doubt over the strength of the German economy. Particularly the second consecutive drop of industrial production indicates that the economy really needs two strong months if it still wants to meet the high expectation in the final quarter of the year. In October, industrial production dropped by 1.2% mom, after a 0.7% drop in September. On the year, industrial production is still up by 1.0% yoy. The decrease was broadly-based, driven by all sectors, with the sharpest drops in the production of capital goods (-3.0% MoM) and durable consumer goods (-4.5%). After the revival in the first half of the year, the construction sector continued its latest slowdown, decreasing by 1.7% mom. Earlier this morning, October trade data showed a new record high for German exports. In non-seasonally adjusted terms, German exporters sold goods worth 99.1 bn euro. In seasonally-adjusted terms, exports rose by 0.2% mom, after 1.6% in September. Since May, German exports have increased by more than 3%. Another month of German export successes should, however, be no reason for new international criticism as at the same time imports increased by 2.9% mom. As a result, the German trade surplus narrowed to 16.8bn euro, from 18.7 bn euro in September. The trade balance with the rest of the Eurozone is, by the way already, in balance. Germany’s trade surplus is mainly a result of its export successes outside of Europe. Looking ahead, filled order books and the low level of inventories still bode well for industrial activity. Moreover, the less prominent Sentix indicator, which measures investors’ expectations, today increased to the highest level since April 2011 in December. Expectations even reached their highest level ever since the start of the survey in 2009. Over the last months, the Sentix indicator has been an excellent leading indicator for more prominent indices like the ZEW and Ifo index. If this track record continues, the economy could end the year 2013 on another wave of enthusiasm. However, the real economy will have to catch up. Otherwise it could become a rather sentimental wave of enthusiasm. With a narrowing trade surplus and dropping industrial production the German economy did not have the overwhelming start to the fourth quarter confidence indicators had suggested. Still, in our view, the economy should pick up speed again, ending the year on a positive note.

No early Christmas gifts in Frankfurt

The ECB did not bring any early Christmas gifts today and left interest rates unchanged. ECB president Draghi stressed the ECB’s determination to fight any deflationary tendencies. However, he was rather unclear on how and when the ECB would act again. Tone and content of today’s meeting were rather typical for these intermediate meetings in which the ECB cannot or does not want to deliver additional action. The introductory statement was almost a verbatim copy of the November statement. The ECB still expects “a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on”. This assessment of the inflation outlook was backed by the latest ECB staff projections, which forecast headline inflation to come in at 1.4% in 2013, 1.1% in 2014 and 1.3% in 2015. The most remarkable forecast is the 2015 forecast. It is the lowest “2-years-ahead” inflation forecast ever. As regards the economic outlook, the ECB still expects a very gradual recovery in the coming two years, driven by some improvement in domestic demand. This assessment is also reflected in latest ECB staff forecasts, which now foresee GDP growth at -0.4% in 2013, 1.1% in 2014 and 1.5% in 2015. Overall, the subdued growth forecast combined with inflation remaining far below the ECB’s target for three years raises opens the door for further ECB action. Mario Draghi’s statement that “we are fully aware of the protracted downside risks that a longer period of low inflation does imply” combined with the ECB’s forward guidance and a fierce “we are ready and able to act” sent a clear message: the ECB is prepared and preparing to do more. Draghi’s strong hint at further action is another illustration of the ECB’s u-turn on deflationary risks, within a couple of months. It should not be new for the bright minds in the EuroTower that a long-lasting process of structural deleveraging across sectors and economies exerts deflationary pressure. Still, the ECB had been rather benign on deflationary risks for a long while, nicely illustrated by Mario Draghi’s comments at the June press conference that “with low inflation, you buy more stuff”. The November cut apparently has marked a new episode: the deflation-fighting period. Looking ahead, today’s ECB meeting leaves two crucial questions unanswered: i) which additional steps could the ECB really deliver; and ii) what would actually trigger further actions? As regards the ECB’s toolbox, Draghi tried to make it bigger than it probably is. Comments like “we have numerous instruments” or “an entire artillery” were quickly followed by statements that any kind of QE, conditional LTROs like the BoE’s funding for lending scheme or even not sterilising the SMP programme were not easy to implement. We did not get the impression that the ECB already has a detailed plan of action ready. Interestingly, Draghi mentioned that the ECB had briefly discussed the possibility of a negative deposit rate today. As regards the timing of an additional action, Draghi refrained from giving any hints. In our view, Draghi’s comments can be rephrased as: if deflationary forces increase and/or headline inflation drops unexpectedly, the ECB will ease further. Bolder steps that could be a major step to repair the monetary policy transmission mechanism, however, are technically hard to implement and clearly controversial within the Governing Council. Reverting to rather traditional interest rate cuts could eventually still turn out to be the ECB’s first answer to new deflation risks. All in all, ECB president Draghi did not present any early Christmas gifts for the Eurozone. Instead, the ECB will have to use the Christmas period not only for contemplation and reflection but also for more studying of its non-standard measures.

Freund oder Feind?

Die Brüsseler Beamten haben in Europa nicht viele Freunde. Wer ständig Einsparungen und schmerzvolle Reformen propagiert, muss sich nicht wundern, dass die Zahl der Freunde überschaubar ist. Daher freut man sich jetzt umso mehr, dass man ab Januar einen neuen Geistesverwandten begrüßen kann. Im Januar tritt mit Lettland das 18. Mitglied der Währungsunion bei. Für viele ist dieser Beitritt das logische Ende einer wirtschaftlichen Erfolgsgeschichte. In den letzten Jahren hat Lettland eine wirtschaftliche Rosskur durchgezogen. Mit Gehaltskürzungen von mehr als 20% und einem strikten Sparkurs hat das Land sich an den eigenen Haaren aus der Rezession gezogen und gleichzeitig für den Euro qualifiziert. Für viele ist Lettland ein leuchtendes Beispiel dafür, dass sich ein langer Leidenswert auch lohnen kann und dass Austerität und Wachstum kein Widerspruch sind, sondern Voraussetzungen für neues Wachstum sein können. In Brüssel und Deutschland freuen sich einige jetzt schon, dass man endlich einen Verbündeten dazu bekommt. Einen Verbündeten, der solide Staatsfinanzen und Reformen vorlebt. Einen Verbündeten im Kampf gegen die Reformverweigerer und Verschwender in Südeuropa. Man sollte sich nicht zu früh freuen. Hinter der glänzenden Fassade schlummert nämlich eine sehr unangenehme Seite. Ein großer Finanzsektor, eine starke Abhängigkeit der Banken von ausländischen Bankeinlagen und dubiöses Geld aus ehemaligen Sowjetstaaten wecken Erinnerungen an einen kleinen Inselstaat im Mittelmeer. Die drittniedrigste Körperschaftsteuer aller EU-Staaten und die Abschaffung der Quellensteuer auf Gewinnausschüttungen könnten aus Lettland schnell eine internationale Steueroase machen. So groß die Freude über die Attraktivität des Euroraums auch ist, die Brüsseler Beamten müssen aufpassen, dass es nicht bald heißt: mit solchen Freunden braucht man keine Feinde. Diese Kolumne erschien eher als 'Letter from...Brussels' in der Euro am Sonntag.