Binge shopping in Germany?

Binge shopping? German consumers have become real optimists and any worries about the current Greek crisis were clearly outweighed by low inflation and the strong labour market. German consumer confidence continued its recent upward trend. The GfK index increased to 10.0, from 9.7 last month, and is now at its highest level since October 2001. Interestingly, the willingness to buy increased to the highest level since November 2006. Over the last months, Germans have really started to spend it. Retail sales have seen an unprecedented uplift, increasing by a total of almost 6% since September last year; by far the best 4-months-performance ever. This is not a debt-driven shopping palooza but rather an indulgence-and-there-is-no-alternative consumption boom. On the back of the strong labour market, wage increases, low inflation and low interest rates, private consumption has become an important growth driver. Looking ahead, the factors behind consumption growth last year should remain intact this year. Given that Germans’ willingness to save has dropped to all-time-low, it seems that the ECB’s low interest rate has also reached German consumers. Only time can tell whether latest signs of de-saving are only a temporary phenomenon driven by low interest rates or a more structural and cultural shift. Fact is that households’ savings rate has dropped to the lowest level since 2001. All in all, even if we don’t expect excessive binge shopping, today’s consumer confidence indicator confirms our view that private consumption should be an even more important growth driver this year.

German Ifo continues upward trend in March

The gradual improvement continues. Germany's most prominent leading indicator, the Ifo index, just increased for the fifth month in a row to 107.9 in March, from 106.8 in February, indicating that the economy has gained further momentum. While the current assessment component improved to 112.0, from 111.3, expectations increased to 103.9, from 102.5 in February. Optimism has returned to the German economy. Strong growth in the fourth quarter of 2014, combined with low energy prices and the weak euro exchange rate have boosted confidence in the economy. However, before getting overly enthusiastic, one should keep in mind that hard data at the beginning of the year were less impressive than soft data. Moreover, today’s Ifo index is still only slightly above its average of the last five years. Looking ahead, the role of domestic demand as an important growth driver of the German economy should increase again this year. The strong labour market, wage increases, low inflation and de-saving on the back of record low interest rates should lead to strong consumption. In addition, exports should also pick up further as a result of the lower euro. The only unknown for stronger domestic demand is private investment. Here, favourable financing conditions have not yet led to a significant increase. The main reasons for still muted investment are probably the lack of strong incentives and continued uncertainty, the latter stemming the ongoing Greek crisis and the Russian-Ukrainian conflict. Consequently, the main risks to the positive German outlook come from the outside world. All in all, it looks as if the ECB and QE enable the German economy to extend its golden cycle without any new reforms. In fact, the economy is like a sailboat which only needs to hoist the sail and lean back to relax. Strong tailwinds could bring the strongest economic performance since 2011.

Good news show from Nikosia

As expected, the ECB today kept interest rates unchanged at its meeting in Cyprus. While Draghi was surprisingly upbeat on the economic outlook and the impact of QE, he kept a stringent stance on Greece. The ECB’s macro-economic assessment sounded as if the ECB is a bit inebriated by its own QE announcement. It was the most positive and optimistic assessment in a long while. Words like “broadening” and “strengthening” had not been used in combination with the Eurozone recovery for quite a while. In more detail, the ECB emphasized a “significant number of positive effects” from latest monetary policy decisions, as for example improved financial market conditions, financing conditions and lower borrowing costs. Moreover, the ECB stressed the fact that confidence indicators had also improved recently. Finally, lower energy prices and the weaker euro exchange rate should also contribute to the Eurozone recovery. This more positive take on the Eurozone economy was also reflected in the latest ECB staff projections which foresee GDP growth coming in at 1.5% in 2015 (from 1.0% at the December projections), 1.9% in 2016 (from 1.5) and 2.1% in 2017. It was for the first time since 2007 that the ECB projects a single year with GDP growth above 2%. With regards to inflation, ECB staff revised downwards its projections for this year due to lower actual inflation rates. More generally speaking, the ECB expects a very gradual increase of inflation over the coming years. In detail, ECB staff projections now foresee headline inflation to come in at 0% this year (from 0.7%), 1.5% in 2016 (from 1.3%) and 1.8% in 2017. To be fair, Draghi said that the ECB’s staff projections were conditional of a full implementation of all announced monetary policy measures. Don’t even dare thinking about tapering before QE has actually started. As for QE, Draghi revealed some interesting details. The ECB will start the actual government bond purchases next week Monday. Draghi repeated the January wording that the ECB will buy 60bn euro per month until the end of September 2016 and, in any case, until the ECB sees “a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2%”. The latter gives the ECB a lot discretionary power to alter the programme if need be. Draghi explicitly said that the ECB would buy government bonds with negative yields only if yield are not lower than the deposit rate. This would currently only exclude 2 year German government bonds. During the press conference, there were also several questions on Greece, QE and ELA. The bottom line of Draghi’s answers was that the ECB would only buy government bonds rated lower than investment grade if the countries are in a bailout programme and the programme is not in a review period. Moreover, the ECB could not buy more than 33% of a single issuer. For Greece, all of this means that the ECB could at the earliest start purchasing Greek bonds only in June or July, if and when Greece has reimbursed the bond expiring in June which the ECB had (partly) purchased under the old SMP programme. Finally, Draghi also said that ELA for Greek banks had been extended by 500 million euro. The ECB’s stance on Greece has definitely not softened. Overall, the ECB’s macro-economic assessment was much more upbeat than in previous months. It looks as if at least the ECB is a strong believer in the positive economic impact of its own QE programme. Admittedly, it would have been difficult for the ECB not to be positive but today’s euphoria was in our view almost a bit overdone. The warning that the more positive outlook should not lead to complacency and that now governments had to “contribute decisively” to the recovery was a standard part of the ECB’s introductory statement. However, it remains to be seen how credible this call on governments will be if at the same time the ECB will make an enormous advance payment in the form of its QE. To some extent this has some similarities with parents cleaning up their children's room and then asking them to do something as well. A strategy that might not make it into bestselling parenting guidebooks.

