En route for a gold medal?

German businesses remain diehard optimists. The February Ifo just increased to the highest level since July 2011 and stands at 111.3, from 110.6 in January. While the expectations component weakened somewhat, the current assessment component reached its highest level since April 2012. German business optimism seems to be contagious and slowly but surely the latest conundrum between soft and hard data is fading away. Better-than-expected GDP data in the fourth quarter marked an important first step, hard data in the coming weeks should confirm the catching up of the real economy. Particularly the industrial backbone of the economy should strengthen again. The combination of filled orders books and low inventories bodes well for industrial production in the coming months. It does not come as a surprise that reportedly big German companies have increased working hours to reduce latest backlogs. Moreover, the construction sector, driven by the mild winter weather, and domestic investment, driven by government investment and a first tender start of business investment, will be growth-supportive throughout 2014. Finally, the strong labour market and latest wage increases should further back domestic demand, even though the 2013 drop in real wages indicates that a spending spree will be hard to find. Of course, there are also risks. An unexpected slowdown, further emerging market turmoil and a Chinese hard landing have often been mentioned as the main threats to the German economy. In our view, particularly the worries about the US economy should disappear quickly. In fact, the US economy should quickly return as one of the main drivers of German export growth this year. As regards the other risks, the negative impact from emerging market turmoil should remain limited. As long as China remains relatively stable, German exports should remain relatively unharmed. India, Brazil, Turkey and Argentina are not more important as export destinations than Belgium. While some performances of Germany’s Olympic athletes over the last two weeks might have disappointed, the economy’s performance is again en route for a gold medal.

German headache for the ECB?

The return of the island of happiness? While confidence indicators in other major economies softened, optimism in the German economy remains strong. The composite PMI increased to a 32-month high in February on the back of a sharp improvement in the service component and stands now at 56.1, from 55.5 in January. At the same time, however, the manufacturing component weakened somewhat, dropping to 54.7, from 56.5 in January. The mild winter weather, low inventories and gradually filled order books bode well for economic activity in the coming months. Meanwhile, however, today’s data also provides new ammunition for those accusing Germany of beggar-thy-neighbour policies. Earlier this morning, the German statistical office reported that real wages dropped by 0.2% YoY in 2013. This was the first drop in real wages since 2009. The drop in real wages can partly be explained by one-off factors as extra payments in 2013 were lower than in 2013. Corrected for these extra payments, real wages would have been up by a meagre 0.2% YoY. Even such an increase would be disappointing. Over the last six years, German real wages have on average increased by an annual 0.5%. Too little to create a consumption boom but also too much to facilitate Eurozone rebalancing. Moreover, another piece of German data should feed another Eurozone debate: the one on deflation as German producer prices dropped by 1.1% YoY in January. While prices of consumer non-durable goods increased by 1.2% prices of intermediate goods were down by 1.8% and 3.0% for energy. In fact, the large drop of the energy component should probably also come back in the next reading of consumer price inflation. As argued earlier, an energy-drive drop in headline inflation should not be sufficient to automatically trigger new ECB action but it should clearly sharpen the discussion within the EuroTower. All in all, this morning’s data from Germany should offer lots of food for thought for the ECB. The German economy is powering ahead but at the same time it doesn't make Eurozone rebalancing any easier. Combined with new deflation fears, this gives a cocktail with a high risk for a headache.

Herrieschoppers in rode toga

Het zijn geen makkelijke tijden voor Europa. Populistische partijen lopen zich warm voor de Europese verkiezingen, in Nederland presenteert Geert Wilders zijn laatste Nexit-scenario, de Zwitsers willen de grenzen weer sluiten en een Amerikaanse diplomate vat dat alles met drie woorden samen: 'Fuck the EU'. En alsof dat niet genoeg was, kreeg Europa ook nog een behoorlijk gemene natrap uit een kleine stad van betweters in Zuid-Duitsland. 

Het grote, vaak angst inboezemende Duitse Constitutionele Hof vraagt het Europese Hof om advies in de kwestie van het zogenaamde OMT-programma van de Europese Centrale Bank (ECB), het mogelijkerwijs onbeperkt opkopen van staatsobligaties. De reacties van experts lopen sterk uiteen: van 'het OMT is dood' tot 'een nederlaag voor het Duitse Hof'. Dat niet alleen economen maar nu ook juristen er een mening over hebben, vermindert het aantal uitgesproken opinies zeker niet.

