Thursday, February 28, 2013
German labour market remains solid
German labour market remains solid as a rock, defying the winter weather and the euro crisis. German unemployment increased by a non-seasonally adjusted 18,400 in February, bringing the number of unemployed to 3.156 million. Despite the harsh winter weather, the February increase was somewhat smaller than in previous years. In seasonally-adjusted terms, unemployment even dropped, keeping the seasonally-adjusted unemployment rate at last month’s 6.9%.
For the labour market, the tailwind stemming from a favourable business cycle has ebbed away. It seems as if the German labour market has reached its natural rate of unemployment last year. A further additional drop in unemployment would require additional structural reforms, eg a further reduction of the mismatch between vacancies and job-seekers’ qualifications, or substantially higher growth. As none of these two factors are likely to gather pace this year, the German labour market should continue treading water in the period ahead. Nevertheless, at the current juncture and in its current shape, even a stagnating labour market will be growth supportive.
The overall trend of the German labour market still masks interesting diverging trends across the sectors. While unemployment has increased in the export-oriented manufacturing sector, companies operating in domestic sectors, as eg in the construction sector and health services, still have a strong demand for labour. This trend is also reflected in the latest European Commission survey, which showed that recruitment plans remain cautious in the manufacturing sector but very favourable in the service sector. This new divergence could have an impact on the new round of wage negotiations. Several unions already announced their bids for this year’s negotiations and more will follow. Demands range between 3.5% and 6%. Obviously, these demands are unlikely to be fully met but with our expected inflation rate of 2% for this year, real wages look set to increase for the second year in a row.
The German job miracle has become less magic. However, even without magic and enchantment, the labour market should remain growth-supportive.
Friday, February 22, 2013
Watchdog finally unchained?
You have probably heard it often enough: the worst of the crisis is over. Indeed, financial markets have excessively celebrated Mario Draghi’s “whatever it takes”, structural reforms in peripheral countries are starting to bear some fruit and confidence indicators have improved somewhat. However, as with every severe marital quarrel, avoiding a break-up is not an automatic return to normal. It often needs long-term counselling and effective action to avoid repeating the mistakes of the past. Returning to the euro crisis, the counselling has led to another make-over of the fiscal framework, giving the European Commission additional powers and an ever more decisive role. The former paper tiger has become an unchained watchdog. However, we think it will use its new powers carefully, balancing between austerity pragmatism and restoring credibility of the fiscal framework. A shift away from nominal results to structural adjustment could be the new fudge.
Here's a longer note on the Eurozone's fiscal framework and the role of the European Commission.
http://bit.ly/YhFMBh
Here's a longer note on the Eurozone's fiscal framework and the role of the European Commission.
http://bit.ly/YhFMBh
Ifo signals German economy returns to league of its own
The wow effect. Germany’s most prominent leading indicator, the Ifo index, increased in February for the fourth month in a row and stands now at 107.4; its highest level since April last year. Both, the current assessment and the expectation component improved significantly. The headline index saw its strongest monthly increase since July 2010, the expectation component the strongest monthly increase since July 2009. Nothing seems to be able to stop German business optimism.
Earlier today, the contraction of the German economy in the last quarter of 2012 was confirmed. As expected, exports turned out to be the main drag on the economy. Stable private and public consumption illustrated the sound fundamentals of the economy.
Looking ahead, evidence is increasing that the contraction in the fourth quarter has been a one-off which never felt anything near a recession. With the improved outlook for the US and China, prospects for German exporters are also clearing off. The inventory build-up seems to have come to an end and order books have started to thicken again. In fact, it looks as if the gradual decoupling from the rest of the Eurozone is continuing. While most other Eurozone countries remain stuck in recessionary territory, preoccupied with structural reforms and austerity, German businesses are surfing on the wave of optimism. German optimism could become reality as the main drivers behind the fundamental decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, a balanced budget, labour market strength and favourable financing conditions.
A day like today once again illustrates the divergences across the Eurozone. While most other Eurozone countries are moaning under the burdens of reforms, austerity and recession, the German economy continues playing in a league of its own.
