Oren

Waarom hebben Nederlanders zulke grote oren? Omdat alle kinderen door hun vaders bij de Duitse grens bij de oren omhoog worden getild met de woorden: kijk daar woont de wereldkampioen voetbal...Een flauwe, maar op dit moment weer zeer populaire mop in Duitsland. Een kleine troost voor alle Nederlandse kinderen: als ze vandaag omhoog worden getild, kijken ze ook neer op een stagnerende economie. Als er niets geks gebeurt, zullen de nieuwste cijfers van Eurostat vanochtend bijna historisch zijn. Voor het eerst sinds het begin van de crisis is de economie van de eurozone harder gegroeid dan de Duitse. Vooral voor de Duitsers is dat een schok. Zijn ze, nu ze eindelijk wereldkampioen voetbal zijn, opeens de titel Europees groeikampioen kwijt? De crisis in Oekraïne en de Europese sancties voor Rusland worden vaak genoemd als oorzaak voor de recente afzwakking van de Duitse economie. Naar mijn gevoel iets te populistisch gedacht. De componenten van de Duitse groeiprestatie worden pas eind augustus bekendgemaakt, maar de beschikbare maandelijkse macrocijfers vertellen alvast een ander verhaal. De Duitse groeistop is home made. De logische correctie in de bouw na een uitzonderlijk sterk eerste kwartaal door het milde winterweer, en uitzonderlijk veel vrije brugdagen in mei in combinatie met voortdurende economische zwakte in Italië en Frankrijk zijn de redenen voor de groeiteleurstelling, niet Rusland of Oekraïne. Maar wat niet is, kan toch nog komen? Zeker, maar niet zozeer via de export, maar via andere kanalen. Een lang aanhoudende onzekerheid door geopolitieke conflicten kan Duitsland het meeste pijn doen, waardoor de broodnodige binnenlandse investeringen opnieuw worden uitgesteld. Zonder investeringen en met aanhoudende problemen in Frankrijk, Italië en China ligt het lot van de Duitse economie in de handen van een beetje consumptiegroei en export naar de VS en het VK. Dat is mooi meegenomen, maar niet genoeg voor aanzienlijke - en houdbare - groei in de komende jaren. De titel Europees groeikampioen zal Duitsland ook na de cijfers van vandaag nog zo snel niet verliezen. Niet door zijn eigen kracht, maar omdat de andere landen de kracht ontberen om Duitsland naar de kroon te steken. De groei in Nederland lijkt vanwege technische factoren uitzonderlijk hoog, de Spaanse consumptiegebaseerde groei onhoudbaar hoog, België vertoont tekens van stagnatie en Frankrijk en Italië zullen nog lange tijd worstelen met economische hervormingen. Voor Duitse beleidsmakers moeten de cijfers van vandaag echter een duidelijk signaal zijn dat het ouderwetse 'weiter so' een gevaarlijke strategie is. De tijd is echt gekomen om binnenlandse investeringen te stimuleren, zowel door de overheid als door bedrijven. Het enige risico van die strategie zijn zure kinderen met flaporen bij de buren... Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

The end of the Wirtschaftswunder?

The German economy contracted in the second quarter of 2014, for the first time since 4Q2012 (or after switching to the new national accounts: 1Q13). According to the first estimate of the statistical office, German GDP dropped by 0.2% QoQ, from a slightly downward revised increase of 0.7% QoQ in the first quarter. On the year, the economy still grew by 0.8% (working day corrected 1.2%). GDP components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that the downturn was driven by weaker net exports and investments, consumption should have been positive. The final jury is still out - at least until 11 am CET when Eurozone GDP data will be released - but the German contraction has clearly increased chances that for the first time since 2007 the Eurozone has outpaced its own growth engine. However, in our view, this does not mark a turnaround in the euro crisis but is rather a symptom of the current common race to the bottom. As long as the second and third largest Eurozone economies (France and Italy) are struggling to accelerate their reform pace, the German economy will remain the Eurozone’s main growth engine. Returning to the German economy, today’s stagnation as such is no reason to get overly concerned. Contrary to a common belief, the stagnation is not so much the result of crisis in the Ukraine and European sanctions on Russia but it’s rather homemade. Or better: homemade and Eurozone-made. The reversal of the mild-weather-effect on the construction sector, an unusual amount of holidays in May combined with ongoing problems in France and Italy should have been the main drivers of the slowdown of the German economy. While the direct impact of geopolitical risks on the German economy was limited in the second quarter, ongoing or even further worsening tensions around the world obviously don’t bode well for the second half of the year. Probably not so much through the export channel but through the return of uncertainty and fear. The latter could once again delay the urgently needed rebound of domestic investments. In the short run, the German economy can remain the Eurozone’s growth engine as the strong labour market and higher wages will support private consumption and strong growth in the US and the UK should more than offset export losses elsewhere. Without stronger domestic demand, however, such a growth model could quickly become unsustainable. All in all, today’s GDP data do not mark a turnaround in the euro crisis but for Germany they are a strong reminder that too much economic complacency can easily backfire.

