Strong Ifo reading increases German growth conundrum

German businesses remain diehard optimists. The January Ifo just increased to the highest level since July 2011 and stands at 110.6, from 109.5 in December. Both the current assessment and the expectation component increased, with expectations now at their highest level since February 2011. The small growth conundrum of the German economy continues. While soft indicators remain buoyant and both consumer and business confidence are close to all-time highs, hard data has been lagging behind and still is. The growth performance throughout 2013 was much weaker than soft indicators had suggested. This dichotomy worsened towards the end of last year, which saw an unexpected disappointing growth performance despite a new acceleration of sentiment indicators. Explanations for this new German conundrum are not easy to find and range from “the economy is simply not as strong as many think” to “the data are wrong”. Particularly the latter explanation got more attention recently. In our view, the truth is – as so often – probably somewhere in the middle. There are indeed plausible reasons to believe in an upward revision of some hard data. Many domestic activity data are often revised after their first estimates and an upward revision of activity in the construction sector, services and retail sales, particularly in the last months of 2013, seems possible. At the same time, however, it was net exports which weighed on German growth last year. These data are less subject of later revisions. Consequently, the poor export performance was rather a result of weaker demand from emerging countries and Eurozone peers than of bad data collection. Looking ahead, with a solid labour market, higher real wages, favourable financing conditions, the gradual investment pick-up, filled order books and low inventories, strong fundamentals still make a compelling case for a strong growth performance of the German economy this year. As long as latest problems in emerging markets do not worsen, the German growth conundrum should automatically end in the coming months.

Strong ZEW reading in January

Still going strong. The German ZEW index dropped in January for the first time since July last year. The ZEW index, which measures investors’ confidence, decreased slightly and now stands at 61.7, from 62.0 in December. At the same time, investors have become significantly more positive on the current economic situation. The current assessment component accelerated to 41.2, from 32.4 in December. The strong equity market, the smooth tapering announcement and the possibility of further ECB action have clearly kept German investors in a positive mood. The ZEW index has not the best track record when it comes to predicting German economic activity. However, in the absence of other guidance for the future path of the economy, it’s worthwhile trying to squeeze out some essentials. Over the last years, the current assessment component has become a rather good leading indicator for GDP growth. In this regards, today’s sharp increase of the current assessment component is good news for the economy. Moreover, let’s not forget that the combination of a much stronger current assessment and only a marginal drop in expectations actually implies improved sentiment. The fundamentals of the German economy remain strong. However, in recent months, it has been rather difficult to identify the exact pace of economic growth as soft indicators have been more buoyant than hard economic data. Normally, one of the two will have to budge. In our view, there are sufficient arguments in favour of an acceleration of economic growth rather than in favour of a drop in soft indicators. Today’s ZEW readings fit perfectly into this picture. With a solid labour market, higher real wages, the gradual investment pick-up, filled order books and low inventories the German economy seems to be in the starting blocks for a growth acceleration this year.