Earlier today, the contraction of the German economy in the last quarter of 2012 was confirmed. As expected, exports turned out to be the main drag on the economy. Stable private and public consumption illustrated the sound fundamentals of the economy.
Looking ahead, evidence is increasing that the contraction in the fourth quarter has been a one-off which never felt anything near a recession. With the improved outlook for the US and China, prospects for German exporters are also clearing off. The inventory build-up seems to have come to an end and order books have started to thicken again. In fact, it looks as if the gradual decoupling from the rest of the Eurozone is continuing. While most other Eurozone countries remain stuck in recessionary territory, preoccupied with structural reforms and austerity, German businesses are surfing on the wave of optimism. German optimism could become reality as the main drivers behind the fundamental decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, a balanced budget, labour market strength and favourable financing conditions.
A day like today once again illustrates the divergences across the Eurozone. While most other Eurozone countries are moaning under the burdens of reforms, austerity and recession, the German economy continues playing in a league of its own.
Tuesday, February 19, 2013
ZEW climbs to highest level since April 2010
Full speed ahead? The German ZEW index increased in February to the highest level since April 2010. The ZEW index which measures investors’ confidence now stands at 48.2, from 31.5 in January; the third consecutive monthly increase. At the same time, however, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 5.2, from 7.1 in January, its lowest level since June 2010. The positive contagion in financial markets continues to comfort financial analysts.
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 increase of Germany’s leading confidence indicator, the Ifo index, at the end of this week.
Without any single hard data for the year 2013, the prospects for the German economy look promising. Even if the real economy only lives up to half the expectations recently created by soft indicators, any fears of a technical recession should turn out to have been unjustified.
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 increase of Germany’s leading confidence indicator, the Ifo index, at the end of this week.
Without any single hard data for the year 2013, the prospects for the German economy look promising. Even if the real economy only lives up to half the expectations recently created by soft indicators, any fears of a technical recession should turn out to have been unjustified.
Monday, February 18, 2013
Fiscal storm ahead?
The European Commission’s latest economic forecasts will be presented on Friday. They should be the prelude to the first test case of the Eurozone’s ever-stricter fiscal rules.
Normally, releases of the European Commission’s economic forecasts pass by almost unnoticed and often lack financial markets’ interest. This time around, it should be different. When the European Commission presents its economic forecasts on Friday, market participants are well advised to have a closer look and pay particular attention to the fiscal forecasts. For the first time, the Commission will present a fully-fledged forecast in February. The forecasts for government budgets will form the basis for the next steps in the Eurozone’s fiscal surveillance.
Of course, fiscal surveillance in the Eurozone has become a rather complex mixture of prevention, correction, early warnings and ultimately even financial sanctions. The most straightforward surveillance is still the so-called Excessive Deficit Procedure (EDP). Enshrined in the Treaty, the EDP is the sanctionary or dissuasive arm of the Eurozone’s fiscal surveillance framework, stipulating a trajectory to correct excessive fiscal deficits and bring fiscal balances back in line with the threshold of 3% of GDP.
Currently, 12 out of 17 Eurozone countries are in an EDP. While the four bailed out countries (GR, SP, IR and PT) still have some time to bring their fiscal deficits back to 3% of GDP, the other eight countries had received 2012 or 2013 as a deadline to, as it is called, “correct the excessive deficit” (see Figure 1). For the countries with the 2012 deadline (IT, CY and BE), it will be thumbs up or thumbs down already before the summer. Normally, the Ecofin should decide on next steps in May. The European Council in June could take final decisions. For the countries with the 2013 deadline (FR, NL, AT, SL and SK), the Commission forecasts should send a clear signal of whether the countries are on the right track for fiscal consolidation or whether more austerity measures have to be taken.
The European Commission’s forecasts of last November suggest that the coming months could be the first big test case for the (once again) overhauled fiscal rules of the Eurozone. Back in November, only Belgium, Italy, Austria and the Netherlands were on track to meet their respective deadlines. Given the worse-than-expected growth environment in 2012 but also prospects for 2013, new fiscal slippages could be expected.
So what if a country fails or looks set to meet the required deadline? Eventually, not sticking to the official deadline could lead to a financial fine. Before this happens, however, the country in question will be given a last chance to take additional austerity measures. Or, following good European traditions, the deadline could be extended.