German ZEW sends further signs of caution

While the World Cup trophy just landed in Berlin, the German ZEW index sends more signs of caution. The ZEW index, which measures investors’ confidence, continued its recent downward trend and decreased in June for the seventh month in a row and now 27.1, from 29.8 in June. This is the lowest level since December 2012. At the same time, the current assessment component dropped for the first time since November 2013. Latest data releases have increased concerns about a stagnation of the German economy in the second quarter. Weak industrial production, a sharp correction in the construction sector and the reversal of the positive weather effect from Q1 do not bode well for second quarter growth. This is not only bad news for Germany but for the entire Eurozone. Currently it seems as if only a return of strong net exports and/or a real consumption boom can avoid a stand-still of the economy in the second quarter. Only die-hard optimists and soccer fanatics would argue that the German victory at the soccer World Cup would be sufficient to boost private consumption. Contrary to the German Summer Fairy Tale of 2006, soccer enthusiasm is very unlikely to ignite economic confidence. Back in 2006, both the national soccer team and the economy had been written off and successes came as huge positive surprise. Combined with a very special atmosphere, a new national self-confidence and, most importantly, earlier implemented reforms, the summer of 2006 brought confidence back. Even if any macro-economic impact from soccer successes can not be supported by statistics, the magic of 2006 remains (for some it there was a correlation, for others it was only coincidence). This time around, however, even the unexplainable magical interaction between soccer and the economy should be very limited. The German economy is already doing well, consumer confidence is at a 7 ½-year high and private consumption has become an important growth driver. Despite all euphoria, the World Cup title did not come as a real surprise. It was more the final stage of continuous work and improvement over a longer time period. As much as we would like to see it, but hopes that the 2006 magic between soccer and economics can be repeated are based on wishful thinking rather than on facts. Even if cheering masses in front of the Brandenburg Gate today could give rise to different ideas, soccer is what has always been: the most wonderful pastime in the world.

Return(ed) to mainland

No more island? German industrial production dropped sharply in May, showing that earlier risk factors like slowing emerging market economies, including China, and geopolitical conflicts do have an impact on the German economy. In May, industrial production dropped by 1.8% MoM, the third consecutive drop. The last time industrial production had dropped for three months in a row was in the summer of 2012. On the year, industrial production is now still up by 1.2%. Today’s drop was driven by a decline in production in manufacturing, intermediate goods and consumer goods. Moreover, the correction in the construction sector continued (-4.9% MoM). In fact, the construction sector has by now lost all gains of the last months and is back at the level of early 2013. Today’s industrial production data adds evidence that the German industry is currently treading water. Already last week, German new orders had dropped by 1.7% MoM in May, with the sharpest drop coming from orders from outside the Eurozone. Interestingly, orders from Eurozone peers had risen for the second month in a row. To be clear, there is no reason to worry. It is more a question of level and change. The overall level of industrial activity is still strong and the safety net for the German industry, richly filled order books and low inventories, is still boding well for the coming months. However, the stimulus for a further acceleration is currently missing. In fact, latest data give the impression that the dichotomy between soft and hard data has returned to Germany. While sentiment indicators, despite recent softening, still point to solid growth, hard data is less encouraging. This dichotomy seems to be an ever-returning phenomenon of the recent German economy. Over the last quarters, the dichotomy always disappeared by itself, with statistical revisions, the weather or domestic demand eventually turning out as the missing link. This time around, it seems to need a return of strong net exports and/or a real consumption boom to avoid a stand-still of the economy in the second quarter. It could take until the third quarter before the dichotomy disappears again. Until then, today’s industrial production data show that the German island of happiness has been brought back to mainland.

EU Summit preview: Flexible, more flexible, Cameron?

