German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

Draghi increases bets for December action

Back to back with one of Malta’s biggest casinos, the ECB today clearly increased its bets, sending strong hints on new monetary stimulus at the December meeting. While no decision was taken today, the ECB’s sounded more concerned about the growth outlook for the Eurozone and signaled its willingness to act. According to ECB president Draghi, some members of the Governing Council were already willing to act today. As regards the macro-economic assessment, the ECB voiced more concerns about the growth outlook. Back in September, market turmoil and the slowdown of China and emerging markets were still too fresh to be integrated in the ECB’s projections. Today, the ECB singled exactly these factors out as the main risk for the Eurozone economy. To be precise, the ECB warned that “concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.” Against the background of increased concerns about growth, and related second-round effects on inflation, ECB president Draghi opened the door to more monetary stimulus in December. In this regards, the key statements at today’s press conference were “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and that the ECB already today had a “rich discussion and was “open to a whole menu of monetary policy instruments”. Draghi remarked that the ECB had tasked several committees to work on the implementation of possible instruments. He called this a “work-and-assess” stance. Finally, Draghi also mentioned a lowering of the deposit rate as a possibility for future action, even though back in 2014 he had announced that interest rates had reached the lower bound. Obviously, it is hard not to see the ECB’s intention to add more monetary stimulus. Still, the ruthlessness with which Draghi sometimes tried to defend the ECB’s position was a bit surprising. In fact, the ECB is still only one third into its envisaged QE purchases and the discussion on whether low (or even negative) inflation rates are now a curse or a gift for the Eurozone remains unclear. Furthermore, it is also far from certain that the marginal gains from stepping up QE are still positive. Judging from the immediate market reaction, stepping up QE should at least weaken the euro somewhat. In our view, probably the biggest and most important goal of the ECB as it would deliver almost instant success. Even though Draghi repeated the ECB’s well-known position that the exchange rate was obviously not a policy target for the ECB. All in all, Draghi has been more explicit than we had expected. The door for more monetary stimulus is wide open and does not necessarily have to be more QE. It could also be a lower deposit rate, maybe even fx interventions or purchases of other assets (previously excluded). Draghi’s u-turn on the lower bound of interest rates has made him walk in the footsteps of former German chancellor Adenauer who once said “why should I care about my chatter from yesterday”. So everything is possible. In our view, the main triggers for more action in December will be the ECB’s staff projections, particularly the headline and core inflation forecasts for 2017. Even though market participants should know from recent experiences with the Fed that crucial and groundbreaking decisions can be postponed more often than markets believe, it will be hard for the ECB not to deliver in December. Maybe inspired by the casino next door, the ECB today increased its bets. The ECB has to have strong cards, because it will have to show its hand in December.

German IP disappoints in August

“I know what you did last summer…”. German industrial production disappointed in August, dropping by 1.2% MoM, from +1.2% MoM in July. On the year, industrial production is still up by 2.3%. The drop was widely spread across all sectors. Only the production of intermediate goods remained flat. The sharpest declines were recorded in the production of capital goods and energy. The German industry is still struggling to gain momentum. Yesterday’s drop in new orders already signaled a note of caution. The August drop marked the first decline for two consecutive months since the beginning of the year. A clear sign for caution. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy. All in all, today’s weak industrial production data will again give rise to speculation that the German economy is suffering from the Chinese slowdown. In our view, however, there is no need to panic. Just remember last summer when the German industry went through a similar period of weak data. In the end, the batch of disappointing data was rather the result of too many Germans enjoying too much vacation than the beginning of a downward trend. Let’s hope that history repeats itself.