The option of an extended deadline is seen in the official fiscal rules. To qualify for an extended deadline, two criteria have to be fulfilled: 1) the country has to have implemented the required structural adjustment; and 2) fiscal slippages must have been caused by “unexpected adverse economic events”. An exact definition of these “unexpected adverse economic events” does not exist. In recent years, the severe 2009 recession led to an extension of EDP deadlines.
Given the above, at least three Eurozone countries will anxiously study the new European Commission forecasts on Friday. Cyprus and Slovenia seem to be off track in terms of both meeting the required deadline and fulfilling the structural adjustment. Clear evidence that Cyprus probably needs a fully-fledged bailout, rather than a bailout light only for its financial sector. France is a borderline case and could become the big challenge for the Eurozone’s fiscal framework. Last week, a French government official announced that the deficit target for this year will not be reached. This means that the deadline to bring the deficit back to 3% will be missed and, at the same time, the structural fiscal adjustment so far has anything but outperformed the requirements. Here, the deadline could be extended although sluggish growth, mainly due to home-made structural weaknesses, would obviously not be the most elegant way to define “unexpected adverse economic events”. The same holds for the fact that the economy falls clearly short of returning to the government’s assumed trend growth of 2.5% from 2011 onwards.
For the European Commission and eventually all Eurozone governments the question will be “sink or swim”. Strict application of the rules to regain credibility or softer (and for some smarter) application not to overburden the battered economies with additional austerity? Obviously, there are pros and cons for both options. An interesting side track will be the discussion on the methodology of structural adjustment. The structural adjustment is measured as the change of the cyclically-adjusted fiscal balance; a methodology that recently received some criticism in the context of the fiscal multiplier discussion.
The way forward will be a walk on a tightrope. The decisions of the coming months will not only have an impact on near-term economic prospects but will also more fundamentally pave the way for fiscal surveillance in the Eurozone.
Normally, releases of the European Commission’s economic forecasts pass by almost unnoticed and often lack financial markets’ interest. This time around, it should be different. When the European Commission presents its economic forecasts on Friday, market participants are well advised to have a closer look and pay particular attention to the fiscal forecasts. For the first time, the Commission will present a fully-fledged forecast in February. The forecasts for government budgets will form the basis for the next steps in the Eurozone’s fiscal surveillance.
Of course, fiscal surveillance in the Eurozone has become a rather complex mixture of prevention, correction, early warnings and ultimately even financial sanctions. The most straightforward surveillance is still the so-called Excessive Deficit Procedure (EDP). Enshrined in the Treaty, the EDP is the sanctionary or dissuasive arm of the Eurozone’s fiscal surveillance framework, stipulating a trajectory to correct excessive fiscal deficits and bring fiscal balances back in line with the threshold of 3% of GDP.
Currently, 12 out of 17 Eurozone countries are in an EDP. While the four bailed out countries (GR, SP, IR and PT) still have some time to bring their fiscal deficits back to 3% of GDP, the other eight countries had received 2012 or 2013 as a deadline to, as it is called, “correct the excessive deficit” (see Figure 1). For the countries with the 2012 deadline (IT, CY and BE), it will be thumbs up or thumbs down already before the summer. Normally, the Ecofin should decide on next steps in May. The European Council in June could take final decisions. For the countries with the 2013 deadline (FR, NL, AT, SL and SK), the Commission forecasts should send a clear signal of whether the countries are on the right track for fiscal consolidation or whether more austerity measures have to be taken.
The European Commission’s forecasts of last November suggest that the coming months could be the first big test case for the (once again) overhauled fiscal rules of the Eurozone. Back in November, only Belgium, Italy, Austria and the Netherlands were on track to meet their respective deadlines. Given the worse-than-expected growth environment in 2012 but also prospects for 2013, new fiscal slippages could be expected.
So what if a country fails or looks set to meet the required deadline? Eventually, not sticking to the official deadline could lead to a financial fine. Before this happens, however, the country in question will be given a last chance to take additional austerity measures. Or, following good European traditions, the deadline could be extended.