Eurozone - Bluff or u-turn?

The next act of the Greek crisis has all the elements for a new blockbuster: conciliation, refusal, only the happy end is still far from certain. What a day. Yesterday, events in the Eurozone unfolded at a breakneck pace. First, the Greek government submitted an official request to extend its bailout by six months. More than an hour later, the German government reacted with a strict refusal. Are the Germans a party pooper? This was the first reaction to the series of events. Now that Greece finally came across and let go earlier positions regarding the bailout, what made the Germans refuse it? To understand the German refusal, one has to apply lots of semantic skills and European institutional memory. In the official Greek letter, Finance Minister Varoufakis asked for an extension of the “Master Financial Assistance Facility Agreement” (MAFA). This is only one part of the bailout programme, the laying out of the financing scheme. The so-called Memorandum of Understanding (MoU) which includes all reforms and policy requirements was not mentioned at all by Varoufakis. While some claim that accepting the MFAFA automatically includes the MoU, there is a legal escape clause stating that the MoU should be applied unless otherwise specified. In the eyes of the German government, not mentioning the MoU is another Greek provocation. Moreover, the Greek government’s letter has little concrete commitments, except for the promise to only implement fiscally-neutral new policy measures. For the rest, the letter suggests that the role of the Troika should be redefined as well as further financial agreements. As such, the letter can be interpreted as the request for a bridging facility with the only goal of renegotiating the bailout programme but little concrete commitments. In the eyes of the German government, the Greek letter could just be a Trojan horse, bringing more cumbersome discussions and fights to the Eurozone. The current dispute is only at first glance a semantic dispute. In fact, the Greek government’s letter invited the view that it is only a smart attempt to extend the loan while escaping full conditionality, trying to keep Greece and Greek banks afloat with ECB support. The positive interpretation of the Greek letter is that it is the first substantial concession of the Greek government and that a real compromise is within reach. When Eurozone finance ministers meet today for a special meeting in Brussels, the Eurozone will get its next face-off. A face-off with an open end: either the Greek government will go all the way and convince its Eurozone partners, particularly the ones where national parliaments would have to agree to an extension of the loan, that its commitment is credible, or the German government was right and yesterday’s letter was only a bluff. In the latter case, any happy end would be deferred to a distant future.

Merkel, growth, Greece and TGEFKAT

The German economy ended a volatile year on a very strong note. According to the statistical office’s first official estimate, the economy grew by 0.7 % QoQ in the final quarter of 2014. This is more than the first estimate for the annual growth number had suggested. Compared with the last quarter of 2013, the economy grew by 1.6%. Details of 4Q GDP will only be published at the end of the month but available monthly indicators and the statistical office’s statement suggest that domestic demand was the main growth driver. A clear sign that lower oil prices have found their way into consumers’ pockets. Looking ahead, the German economy looks set to continue surfing on a wave of economic well-being. With the strong labour market, wage increases, low energy prices and extremely low interest rates, consumers should continue to spend it. At the same time, the weak euro will definitely benefit German exports, letting them return as a growth engine. With a statistical overhang of 0.5%, less public holidays and the external stimulus package our current GDP growth forecast of 1.5% for 2015 looks almost pessimistic. The big unknown for 2015 remains domestic investment. While low interest rates and comfortable liquidity positions of many corporates should normally bode well for investment, uncertainty about the future of the Eurozone and continued geopolitical tensions could still dampen investment growth in 2015. While the German economy is doing what it is supposed to do (ie growing), the German government can concentrate on the conflict with Greece. After the disappointing Eurogroup meeting, hopes on a compromise had received a clear hit. However, yesterday evening at the European leaders’ meeting in Brussels, comments from German chancellor Merkel surprisingly opened the door for Greece. Merkel signaled German willingness to compromise, stressing the importance of rules and being a reliable partner in Europe. Combined with German media reports and official statements, the German government could eventually become flexible on the primary surplus target for Greece and conditions of the planned privatisiation. However, red lines the German government is not willing to cross are clearly debt forgiveness, supervision and credible commitments. This means that Greece would have to swallow some bitter pills like an extension of the current bailout programme and cooperation with the Troika. In this context, it does not surprise that German media yesterday night reported that a group of experts from the three institutions formerly known as The Troika will investigate possible overlaps between the current bailout programme and the wishlist of the new Greek government in the coming days. Whether Merkel’s comments are really a substantial change in the Eurozone’s negotiation chaos and an invitation to compromise or just a precautionary measure so that she cannot be blamed if things go completely wrong, remains to be seen. One thing is at least for sure: with Merkel’s moves, the pressure is now on Greece.