Eurozone - Still united in diversity

The final stage of the Greek saga debuted along the lines of the recent past. Neither side seems in a hurry to bow to the counterparty’s requests. Having irritated EU Commission President Juncker late last week by quipping that the EU suggestions were irrational, on Tuesday the Greek PM Tsipras finally submitted his new proposal to the institutions. As reported by Kathimerini, it foresees an increase in the primary surplus targets to 0.75% of GDP (from 0.6%) for 2015 and to 1.75% (from 1.5%) in 2016 and an upward adjustment to its three-rates original proposal. The Commission’s first reaction was a cool one, focusing on the fact that the proposal contained ideas already rejected in the past rather than on the adjustments to the primary surplus targets and on the new VAT rates. Unsurprisingly, Greek Finance Minister Varoufakis was also dismissive as he defined last week’s creditor proposal a return back to square one, as if the negotiations had not happened. In our view, even if the manners and procedures of this never-ending process will definitely not win any beauty contest, just looking at the sheer facts it seems as if at least headline numbers and targets have converged again – a tiny bit. The issue is not so much numerical targets but rather how to reach them. This is where the biggest discrepancies between Greece and the rest of the Eurozone still exist. The other, probably most controversial issue is the Greek pension system. While the Eurozone demands an overhaul of the system to make it more sustainable, the Greek government refuses any changes. Even if both sides are still well apart, these discrepancies look bridgeable; at least in normal European circumstances. However, the Greek crisis has long ago entered new dimensions. Therefore, it looks as if an old negotiation pattern is currently emerging again: when progress at the technical level failed to materialise, the negotiation table is shifted to the top politicians. Looking at the key players, it seems as if we are reaching the final stage of the negotiations; at least for a short-term solution. After negotiations at the wider European level, including the IMF, it again seems to come down to another Greek-German showdown. These two government leaders will have to decide whether they can pour more water into their wine and still serve it at home as an exclusive drink and not as a cheap spritzer. In this light, observers were yesterday eagerly awaiting a meeting between Tsipras and Merkel at the margins of an EU-Latin America summit in Brussels. However, the two left main actors of the Greek crisis continued their game of chicken, now even at the level on whether or not a meeting would take place. After denials and opposing news, Tsipras and Merkel, supported by French president Hollande, finally met late last evening. After two hours, the meeting was concluded with only one official statement: government leaders had a good exchange of views in a constructive atmosphere. The negotiations between Greece and the three institutions will be continued with high intensity in the coming days. For us, it is hard to tell what really happened during yesterday’s meeting. It all looks as if the psychological game of who will blink first continues.

More rebound evidence

More evidence for Germany’s rebound. October trade data just added to recent evidence that the Eurozone’s largest economy gained some momentum at the start of the fourth quarter. Exports dropped by only 0.5% MoM, from a strong +5.5% MoM in September. As imports dropped by 3.1% MoM, the seasonally-adjusted trade balance improved to 20.6 bn euro, from 18.6bn in September. The trade balance with Germany’s Eurozone peers was only slightly positive and exports to the rest of the Eurozone are only up 1.9% YoY. The fact that German exports to non-Eurozone countries are up by around 7% on the year illustrates the economy’s gradual decoupling from the rest of the Eurozone. German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, over the last twenty years, German exports to non-Eurozone countries have shown a rather unique correlation with exchange rate movements. Relatively immune against currency strengthening but strongly benefitting from currency weakening. A lucky pattern not all Eurozone countries have experienced. The exchange rate channel remains in our view the strongest argument for the ECB’s QE efforts. Indeed, going back to bigger macro-economic simulations indicates that ECB president Draghi was right in pointing to the negative impact on inflation from lower oil prices, rather than any positive effects for growth. As a rule of thumb, a depreciation of the (trade-weighted) euro exchange rate by only 5% could add some 0.3%-points to Eurozone GDP growth. To get the same impact from oil, prices would need to fall by at least 50%. At the current juncture, the weakening of the trade-weighted exchange rate has been less accentuated than the weakening vis-à-vis the US dollar. If it stayed at its current levels throughout 2015, the nominal effective exchange rate would only be 2.5% below its 2014 average. This seems to explain why ECB president Draghi prefers to use falling oil prices as a means to get QE, rather than hoping for the direct healing impact from oil. Looking ahead, even if it might hinder new structural reform efforts, a weaker euro is probably the best thing that could happen to both Germany and the Eurozone.