 Heel eerlijk: de ECB zal er zich niets van aantrekken. Het is en blijft een zaak waarover de uitspraak nog steeds in de lucht hangt. Of Luxemburg nu wel of niet méér pro-Europees zou oordelen dan Karlsruhe blijft koffiedikkijken. De kans dat het OMT ooit wordt ingezet, is vandaag net zo groot (of klein) als afgelopen week. 

Veel interessanter is de metaboodschap die Karlsruhe naar Europa stuurt. Want Karlsruhe vraagt niet zomaar om hulp. Nee, de begeleidende tekst die het Duitse Hof naar Luxemburg stuurt, windt er geen doekjes om. Het Duitse Hof stelt namelijk met zoveel woorden dat het OMT volstrekt illegaal is, 'in strijd met Europees recht' en dat de ECB buiten haar mandaat handelt. Daarmee daagt het Duitse Hof in feite het Europese Hof uit, onder het motto 'kijk eens wat je hier tegenin weet te brengen'. De uitdaging wordt nog groter als we terugblikken naar de Honeywell-zaak in 2010. Die biedt het Duitse Hof de rechtsbasis om bij het uitblijven van een Europese uitspraak zijn eigen gang te gaan. Het Europese Hof is daardoor gedwongen om een duidelijke positie in te nemen. 

Niemand vraagt zich af of het Duitse Constitutionele Hof wel de juridische bevoegdheid heeft om een onafhankelijke Europese instelling te kastijden, zeker als die laatste onderhevig is aan EU-wetgeving. Europese wetgeving staat nog steeds boven het nationaal recht, en er bestaat geen Duits grondrecht op (EU-)verdragsconform handelen. Een onduidelijk of halfslachtig oordeel uit Luxemburg zou de juridische taliban in Duitsland laten juichen. Het is dus aan het Europese Hof van Justitie om daarover geen misverstanden te laten bestaan en een duidelijke uitspraak te doen. Iemand is over de grens gegaan, maar niet per se de ECB.

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

No year-end sprint for the German economy

Another setback. German industrial production disappointed in December, dropping by 0.6% MoM from +2.4% MoM in November. The two-months-average is still up by 1.5%. On the year, industrial production is now up by 2.6%. The December decrease was driven by weaker production of capital goods (-2.5% MoM) and energy (-2.6%). Production in the construction sector increased by 0.5% MoM. Earlier today, German exports disappointed, dropping by 0.9% QoQ in December. As imports declined by 0.6% MoM, the seasonally-adjusted trade balance narrowed somewhat to 18.5 bn euro, from 18.9 bn euro in November. Over the entire year 2013, the trade surplus reached a new all-time-high of 198.9 bn euro. The 2013 numbers also illustrated the continued decoupling of German exports from the rest of the Eurozone. While exports to Eurozone countries dropped by 1.2% YoY in 2013, exports to other EU countries increased by 2.6% yoy. The dichotomy between soft and hard data has been a striking conundrum of the German economy in recent weeks. Most confidence indicators stand close to all-time-highs and the optimism is strong. At the same time, however, hard economic data has rather disappointed. Today’s numbers were another illustration that the economy did not stage the expected year-end-sprint but rather slowed down. Looking ahead, all puzzle pieces to solve the current conundrum are still there. Despite yesterday’s drop, order books are still filled. Combined with the latest inventory reduction, industrial production should gain new momentum in the coming months. Moreover, the construction sector, driven by the mild winter weather and government investment, should be growth-supportive throughout 2014. Finally, the strong labour market and latest wage increases should further back domestic demand. Of course, there are also risks. From the latest risk events trades at financial markets, an unexpected US slowdown or a Chinese hard landing would in our view be the biggest risks for the German economy. Up to now, the negative impact from emerging market turmoil should remain limited. In fact, as long as China remains relatively stable, German exports should remain relatively unharmed. India, Brazil, Turkey and Argentina are not more important as export destinations than Belgium. With today’s numbers, the last faint hope that fourth quarter growth could still surprise to the upside has disappeared. It looks as if the meagre growth rate of 0.1-0.2% QoQo, suggested by the German statistical office’s first estimate in mid-January, was right. The only upside from this disappointing year-end is that it will make the upcoming growth acceleration more enjoyable.