German Ifo increases in January

Good news from the perfect little world. German business confidence confirmed the decent rebound of the economy in the final quarter of the year. Germany's most prominent leading indicator, the Ifo index, just increased for the third month in a row to 106.7 in January, from 105.5 in December. While the current assessment component improved to 111.7, from 110.0, expectations increased to 102, from 101.1 in December. The rollercoaster ride of German economic data could still last for a while. The conciliatory end of the year 2014, with an estimated annual growth rate of 1.5%, could take turns with rather disappointing December data. Let’s not forget that December was yet another month, strongly affected by the timing of vacation. Luckily, the year 2015 should be less sensitive to seasonal fluctuations. Looking ahead, the German economy should enjoy a pleasant tail wind, stemming from lower energy prices, the weaker euro and rock-bottom interest rates. 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. Another boost for the German economy on the back of the ECB’s QE is one of the ironies of the Eurozone. The country with the most outspoken criticism could be the biggest beneficiary. Unless German ECB critics had in mind that a recovery on the back of an external stimulus package bears the risk of further self-complacency and a resistance to start new reforms. All in all, almost everything is put in place for another strong year of the German economy. At least in a little perfect and linear world. However, the aftermath of the Greek elections will show that perfect and linear worlds do not exist. As first German official reactions to the Greek election results this morning have shown, maybe the biggest challenge for at least German policymakers in the short run.

Mario Draghi's latest (and last) stunt?

Today, the ECB finally entered the global QE arena. Instead of keeping some aces up their sleeves, the ECB showed its entire hand: a fully-fledged QE programme with exact numbers; a €1.1 trillion quantitative easing programme to boost the economy. At least when it comes to the precision and details already presented today, the programme is bolder than expected. The arguments supporting the QE decision have been known already for a long while. Low inflation expectations, negative inflation rates, disappointing results from earlier liquidity and credit-enhancing measures and an overall bleak outlook for growth are convincing arguments for the ECB to act again. According to the ECB today, additional asset purchases are needed to counter two unfavourable developments: weaker-than-expected inflation dynamics and heightened risks of a too prolonged period of low inflation. As regards the details, the ECB announced to expand the current asset purchase programme (of ABS and covered bonds) by including government bonds. For the first time, the ECB also presented a monthly target for its purchases. As of March, the ECB will start purchasing “euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary markets”. Or in short, government bonds and supranational bonds. The ECB’s purchases will be based on the national central banks’ shares in the ECB’s capital key and the ECB plans to buy government bonds with maturities between two and 30 years. However, according to Draghi, the ECB purchases will be limited to 33% of each issuer. The statement that “some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme” means that the ECB could also by Greek bonds, at least as long Greece stays in a bailout programme. Moreover, the ECB also announced to scrap the 10 basis point premium on all six remaining TLTROs. With the amount of 60bn euro per month and the intended duration of the programme until the end of September 2016, the ECB could return the size of its balance sheet back to 3 trillion euro. Given the amount of purchased ABS and covered bonds so far, the ECB will indeed have to buy government bonds for at least around 50bn euro. Despite the hard numbers, the ECB’s commitment was at least semi open-ended as Draghi also said that QE would also continue "at least until we see a sustained adjustment to the path of inflation". According to Draghi, the issue of risk-sharing of the purchases was not essential for the effectiveness of monetary policy. Nevertheless, the ECB had to accommodate concerns of some national central banks. As a consequence, only 20% of the purchases will be risk-shared (of which the main part would be supranational bonds), the rest not. The impact of QE in the Eurozone is highly controversial. If there is at least one single inflationary tendency in the Eurozone right now, it is the amount of articles and opinions on the sense and nonsense of QE. Only time will tell which arguments were right or wrong. Obviously, the ECB hopes for an investment boom on the back of QE and even lower interest rates. However, whether ECB purchases of government bonds will really free new lending space at banks or through higher equity prices room for corporate investment is far from certain. Therefore, the safest bet for a positive QE impact seems to be through a weaker euro exchange rate. All in all, it seems that the ECB hopes for a happy end of a long fairy tale of fighting the euro crisis. It all started with measures to keep the Eurozone together and has now led to a series of activity –reviving measures (just think of negative deposit rates, TLTROs, ABS and covered bond purchases). There is no guarantee that QE will work. The ECB can prepare the grounds for more investment and activity but it cannot force consumers to spend or companies to invest. This also requires further structural reforms, fiscal support and probably a longer, positive, vision for the entire Eurozone. Against this background, today’s QE announcement is historic but it was also the ECB’s last trump card. There are no more hidden aces. We have heard it often in the past but the flowery phrase that the ball is now back in the court of Eurozone governments has never been more true than today. Even worse, the ECB will not be able to pick it up again if governments try to play it back.