Downward slide continues

Downward slide continues. German business confidence dropped for the sixth month in a row in October, illustrating the Eurozone’s biggest economy has reached a dangerous stage between soft spell and longer-lasting almost-stagnation. Germany's most prominent leading indicator, the Ifo index, just decreased to 103.2, from 104.7 in September. Both the current assessment and the expectation component slowed down. Particularly the weaker expectation component, which dropped to its lowest level since December 2012, is a reason for further caution. Latest soft data has rather increased than decreased the degree of diffusion, maybe even confusion. While last week’s PMI and consumer confidence indicator had given hope that the economy would slowly recover from the psychological shock waves from the summer, today’s Ifo index is less encouraging. Trying to get some grip on the current state of the economy requires a lot of instinctive feel. At the current juncture, it is still hard to tell whether solid domestic demand can offset weaker industrial activity; and if for how long. While the strong labour market and low interest rates are supporting private consumption and the construction sector, the export-oriented industry is still going through a dry spell. However, the latest reductions in backlogs and optimism stemming from new Chinese bulk orders show that the risk of drying-up is still relatively small. Looking ahead, Germany’s export industry will face several opposing trends in the next months: on the negative side, with France and Italy stagnating, demand from the Eurozone should remain weak. On the positive side, however, the strong US recovery and renewed demand from China bode well for exports. In our view, the German economy is neither near the abyss, nor close to a period of self-complacent honky-dory. It is in a longer-lasting transition period from the end of the positive reform cycle to the challenges an ageing economy is facing. Even if it is does not make sense to use single economic data as a barometer on whether or not the government will decide on growth-enhancing measures, the general need for more domestic investment in Germany remains. Last week’s European Summit, which took place off markets’ radar screens due to the stress test excitement, did not provide any further guidance. While statements in the final summit conclusions like “…the urgency of the prompt implementation of measures to boost jobs, growth, competitiveness…” sounded promising to those hoping for additional fiscal stimulus, the Germanic sentence “structural reforms and sound public finances are key conditions for investment” underlined that the face-off between Germany and the rest of Europe on how to revive the Eurozone economy is far from being solved. In the short run, lower energy prices and the weaker euro exchange rate are already a small stimulus package for the German economy. However, it is a package which will rather delay than advance new structural reforms.

ECB meeting - The art of doing nothing

As expected, the ECB kept its ammunition dry. Rates were left unchanged but ECB president Mario Draghi sharpened up the ECB’s language to again stress its determination to act (if needed). The ECB’s macro-economic assessment was almost a verbatim copy of last month’s. Economic activity is bang in line with the ECB’s base case scenario. The gradual recovery should continue, although the ECB still sees downside risks to the economic outlook. Interestingly, the exchange rate was still not mentioned as one of these downside risks. As regards inflation, ECB president Draghi remarked that he had been surprised by the March drop in headline inflation. However, contrary to the inflation data ahead of the November rate cut, the March inflation surprise would not have any significant impact on the ECB’s inflation outlook. In the ECB’s view, the timing of Eastern should push up inflation in April and the base case scenario of a gradually accelerating inflation rate until the end of 2016 remains unchanged. Risks to this scenario are still balanced but, remarkably, the exchange rate was explicitly mentioned as a risk factor. During the Q&A session, it became also clear that the ECB is not so much concerned about deflation but rather of a prolonged period of a very low inflation. In the absence of any real action, the ECB provided markets with the expected verbal action. One entire paragraph in the ECB’s introductory statement was dedicated to stress the ECB’s determination to act. “We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time…The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” There are clearly two key take-aways from this sharpened language: i) the ECB is on even higher alert than before; and ii) unconventional measures, including the for markets so important QE, are backed by all ECB members. Listening to Draghi during the press conference and looking at the available options, however, still leaves us with the impression that QE will not happen any time soon. Draghi’s reference to the Fed and the totally different institutional set-up in the US and the Eurozone indicated that any Fed-style QE, which bypasses banks, is highly unlikely. Interestingly, given his comments it looks as if the option of a negative deposit rate currently has fallen into the category of unconventional measures. For the time being, the ECB sees low inflation as the result of positive supply shocks and temporary factors. In fact, the current period can still be filed under Draghi’s earlier label “with low inflation, you can buy more stuff”. However, today’s press conference signalled that the ECB has increased its state of high alert. Given the expected reversed Easter bunny effect on prices next month, it looks unlikely that the ECB will act at its May meeting. The June meeting, with the next round of ECB staff projections, should be the ultimate litmus test for the ECB’s sharpened determination. If then the 2016 inflation outlook shows lower numbers than the current 1.5%, new ECB action looks probable. This does not necessarily have to be QE. Draghi’s comment that the ECB had not yet reached the end of its conventional measures indicates that a refi rate without a negative deposit rate cannot be excluded. All in all, the bottom line of today’s ECB meeting is that the famous “we stand ready to act” has been stretched to its maximum. No further verbal stepping up possible. The ECB seems to be well aware of the downside risks and implementation difficulties surrounding unconventional measures. Still, the ECB mentioned them to maintain its own credibility. The risk of this strategy can be found back in Goethe’s The Sorcerer’s Apprentice. “beware of the spirits that you call ”. From here on, a further verbal stepping up seems impossible. In a way it’s a gamble, either the recovery continues and inflation picks up again, or the ECB will have to act in June, even if it’s only a small refi rate cut. Carsten Brzeski