The option of an extended deadline is seen in the official fiscal rules. To qualify for an extended deadline, two criteria have to be fulfilled: 1) the country has to have implemented the required structural adjustment; and 2) fiscal slippages must have been caused by “unexpected adverse economic events”. An exact definition of these “unexpected adverse economic events” does not exist. In recent years, the severe 2009 recession led to an extension of EDP deadlines.
Given the above, at least three Eurozone countries will anxiously study the new European Commission forecasts on Friday. Cyprus and Slovenia seem to be off track in terms of both meeting the required deadline and fulfilling the structural adjustment. Clear evidence that Cyprus probably needs a fully-fledged bailout, rather than a bailout light only for its financial sector. France is a borderline case and could become the big challenge for the Eurozone’s fiscal framework. Last week, a French government official announced that the deficit target for this year will not be reached. This means that the deadline to bring the deficit back to 3% will be missed and, at the same time, the structural fiscal adjustment so far has anything but outperformed the requirements. Here, the deadline could be extended although sluggish growth, mainly due to home-made structural weaknesses, would obviously not be the most elegant way to define “unexpected adverse economic events”. The same holds for the fact that the economy falls clearly short of returning to the government’s assumed trend growth of 2.5% from 2011 onwards.
For the European Commission and eventually all Eurozone governments the question will be “sink or swim”. Strict application of the rules to regain credibility or softer (and for some smarter) application not to overburden the battered economies with additional austerity? Obviously, there are pros and cons for both options. An interesting side track will be the discussion on the methodology of structural adjustment. The structural adjustment is measured as the change of the cyclically-adjusted fiscal balance; a methodology that recently received some criticism in the context of the fiscal multiplier discussion.
The way forward will be a walk on a tightrope. The decisions of the coming months will not only have an impact on near-term economic prospects but will also more fundamentally pave the way for fiscal surveillance in the Eurozone.
Letter from Brussels - Scheinzwerg
In Brüssel ist Jim Knopf kein Unbekannter. Ganz nach dem Vorbild des Scheinriesen Herrn Tur Tur, der immer größer wird je weiter man sich von ihm entfernt, hat man ein neues Phänomen entdeckt: den Scheinzwerg. Die Probleme des kleinen Inselstaates Zypern werden nämlich größer, je näher man sich an sie heran wagt.
Letztendlich wird es keine Zweifel geben: der Zypern wird bald unter den Rettungsschirm schlüpfen. Eine finanzielle Rettung Zyperns muss vor allem dem angeschlagenen Nachbarn Griechenland helfen. Ein Bankrott Zyperns oder seiner Banken würde griechische Banken weiter in den Abgrund ziehen.
So einfach ist die Rettung jedoch nicht. Im Augenblick versuchen europäische Politiker noch allen weis zu machen, dass eine Beteiligung des Privatsektors nicht zur Diskussion steht. Das Versprechen, dass der griechische Schuldenschnitt einmalig war, soll aus Angst vor neuer Ansteckungsgefahr nicht gebrochen werden. Es wird schwer, dieses Versprechen nicht zu brechen.
Mit dem im Raum stehenden Rettungspaket von 17 Milliarden Euro schnellt die zyprische Staatsschuld auf 180% vom BIP. Den griechischen Schuldenschnitt gab es bei einer Schuldenquote von 170%. Politisch wird es auch nur schwer zu verkaufen sein, dass der Finanzsektor Zyperns, der den Verdacht der Geldwäsche noch nicht widerlegen konnte, nur mit Steuergeldern gerettet wird. Letztendlich würde eine zyprische Rettung ohne Gläubigerbeteiligung auch gegen den aktuellen europäischen Trend gehen: In den Niederlanden gab es gerade eine Bankenrettung mit Privatbeteiligung und auf europäischer Ebene wird schon lange über einen Bankenabwicklungsmechanismus gesprochen, bei dem Banken, Aktionäre und Gläubiger erst selber zur Kasse gebeten werden sollen. Schwer vorstellbar, dass genau bei Zypern jetzt eine Ausnahme gemacht wird.
Herr Tur Tur bei Jim Knopf wird am Ende ein lebendiger Leuchtturm für Lummerland. Zypern könnte das Zeichen setzen, dass europäische Rettungsaktionen nicht nur mit öffentlichem Geld finanziert werden.