Recovery hopes win from deflation fears (at least for now)

The ECB kept its powder dry at today’s meeting. As expected, it must have been a very close call but eventually the ECB followed the old saying ‘if in doubt cut it out’. However, during the Q&A session, ECB president Draghi stressed the ECB’s determination to act again if money market tensions would increase and/or the medium-term inflation outlook worsens. Postponed is definitely not abandoned. As regards the ECB’s macro-economic assessment, the base case scenario still seems to be intact. The ECB still expects a gradual recovery, mainly supported by domestic demand, improving financing conditions and a gradual pick-up in global activity. Risks to this outlook are still to the downside, with recent financial market turmoil and uncertainties in emerging economies being a new risk factor. As regards inflation, the lower-than-expected headline inflation in January did not change anything. The ECB still expects a “prolonged period of low inflation, which will be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on”. Ahead of today’s meeting, new speculation about imminent ECB action had emerged, mainly driven by the latest drop in headline inflation and the continued subdued recovery. Since the last rate cut in November, many market participants and observers had re-interpreted the ECB’s reaction function, expecting a direct link between movements in headline inflation and ECB action. Today’s decision showed that this direct link does not exist. Instead, Draghi presented at least two interesting insights in the ECB’s current way of thinking. The first remarkable change was in the introductory statement, which for the first time in a long while started by stressing the recovery and only then moved to inflation developments. In our view, the best explanation why the ECB did not act today. At least today, recovery hopes won from deflation fears. The second remarkable detail was Draghi’s announcement that the ECB staff projections in March will for the first time ever present numbers for t+2 (ie two years ahead). While former ECB-president Trichet had invested lots of effort into the ECB’s predictability – just think of the famous code words – his successor Draghi had recently more problems in getting his meassage across. Today’s meeting should have helped in finally explaining the ECB’s current reaction function. In our view, only a significant increase in money market tensions and/or a worsening of the medium-term inflation outlook will trigger further action. In this respect, the March meeting with the presentation of the staff projections will indeed be crucial. Remember that in December, ECB staff had predicted an average inflation rate of 1.3% for 2015. A lower number for both 2015 and 2016 would clearly open the door for more ECB action. What could this ECB then actually be? By now, the options are well-known and are in theory fully-fledged QE (eg, by purchasing SME loans), conditional liquidity through, for example, a funding for lending scheme or another refinancing rate cut and a negative deposit rate. However, in practice, both a funding-for-lending scheme and fully-fledged QE are still hard to implement. With full allotment still in place (and will be until 2015), it is hard to see how banks could subscribe a new conditional liquidity provisions. Moreover, the positive experience from the UK was mainly concentrated in the mortgage market; probably not the ECB’s biggest concern. Fully-fledged QE is also easier said than done as it would have to focus on SME loans and not government bonds. Given the practical difficulties and Draghi’s comments at today’s press conference, we still think that any next step would be a rate cut, rather than more unconventional measures. All in all, today’s meeting in our view made clear that the door for further monetary policy action remains open. Draghi’s downplaying of an outright deflation risks, however, suggests that the ECB would still like to refrain from all-or-nothing measures, keeping another rate cut as the most likely next step. But for the time being the ECB seems to bank on a long period of low status quo.

Only small drop in German new orders

German new orders decreased in December, dropping by 0.5% MoM, from a 2.4% increase in November. On the year, new orders are still up by a strong 6%. The December drop was driven by weaker domestic and non-Eurozone demand. Interestingly, new orders from other Eurozone countries increased by 7.5% MoM. German new orders have been on a zig-zag trend for almost two years. In this regards, today’s decline is actually good news. Why? Recently, strong monthly increases were always followed by strong declines the month after. Today’s small drop confirms the upward trend for the German industry. Order books are gradually filling. Combined with the low level of inventories, industrial production should gain more momentum in the coming months, hopefully closing the current wide gap between euphoric confidence indicators and rather sluggish hard data.