They will not bend it like Beckham but when European leaders meet in Brussels this week, they are likely to present varying forms of flexibility. Flexible and rigid. These have probably been the best two key words describing the main issues of this week’s European Summit: flexibility on the Eurozone’s fiscal rules and rigidity in the power game on the nomination of the next president of the European Commission. As regards to the Eurozone’s fiscal rules, the economic stagnation in France and Italy combined with the overall rather anaemic recovery of the Eurozone has revived the debate on growth versus austerity. Irony or not, it is mainly the countries, which up to now have not really been glowing with structural reforms, that are now pushing for more fiscal wiggle room. It is also the same countries which have not built in automatic correction mechanisms in their national debt brakes under the so-called fiscal compact. The basic idea behind a new initiative of mainly social democratic governments is to give countries more time for fiscal consolidation in return for structural reforms. Moreover, it should be possible to exclude certain investments and the costs of economic reforms from nominal fiscal deficits. Many social-democratic leaders suggested that the fiscal framework should be applied in a more flexible way. In our view, these attempts of publicly watering down the Eurozone’s fiscal framework are mainly hot air and much ado about nothing. The discussions on flexible interpretations of the rules are as old as the rules themselves. The calculation of the so-called cyclically-adjusted fiscal balances has already shown how complex and open for interpretations these methodologies can be. Moreover, the Eurozone’s fiscal rules already provide more time to adjust in a period of very low or negative GDP growth. Of course, as long as it is a tit-for-tat, including structural reforms into the fiscal equation can make sense. However, this can be better done by clear-cut and strict commitments and supervision than by new methodological tricks. Moreover, let’s not forget that earlier proposals by Germany to introduce binding reform contracts between countries had been rejected by many. The basic principle for economic rules to work is that they should be easy and simple. Further complexity by adding proxies for structural reforms could make sense economically but would make the fiscal framework even more complicated. Monitoring of fiscal policies would then definitely be an art, not a science. It is obvious that flexibility will be one of the buzz words at this week’s Summit. However, the interpretation of flexibility is likely to differ. While several countries led by France and Italy seem to advocate new rules with new flexibility, Germany will stick to the flexibility under the current rules. As long as there is no agreement on any binding framework for structural reforms, it is very hard to see Germany agreeing to any changes of the fiscal framework. The other big topic that will address at least some government leaders’ flexibility is the first stage of European musical chairs: the nomination of the next president of the European Commission. Remember that government leaders have to propose a candidate who will then have to be nominated by European Parliament. Despite earlier reservations, a consensus amongst government leaders to support Jean-Claude Juncker has emerged. Only British Prime Minister Cameron and his Hungarian colleague Orban are still publicly opposing Juncker. Cameron suggested earlier that failing to get his way may increase the chances of a UK exit from the EU. This threat, however, has turned out to be an own goal. Many other European politicians showed little understanding for what some called tactical exaggeration with Cameron’s aides now seemingly resigned to defeat on Juncker’s appointment. Cameron is in a difficult position having promised a referendum on EU membership should his Conservative Party win the 2015 General Election. He has said that he would campaign in favour of remaining in the EU so long as the UK’s relationship with the EU can be renegotiated with certain EU powers “brought back” under domestic control. With Juncker in charge the perception – rightly or wrongly – is that Cameron will be less likely to win any concessions. With the Labour Party currently leading in the UK polls it is possible that the proposed referendum never takes place. However, the Labour leadership is coming under pressure from its own backbenchers to offer it given that UKIP, the anti-EU party that “won” the recent European parliamentary elections, is starting to eat into its support. However, another interesting aspect of all this is the increased polarisation in the UK population’s thinking on its relationship with the EU. UKIP’s surge in the polls has been attracting headlines, but we also see that a greater proportion (and rising) of the UK's population are in favour of staying in the EU. However, it isn’t a majority being led by positive sentiment to Europe – it is more the fear factor of what might happen should the UK leave with people worried about jobs and growth. If there is a form of negotiation that brings some powers back to the UK then approval to stay in the EU rises to 57% according to a recent YouGov poll. However, if no EU concessions are won by the UK government, which would lead to a widespread press revolt and could quickly lead to a reversal in the polls, there is a high probability that the UK leaves the EU in 2016/17. If this occurs, the assumption is that the UK will quickly be allowed into the European Free Trade Association (with Norway, Switzerland, Iceland and Liechtenstein), which basically would give the UK population what it wants – access to the single market without the political ties. It would also allow Europe to press on with greater integration without having to continually make amendments to appease the British. That said, there may be some concern within Brussels about losing the UK given it is still a large, important (and rapidly growing) economy that positively contributes to the EU’s coffers. Some may also take the view that having the UK within the EU also helps boost the EU’s own global influence – US President Obama has recently explicitly stated he wants to see the UK remain part of the EU. Furthermore, demographics do not look good for the EU and losing the UK (whose demographics are dramatically different) may intensify worries over the outlook for the EU’s population, growth and wealth over coming decades. All in all, this week’s Summit almost looks like sports event with government leaders bending and stretching their flexibility. As in real sports, overstretched flexibility can sometimes lead to unexpected injuries. This piece is a co-production together with my ING colleague and UK expert James Knightley