Duitse oppervlakkigheid

Politiek populisme floreert niet alleen in economisch slechte tijden, maar vooral in economisch goede tijden. Kijk maar naar Nederland of Oostenrijk begin jaren 2000. Duitsland leek lange tijd immuun voor dit nieuwe Europese fenomeen. Zelfs de anti-europartij, de AfD, is na de verkiezingen weer in de vergetelheid verdwenen. Dat lijkt te veranderen. Geluiden tegen Europa en tegen immigratie krijgen een nieuw gezicht. Duitsland heeft plots zijn eigen Tea Party: de Beierse CSU. Sinds begin dit jaar zijn de grenzen van de Duitse arbeidsmarkt open voor Roemenen en Bulgaren. Veel Duitsers zijn niet alleen bang voor de goedkope werk- nemers, maar vooral voor het 'sociaal toerisme'. Buitenlanders die enkel voor de uitkeringen en sociale bijstand naar Duitsland komen. De Beierse CSU heeft uitstekend ingespeeld op het buikgevoel van de mensen met de slogan 'Wie bedriegt, die vliegt'. Toen de Europese Commissie onlangs zei dat werkzoekende buitenlanders niet principieel van sociale voorzieningen mogen worden uitgesloten, gingen de Beierse spindoctors waarschijnlijk door het dak van vreugde. Met buitenlandse profiteurs kan je bij de kiezers goed scoren, maar inhoudelijk is het een schijndiscussie die rond de feiten heen draait. Toen de Duitse arbeidsmarkt openging voor de eerste Oost- Europese landen weerklonken dezelfde kreten. Er is echter niks gebeurd. Integendeel, inmiddels telt Duitsland 16 miljoen inwoners met een migratieachtergrond. De meesten verdienen hun geld met werken en betalen belastingen. Er zijn geen no-go-zones in Duitse steden of escalerend geweld van perspectiefloze jonge allochtonen. Meerdere partijen in andere Europese landen hebben al verkiezingen gewonnen door van dingen die geen probleem zijn er een te maken. Maar wat misschien goed is voor electorale winst, is slecht voor de economie. Duitsland heeft geen populistisch, maar een inhoudelijk immigratiedebat nodig. Het is een van de snelst vergrijzende Europese landen. De bevolking krimpt van 80 miljoen nu naar 65 miljoen tegen 2050. Daardoor zakt de structurele economische groei van ruim 1 procent naar minder dan 0,5 procent. Immigratie zou voor Duitsland een zegen zijn. Een ruwe berekening: met een netto-immigratie van 200.000 per jaar zou de Duitse bevolking tegen 2050 slechts krimpen tot 75 miljoen. Duitsland heeft immigranten nodig wil het ook de komende decennia de Europese conjunctuurlocomotief blijven. Als het om Europa en immigratie gaat, verslaat het buikgevoel bijna altijd de exacte cijfers. Maar met te veel oppervlakkigheid en kortetermijndenken mist Duitsland een grote kans voor de eigen toekomst. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Solid but unimpressive German growth in 2013

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 0.5% in 2013 (a non-calendar adjusted 0.4%). This outcome suggests that the German economy has probably grown by 0.2%-0.3% QoQ in the fourth quarter. Moreover, the statistical office also released a first estimate of Germany’s 2013 fiscal balance. While almost the entire rest of the Eurozone is still engaged in austerity policies, German public finances remain strong. According to the statistical office, Germany recorded a meager fiscal deficit of 0.1% GDP in 2013, missing the historic opportunity to post two consecutive years with a fiscal surplus since 1971. With today’s numbers, the economic year 2013 can almost be filed away. Under the surface of below-trend growth, the economic success story continued as unemployment remained low, employment reached a record high, private consumption continued its upward trend and even investment showed first signs of life. Looking ahead, today’s numbers bode well for a re-acceleration of the German economy in 2014. Technically-speaking, as a result of today's numbers, annual GDP growth would already be at 0.5% even without any quarterly growth at all throughout 2014 (the so-called carry-over effect). But this should not be all. With the improved global economic outlook, filled order books, low inventories and the stable labour market all ingredients for another strong growth performance of the German economy are there.

