ECB meeting - It ain't over till it's over

What was expected to be a dull first meeting of the year, turned out to be an exciting ECB meeting with ECB president Mario Draghi opening the door widely for new ECB action in March. While today’s ECB meeting will again feed bold speculations about what could happen in March, the question remains whether Draghi will really be able to deliver on his promise. No action today but probably in March. This is the bottom line of today’s ECB meeting. Interest rates and all else were kept on hold. However, ECB president Draghi sounded much more concerned about the outlook for the Eurozone economy, both in terms of growth and inflation, than six weeks ago. Draghi explicitly mentioned the renewed sharp drop in oil prices, the appreciation of the euro (let’s not forget, the side-effect of Draghi’s monetary policy own goal in December) and the slowdown of emerging markets and China. In addition, Draghi mentioned the volatility in financial and commodity markets as one of the factors behind the increase in downside risks since the start of the new year. Against this background, Draghi sent several strong messages, hinting at new ECB action at the next ECB meeting. First of all, Draghi reintroduced the concept of explicit forward guidance by stating that “we expect them [key ECB interest rates] to remain at present or lower levels for an extended period of time”. In our view a clear indication that despite having announced the lower bound for interest rates several times of the last years, the ECB is again considering cutting rates. Moreover, an even stronger hint at new action was given with the sentence “it will therefore be necessary to review and possible reconsider our monetary policy stance at our next meeting in early March”. According to Draghi, “work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed”. A bit of a surprise as we thought that all possible options had already been on the table back in December. Financial markets reacted enthusiastically to Draghi’s hints and the euro exchange rate dropped immediately. The question, however, is whether and what the ECB can really deliver in March. Let’s not forget that the outcome of the December meeting looked like a compromise between doves and hawks, with the ECB eventually delivering less than markets had expected. Admittedly, at least the external environment for the Eurozone economy has worsened since the December meeting but it is unclear what the ECB can do to tackle low prices. It is hard to imagine that oil purchases will be on the agenda in March. Nevertheless, unless oil prices rebound in the coming weeks or the Eurozone economy surprises to the upside, it will again be difficult for the ECB not to deliver with new action in March. Judging from today’s comments, the most likely common denominator for both hawks and doves should be another rate cut (perhaps the idea of a two-tier deposit rate will be dug out again), possibly combined by another marginal fine-tuning of QE. All in all, today’s ECB meeting shows that Mario Draghi is always in for a good surprise. Every time it looked as if the ECB was done with its stimulus and willing to wait until all measures have had enough time to unfold their full impact, Draghi puts another log on the fire. Even if the big question remains whether Draghi can actually make markets’ new dreams come true. We might not hear Draghi sing at a press conference but for now Draghi has today again reminded everyone that “it ain’t over till it’s over”.

Solid recovery continues: German GDP grew 1.5% in 2015

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.5% in 2015 (in calendar-adjusted terms), from 1.6% in 2014. Without working day adjustments, German GDP increased by 1.7%, from 1.6%. In our view, this outcome suggests that the German economy has probably grown by some 0.4% QoQ in the fourth quarter. However, as no hard data for December has been available so far and the statistical office normal uses extrapolations and historical patterns for its fourth quarter estimates, some downward revisions cannot be excluded. Let’s not forget that the vacation period could have had a negative impact on production in December. Moreover, the statistical office also released a first estimate of Germany’s 2015 fiscal balance, providing more arguments for the critics of too weak German public investment. For the first time since 1961, the German government recorded a fiscal surplus in two consecutive years. According to the statistical office, the fiscal surplus came in at 0.5% of GDP in 2015, from 0.6% GDP in 2014. German austerity fetishists will love it. Already yesterday, the German government reported a federal fiscal surplus, which at the federal level came in at 12bn euro, instead of the initially planned 5bn euro. Previously, the government coalition had already decided to transfer any surplus from the 2015 budget entirely into the 2016 budget and not using the surplus to reduce government debt. The funds are needed to finance the costs of the refugee inflow, which the government has currently estimated at around 8bn euro. The reported surplus now offers additional financing leeway for another 7bn euro. While initially this additional fiscal room for maneuver will be used as a buffer for the refugee costs, it is obviously also grist to the mills of proponents for more public investment. Returning to GDP data, today’s numbers almost close the economic year 2015 for Germany. It was yet another year in which the German economy defied earlier swan songs and, despite many headwinds like the Greek crisis, the slowdown in emerging markets and China and increased geopolitical uncertainties, continued the recovery. The year 2015 clearly marks an important step in the rebalancing of the German economy, as private consumption turned out to be an important growth driver (contributing 1.0 percentage points to growth). Still, despite all talks about the strength of the German economy, it took until 2015 before the current expansion has finally become stronger than the last one between 2004 and 2008. Moreover, it would still need at least two more solid years of growth before the cycle between 1994 and 2000 could be equaled. Looking ahead, the two-speeded recovery, with strong consumption and services on the one hand and sluggish industrial production and exports on the other hand, should continue in 2016. As regards the domestic part of the economy, the year 2016 should bring at least a short-term consumptive stimulus from the refugee inflow and increased government consumption. At the same time, low interest rates, low inflation and high employment should further boost growth. As regards the external and industrial part of the economy, high inventories, subdued order books and weaknesses in several important export markets suggest that the German export sector could soon simply face too many headwinds to prolong the recent success story. All in all, the German economy has once again defied many external headwinds and performed another solid growth year in 2015. However, there are at least two caveats to today’s positive data: firstly, after several years of stellar performances (at least vis-à-vis the rest of the Eurozone), the German economy has returned to normality, hardly outperforming the Eurozone any longer. And secondly, without any new structural reforms and investments it is hard to see any sharp acceleration of the economy any time soon. This might be as good as it gets. Therefore, any celebrations and self-adulations should remain extremely modest.