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.

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.

Opvoeden van ongeliefd kind

Hij lijkt de jongste tijd een beetje op het ongeliefde of nooit gewilde kind, onze euro. Is hij te zwak, dan roept bijna iedereen dat het einde van de monetaire unie nabij is. Is hij te sterk, dan roept bijna iedereen dat de export en daarmee het herstel van de eurozone in de kiem worden gesmoord. Wat er ook gebeurt, de euro kan het blijkbaar nooit goed doen. Ook nu weer. In enkele maanden tijd is de euro veranderd van een bedreigde in een bedreigende specie. Voor sommigen kan een sterke euro juist nu een zegen zijn.

Inderdaad, de koers van de euro is de afgelopen maanden flink gestegen. Vergeleken met het gemiddelde van 2012 is de euro zo'n 5 procent geapprecieerd ten opzichte van de dollar.

Het verrast dan ook niet dat het gejammer over de sterkere euro weer is begonnen. Het staat blijkbaar op de to-do-lijst van elke Franse president om minstens één keer per ambtstermijn de onafhankelijkheid van de ECB ter discussie te stellen en over een te hoge wisselkoers te klagen.

De negatieve gevolgen van de sterkere euro zijn wel nog te overzien. Volgens economische modellen kan de appreciatie tot nog toe de groei in de eurozone dit jaar met 0,1 tot 0,2 procentpunt verlagen. Dat is niet veel. Interessant daarbij is dat de gevolgen voor de diverse eurolanden zeer verschillend zijn. De periferielanden Spanje en Portugal worden nauwelijks geraakt door een sterkere wisselkoers. Ongeveer 60 procent van hun export gaat naar andere eurolanden. In Italië en Frankrijk kan de sterke euro veel meer pijn kan doen. Beide landen zijn relatief open en hebben zich de afgelopen jaren uit de internationale markten geprijsd. Veel Italiaanse bedrijven konden niet standhouden tegen de directe concurrentie uit China in de textielindustrie. De Franse bedrijven concurreren op de wereldmarkten vaak met de Duitsers. En terwijl de Duitse bedrijven door hervormingen, kwaliteitsverbeteringen en loonmatigingen een bijna onverwoestbare internationale vraag hebben gecreëerd, ligt de Franse exportindustrie bijna in as.

Alle periferielanden hebben door de pijnlijke hervormingen hun achterstand in concurrentiekracht ten opzichte van Duitsland gedeeltelijk ingehaald, maar in Frankrijk en Italië is helemaal niets gebeurd. Een sterkere euro brengt deze structurele problemen nu naar boven. Frankrijk zou er goed aan doen niet te veel aandacht te besteden aan onzinnige afleidingsmanoeuvres die toch niet werken. Het is de hoogste tijd om de hand in eigen boezem te steken en eindelijk de 'home made' problemen aan te pakken en structurele hervormingen in gang te zetten.