Dieser Artikel erschien in einer leicht veraenderten Version in der letzten "Euro am Sonntag".
Letztendlich wird es keine Zweifel geben: der Zypern wird bald unter den Rettungsschirm schlüpfen. Eine finanzielle Rettung Zyperns muss vor allem dem angeschlagenen Nachbarn Griechenland helfen. Ein Bankrott Zyperns oder seiner Banken würde griechische Banken weiter in den Abgrund ziehen.
So einfach ist die Rettung jedoch nicht. Im Augenblick versuchen europäische Politiker noch allen weis zu machen, dass eine Beteiligung des Privatsektors nicht zur Diskussion steht. Das Versprechen, dass der griechische Schuldenschnitt einmalig war, soll aus Angst vor neuer Ansteckungsgefahr nicht gebrochen werden. Es wird schwer, dieses Versprechen nicht zu brechen.
Mit dem im Raum stehenden Rettungspaket von 17 Milliarden Euro schnellt die zyprische Staatsschuld auf 180% vom BIP. Den griechischen Schuldenschnitt gab es bei einer Schuldenquote von 170%. Politisch wird es auch nur schwer zu verkaufen sein, dass der Finanzsektor Zyperns, der den Verdacht der Geldwäsche noch nicht widerlegen konnte, nur mit Steuergeldern gerettet wird. Letztendlich würde eine zyprische Rettung ohne Gläubigerbeteiligung auch gegen den aktuellen europäischen Trend gehen: In den Niederlanden gab es gerade eine Bankenrettung mit Privatbeteiligung und auf europäischer Ebene wird schon lange über einen Bankenabwicklungsmechanismus gesprochen, bei dem Banken, Aktionäre und Gläubiger erst selber zur Kasse gebeten werden sollen. Schwer vorstellbar, dass genau bei Zypern jetzt eine Ausnahme gemacht wird.
Herr Tur Tur bei Jim Knopf wird am Ende ein lebendiger Leuchtturm für Lummerland. Zypern könnte das Zeichen setzen, dass europäische Rettungsaktionen nicht nur mit öffentlichem Geld finanziert werden.
Dieser Artikel erschien in einer leicht veraenderten Version in der letzten "Euro am Sonntag".
Thursday, February 14, 2013
German GDP drops 0.6% QoQ in 4Q 12
Contraction confirmed. As expected, the German statistical agency just confirmed the biggest contraction of the German economy since Q1 2009. The economy contracted by 0.6% QoQ in the last quarter of 2012, slightly more than expected. Detailed components will only be released next week but according to the press statement of the statistical agency, construction, investment and, above all, exports dropped in the fourth quarter, while private and public consumption increased.
With increased uncertainty stemming from the euro crisis and the global economic cooling in the second half of the year, the German economy has finally lost its invincibility. Looking ahead, however, there is increasing evidence that the economy should pick up speed again very quickly. Confidence indicators have improved over the last three months and this new optimism is not only wishful thinking. The increase of new orders is again feeding the economy’s industrial growth engine. Moreover, the industrial safety net of filling order books and inventory reductions has improved, boding well for industrial production in the months ahead. Finally, if the lower-risk environment continues, record-low interest rates should support an investment rebound, contributing to growth in 2013.
All in all, even if today’s numbers are disappointing, they are no reason to start singing the blues on the German economy. The contraction should be a temporary gaffe rather than a new worrying reality.
With increased uncertainty stemming from the euro crisis and the global economic cooling in the second half of the year, the German economy has finally lost its invincibility. Looking ahead, however, there is increasing evidence that the economy should pick up speed again very quickly. Confidence indicators have improved over the last three months and this new optimism is not only wishful thinking. The increase of new orders is again feeding the economy’s industrial growth engine. Moreover, the industrial safety net of filling order books and inventory reductions has improved, boding well for industrial production in the months ahead. Finally, if the lower-risk environment continues, record-low interest rates should support an investment rebound, contributing to growth in 2013.
All in all, even if today’s numbers are disappointing, they are no reason to start singing the blues on the German economy. The contraction should be a temporary gaffe rather than a new worrying reality.
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