ECB still on red alert

At today’s meeting, the ECB kept interest rates on hold but stepped up its verbal power, stressing its determination to act again. As regards the ECB’s macro-economic assessment, nothing has changed since the December meeting. In fact, it was almost a verbatim copy of the December assessment. The ECB still expects a gradual and weak recovery, with risks surrounding the economic outlook still on the downside. Turning to inflation, the ECB’s assessment also remained unchanged despite the latest drop in headline inflation and the fall of core inflation to an all-time low. According to Draghi, the latest drop was mainly driven by statistical quirks. Risks to the inflation outlook remain balanced. As Draghi put it: “there are limited upside risks and limited downside risks to the inflation path”. Interestingly, the exchange rate was again not mentioned as a risk factor to the economic outlook. During the press conference, Mario Draghi continued to walk on a thin line on the issue of deflation. While the November cut was officially justified by increased deflationary risks for the Eurozone, Draghi today said that there were no risks of deflation, at least not in the textbook meaning of deflation. According to Draghi, even negative inflation rates in some Eurozone countries could not be considered as deflation but were rather the effect of the ongoing structural adjustment. Draghi’s remarks on deflation were on our view remarkable. It looks as if he wanted to guide expectations away from a direct link between lower inflation rates and new ECB action. Looking ahead, the crucial message from today’s meeting was an addition to the introductory statement, reading as “overall, we remain determined to maintain the high degree of monetary accommodation and to take further decisive action if required”. In our view, a clear sign that the ECB is not leaning back to relax but remains on high alert. Despite the ECB’s strong determination, it was striking that Draghi refrained from going into details of possible next steps. Instead of giving a glance of the ECB’s range of instruments, he only said that the ECB would use all instruments eligible under the European Treaties. This leaves enough room for speculations and phantasies. In our view, it looks as if the ECB is trying to build a tailor-made toolbox with different tools for different situations. In our view, there are three main triggers for further ECB action in the coming months: i) unwarranted money market tightening; ii) a faltering of the recovery; and iii) a stronger euro exchange rate. Obviously, these three factors would have a deflationary impact on the Eurozone economy. Tackling these three problems would indeed require different instruments: (conditional) liquidity for the money market, funding for lending and/or QE for the economy and a negative deposit rate for the exchange rate (or a combination of all three). All in all, fears of another surprise step by the ECB at today’s meeting turned out to be unjustified. Instead, the ECB kept at least one good old tradition unharmed: never change rates in January. So far, the ECB only changed its policy rate in January 2009. Looking ahead, today’s meeting confirmed the ECB’s current monetary stance: it’s rather a state of red alert than a traditional wait-and-see.

German economy prepares for strong year-end finish

German new orders increased by 2.1% MoM in November, providing further evidence that the economy’s industrial backbone is re-strengthening. Looking at the less volatile two-months average, new orders were up by 0.4% and by more than 4% on the year. In November, the increase in new orders was driven by both stronger domestic (+1.9% MoM) and foreign (+2.2% MoM) demand. The increase in foreign demand only reflected demand from countries outside the Eurozone. The increase in new orders adds to the picture of strengthening industrial production in the coming months. Anecdotal evidence shows that German manufacturers got their hands full reducing backlogs. Some companies even reduced the Christmas breaks of their employees. Earlier today, the statistical office reported that German exports grew by 0.3% MoM in November, from an 0.3% increase in October. As at the same time, imports dropped by 1.1% MoM, the seasonally-adjusted trade balance widened to 17.8bn euros; the fifth highest reading ever. These numbers suggest that after being a drag on growth in the third quarter, the external sector should have become growth-supportive in the final quarter of the year. Exports have slowly but surely returned as an important growth driver for the German economy, even though it is still is a growth driver with the handbrake up. Today’s increase was the fourth consecutive monthly increase. On the year, exports are now up by 3.6%. The drop in imports, however, will provide fresh arguments for recent criticism that the German growth model is doing too little for Eurozone rebalancing. Interestingly, a closer look at the export details puts this criticism into perspective. The high trade surplus is a result of surpluses with European countries outside the Eurozone and the rest of the world. In 2013, Germany’s trade balance with the rest of the Eurozone has been virtually in balance. In November, for example, exports to European countries outside the Eurozone were up by almost 5% YoY, while exports to other Eurozone countries remained unchanged. Today’s trade numbers once again confirm that 2013 was another year of Germany’s decoupling from the rest of the Eurozone. After a disappointing start of the fourth quarter, it increasingly looks as if the German economy has regained momentum towards the very end of the year, with hard data gradually starting to meet the high expectations created by buoyant confidence indicators.

German CPI data brings no relief for ECB

Inflationary pressure in Germany remains low. Based on the results of several regional states, German headline inflation increased to 1.4% YoY in December, from 1.3% in November. On the month, German prices increased by 0.4% MoM. Based on the harmonised European definition (HICP), headline inflation decreased to 1.2%, from 1.6% in November. On the month, German HICP increased by 0.5%. Looking at the available components at the regional levels shows that the increase in headline inflation was mainly driven by higher prices for food, alcohol and tobacco and household energy. These factors more than offset the negative base effect from lower oil prices. The movement of two inflation measures into opposite directions can be mainly explained by different revision moments and consequently different base effects. In fact, the most important take-away from today’s inflation data is the monthly change which was the lowest December increase since 2008. Consequently, today’s German inflation data provide little arguments for the ECB to relax its fight against deflation in the Eurozone.