Ifo drops in June on back of weaker expectations

Levelling off. German business confidence dropped in June on the back of weaker expectations, illustrating that the earlier hard-headed optimism is slightly crumbling. Germany’s most prominent leading indicator, the Ifo index, just decreased to 109.7, from 110.4 in May. While the current assessment remained unchanged, the expectations component dropped to 104.8, from 106.2 in May. It is the first time since Spring 2013 that the Ifo has dropped for two months in a row. However, despite today’s drop the absolute level of the Ifo index is still high and there is clearly no reason to panic. The German economy continues to send mixed signals. On the positive side, the strong fundamentals with record high employment, low unemployment rates and extremely favourable financing conditions should ensure continued solid growth in the months ahead. Earlier today, the German statistical office released the latest wage growth data. On the year, real wages were up by 1.3% in Q1, the strongest increase since the first quarter of 2011. Interestingly, wages in the part-time sector increased the strongest (+4.6% QoQ in nominal terms) and at the same time the wage gap between the former West and East German states is narrowing further. Nominal wages in the former East increased by 3.3% QoQ and 2.4% QoQ in the former West. Overall, low inflation, wage increases and the introduction of the minimum wage bode well for private consumption this year. Despite the strong fundamentals, there are currently however also some negative factors weighing on German growth prospects. Two disappointing months in a row for industrial production suggest that the Ukrainian conflict and the Chinese slowdown could still have a stronger impact on the real economy than confidence indicator made us believe and that the Eurozone recovery is not (yet) strong enough to have a positive impact on the German industry. Moreover, France’s economic problems should not leave Germany unharmed, as France is still Germany’s most important trading partner. With the US and the UK going strong, there is no reason to start singing swan songs on German exports. However, the normally very reliable growth engine could sputter longer than expected. With the reversal of favourable one-offs from the first quarter (ie the strong growth contribution of inventories and the mild winter weather), a growth correction the second quarter is almost inevitable. However, today’s Ifo and particularly the unchanged current assessment component suggest that the slowdown will rather be of a technical than of a fundamental nature. Looking beyond short-term fluctuations, the bright prospects for domestic demand should offset any possible headwinds for exports from the far East and the nearby West.

Prinzip Hoffnung

Eigentlich geht es Mario Draghi so wie Joachim Löw. Beide setzen alles daran, um endlich den großen Sieg zu landen. Der eine will den WM-Titel, der andere den Sieg über Rezession und Deflation. Beide setzen dabei auf die Offensive und auf das Prinzip Hoffnung. Joachim Löw setzt in Brasilien auf einen einzigen Stürmer. Er hofft auf den Torinstinkt anderer Mitspieler. Im Aufgebot von Mario Draghi gegen Rezession und Deflation gibt es nicht mal einen richtigen Stürmer. Alle Maßnahmen, die letzte Woche präsentiert wurden sind nicht die große Trendwende für den Euroraum und werden auch nicht zu einem Durchstarten des Kredit- und Wirtschaftswachstums führen. Die EZB-Entscheidungen erleichtern vor allem für südeuropäische Banken nochmals die Finanzierungskosten. Die Banken können vor allem über die sogenannte TLTRO vier Jahre an extrem billiges Geld kommen. Das sollte sich bei den Konditionen für Kreditkunden schon bemerkbar machen. Es bleibt allerdings dabei, dass das schrumpfende Kreditwachstum im Euroraum nicht nur ein Angebots- sondern auch ein Nachfrageproblem ist. Große Unternehmen sind im Augenblick häufig gut mit Kapital ausgestattet oder haben einen guten Marktzugang, so dass die Kreditnachfrage eher gering ist. Es sind vor allem die südeuropäischen Mittelständler, die schwer an neue Kredit kommen. Aber auch für sie bringen die EZB-Maßnahmen nur beschränkt Besserung. Letztendlich ist bei einer Kreditvergabe nicht so sehr der Preis von EZB-Geld entscheidend, sondern viel mehr das Kreditrisiko und das verändert sich nicht. So überwiegt bei Mario Draghi deutlich das Prinzip Hoffnung. Die Hoffnung, dass die neuesten Maßnahmen vielleicht im Herbst, nach den Ergebnissen des Bankenstresstests und weiteren Strukturreformen der Regierungen, wenigstens eine kleine Anschubhilfe für Kreditwachstum und Konjunktur leisten können. Da geht es Draghi dann doch besser als Joachim Löw. Der hat nicht bis zum Herbst Zeit. Gastbeitrag in der Euro am Sonntag vom 14.6.2014