Misschien moeten de eurolanden een van de moderne opvoedboeken voor ouders lezen. Daarin staat duidelijk dat ouders ook naar zichzelf moeten kijken en veranderingen niet altijd van het kind moeten verwachten. Ongeliefd of niet.

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

From endangered to danger? Can the strong euro choke off the recovery before it has even started?

Sometimes the euro looks like the unwanted or unloved child that can never get it right. A weakening of the euro is often regarded as a harbinger of tension and fading confidence in the entire monetary union. At the same time, a strengthening euro is quickly condemned as harmful to growth. At the current juncture, the initial relief associated with the latest euro strengthening has cleared the way for a more sceptical view on the exchange rate. There is now a fear that the recently endangered euro could itself become a danger for the Eurozone.

Here is the link to my latest ING research note: ING: From endangered to danger?

Eurozone sentiment improves in January - danke schoen Deutschland

Still no positive contagion in real economy. At first glance, today’s economic sentiment indicators add to evidence that the worst of the euro crisis might be over. The European Commission’s economic sentiment index increased for the third consecutive month and stood at 89.2 in January, its highest level since June 2012. The increase was mainly driven by improvements in consumer confidence, manufacturing and the construction sector.

The headline numbers are encouraging, a closer look at the details, however, reveals an inconvenient truth. The improvement of economic sentiment was mainly driven by Germany (+2.5 on the index). In fact, excluding Germany from the Eurozone would have yielded an unchanged confidence index. Even worse, confidence in many peripheral countries experienced a set-back and dropped in Greece (-1.1) and Portugal (-1.9). Only Spain saw a minor improvement (+ 0.5). Moreover, France also moved further away from the Eurozone’s core, seeing economic sentiment dropping by 0.3. So much for Eurozone rebalancing.

Employment expectations in the Eurozone improved somewhat in January, reaching the highest level since July 2012. Looking at the crisis-hit Eurozone countries, however, shows that the employment outlook worsened in Greece and Spain and only improved in Portugal. The social impact from record high unemployment rates combined with the weak employment outlook could become the next big challenge for the euro saviours.

Earlier today, the ECB released its latest Bank Lending Survey. The results illustrate that the Eurozone is still in the middle of a double credit whammy. Net tightening of credit standards by Eurozone banks for loans to enterprises was broadly stable in 4Q and even increased for loans to household. At the same time, loan demand is still dropping. Eurozone banks continued to report a pronounced net decline in demand for loans to enterprises in 4Q. As regards the demand for loans to households, the net decline abated in 4Q but remained a decline.

Thanks to Mario Draghi’s confidence trick, the Eurozone has recently gone through a period of calm. Financial markets are cheerful, private capital is returning to Eurozone peripheral countries and structural reforms seem to bear some fruits. This is what Mario Draghi called “positive contagion”. Today’s data, however, illustrate that this positive contagion has not (yet) reached the real economy. It is a painful reminder that stabilisation does not automatically lead to a recovery. The road towards restoring growth in the Eurozone still seems to be a long one.

Merkel's thought leadership takeover?

It seems as if German chancellor Merkel wants to capitalise the current lack of a Eurozone thought leadership, trying to actively steer the integration debate.

At Yesterday, German chancellor Merkel spoke before the European Parliament, calling for far-reaching reforms of the monetary union. What she said was not new but it was another advance, trying to steer the European debate. According to Merkel, the Eurozone 2.0 required more common policies in the fields of financial sector regulation, fiscal and economic policies. The monetary union needs more coordination, not only of fiscal policies but also of other policies. Merkel mentioned a further harmonization of labour market and tax policies as further areas of closer coordination. To reach this goal, the Merkel again proposed a king of two-pillar strategy of stick-and-carrot. The stick would be a further loss of national sovereignty with far-reaching powers and authorities for the European Commission. Merkel even mentioned the possibility that the European Commission could directly intervene in national budgets. The carrot could be the so-called fiscal capacity, a Eurozone fund, which should reward successful structural reforms. The ultimate carrot of real financial burden sharing like for example Eurobonds, however, was not (yet) part of the official German strategy.

While the rest of the Eurozone’s government leaders have their hands full with enormous domestic tasks and challenges, the German government is slowly but surely filling the power vacuum as opinion leader in the euro crisis. Obviously, it would still take a couple for years before the German ideas and proposals could eventually be implemented. However, it looks as they are seriously trying to push the Eurozone into the German direction. Given the current (im-)balance of political forces in the Eurozone, Merkel’s chances of success look currently better than ever before.

A good old friend

At least there is one reliable source of growth. German exports continued their recent upward trend in December, increasing by 3.0% MoM, from 1.1% MoM in November. At the same time, imports increased by 4.5% MoM, after a 6.2% decrease in November. As a consequence, the trade surplus narrowed to 13.5 billion euro, from 17.2 billion euro in November. Since March last year, German exports have increased by more than 10%.

All recently released data indicate that the recovery has slowed down in the fourth quarter. The first estimate will be released on Friday and is likely to show only a moderate growth. However, only at first glance would this mean that the recovery has ended before it really got started. At second glance, the picture looks much better. The inventory cycle is still turning and should lead to a significant growth impulse in the coming quarters. Moreover, stock building in China is still continuing and the upshot of public finance problems in the Eurozone is that no one talks about export-hindering euro strength anymore. In nominal effective terms, the euro exchange rate has lost more than 3% since the beginning of the year and is now back at its level of February 2009.

Today’s numbers highlight once again that the German economy can almost always rely on a helping hand from the export sector. The road might be bumpy but it is the road to recovery and not a dead-end street.

Mehr Schein als Sein

Die Europäer in Brüssel sehen Europa gerne als echte Weltmacht. Die Klimaverhandlungen in Kopenhagen haben jedoch schmerzhaft gezeigt, dass die echten Entscheidungen ohne Europa getroffen werden. Ein starkes Europa ist immer noch mehr Schein als Sein. Das gilt nicht nur auf der politischen Bühne, sondern auch auf der wirtschaftlichen. Der starke Euro hat in den letzten Jahren zwar den Europäischen Exporteuren das Leben schwer gemacht, in Brüssel jedoch für ein neues Selbstwertgefühl gesorgt. Jetzt droht dem Euro das gleiche Schicksal wie der Politik: eine Rückkehr auf den Boden der Tatsachen.

Bis Ende letzten Jahres gingen Risikofreude der Anleger und Wechselkurse Hand in Hand. Die Nullzinspolitik der amerikanischen Fed machten Anlagen in Europa und Schwellenländern interessanter. Das Ende des US Dollars als internationale Leitwährung schien eingeläutet. Im gerade angebrochenen Jahr sollten Anleger jedoch vorsichtig sein mit dieser neuen Faustregel. Was Wechselkursentwicklungen betrifft ist Risikoappetit Schnee von gestern – 2010 wird das Jahr der Zinsdifferenzen.

Die Abgesänge auf die amerikanische Wirtschaft sind erst einmal verklungen. Der Arbeitsmarkt scheint das Schlimmste hinter sich zu haben und auch der geplagte Immobilienmarkt stabilisiert sich. Die amerikanische Wirtschaft wird dieses Jahr zum ersten Mal seit 2005 wieder stärker wachsen als die europäische. Zeit für die Fed, sich langsam mit Zinserhöhungen zu beschäftigen. Das tut die EZB auch, aber Zinserhöhungen werden in Amerika eher und aggressiver kommen als in Europa und den Dollar bis zum Ende des Jahres beflügeln.

Doch der Schein trügt. 2010 wird nur ein zinsbeflügeltes Intermezzo. Asiatische Länder, allen voran China, warten nur auf den richtigen Augenblick, Teile ihrer Dollarreserven zu verkaufen. Der Amerikanische Exportsektor kann sich auch Besseres vorstellen als einen geschäftsschädigenden starken Dollar, und die amerikanischen Konsumenten müssen sich auch noch an ein Leben ohne Kauf auf Pump gewöhnen. Der Euro wird spätestens 2011 wieder glänzen.

Aus: Euro am Sonntag, 10.1.2010, Letter from...Brussels