German IP disappoints in November

This morning’s trade and production data end an almost all-German week in the Eurozone, in which macro-economic data have almost been overshadowed by the mass assaults in several bigger German cities on New Year’s Eve. While the latter could, in our view, mark a turning point in Chancellor Merkel’s handling of the refugee influx, macro data shows a two-speeded economy with strong domestic demand but rather sluggish industrial and export activity. Turning to this morning’s data, industrial production dropped in November by 0.3% MoM, adding to evidence that the Chinese and emerging market slowdowns are leaving their marks on the Eurozone’s largest economy. Moreover, these weak data add to concerns that hard data will not be able to catch up with optimistic sentiment indicators. On the year, industrial production remained unchanged. Looking at the details, bright spots were in the production of intermediate (+1.1% MoM) and consumer goods (+1.9% MoM). The construction sector benefitted from the mild weather in November and increased by 1.6% MoM. At the same time, exports increased by 0.4% MoM in November, while imports increased by 1.6% MoM. As a consequence, the trade balance narrowed to 20.6bn euro, from 22.5bn euro in October. It is not easy to find a common theme for latest German data. While consumption remains solid, on the back of the strong labour market, low inflation and low interest rates, latest developments are still far from creating exuberance. At the same time, industrial production is treading water and the current slowdown is clearly more than only the result of a vacation-driven summer lull. Looking ahead, ongoing uncertainties in China, a possible slowdown in the US economy and more generally the negative effects from record-low oil prices a quick rebound in industrial production is anything but certain. To the contrary, in our view, industrial activity should continue to remain sluggish this year. However, this does not necessarily have to be a problem. In fact, Germany seems to experience the same phenomenon as for example the US and Chinese economy: a shift from manufacturing towards services. In Germany, this has been illustrated by the Ifo index for individual sectors. While the manufacturing sector has been treading water throughout the year and weakened in recent months, the construction, retail and wholesale sectors have been driving the strong Ifo index performance in recent months. Another piece of evidence that the German economy is currently mainly driven by domestic factors. Moreover, the fact that the Ifo index for the service sector has recently climbed to its highest level since early 2005, provides further evidence for the decoupling of manufacturing and services. As regards exports, German exporters are still benefitting from the weak euro. Particularly, exports to the US have benefitted from the sharp depreciation of the euro since 2014. As a consequence, the US has been Germany’s most important trading partner this year, taking this number one spot from France. In this regard, renewed fears of a Chinese hard landing should not push the German economy into severe problems. Germany currently exports almost twice as much to the US as to China. However, as it is not only the Chinese economy which is slowing down but also other emerging markets, while at the same time Eurozone peers are still struggling to gain momentum and oil-exporting countries are suffering from low energy prices, the German export sector could soon simply face too many headwinds to prolong the recent success story. Next week, the German statistical office will continue its long tradition of releasing GDP data for the entire year without having any hard macro data for December. The latest batch of November data suggests a continuation of the recovery in the fourth quarter, albeit at a rather subdued pace. However, in the light of the latest market turmoil, continued concerns about the Chinese economy, extremely low oil prices and the absence of dynamic growth regions in the world economy, any shouts of joy about strong German growth should better remain humble. Carsten Brzeski

Encouraging data from Germany

Signs of relief. This morning’s German data provides some relief and signs of stabilization of the economy in the final quarter of the year. Particularly the surprise increase of new orders in November bodes well for the coming months. After a disappointing summer performance, German new orders increased for the second month in a row, now by 1.5% MoM in November, from 1.7% MoM in October. For the pessimists, the increase in new orders was mainly driven by domestic demand (2.6%). This shift of the German economy towards more domestic activity is probably the theme of 2015. On the year, domestic new orders are now up by more than 6%, while foreign orders are down by 0.7%. Moreover, this morning’s retail sales data supports strengthened domestic demand, showing an increase of 0.2% MoM in November. On the year, retail sales are up by 2.3%. This morning’s data has at least two important messages for and on the German economy: i) there is still hope that hard industrial data will eventually catch up with strong soft data (and the other way around); and ii) with record low inflation, record high employment, record low unemployment, strong consumption and the surge in domestic orders, the year 2015 marks the successful transition towards more balanced growth.

German exports drop in October

Weakening but not faltering. German exports dropped by 1.2% MoM in October, from +2.6% in September. As imports dropped by 3.4% MoM, the seasonally-adjusted trade balance actually improved to 20.7 bn euro, from 19.2 bn euro in September. In our view, the October drop in exports is a technical correction after strong September data, rather than a structural shift. Honestly, it is also very hard to attribute this drop to the Volkswagen emission scandal. Despite the negative contribution of net exports to German GDP growth in the third quarter, the export sector remains an important growth driver. Since 2009, net exports have contributed 0.1 pp to quarterly GDP growth; or one third of GDP growth every single quarter. This success story is not only the result of excellent quality and product specialization of German exporters, but also of a wide range of export destinations and recently the weak euro. In fact, a closer look at German export destinations shows that during the first nine months of the year, exports to China were down by 2.5% compared with last year’s period, showing the negative impact from the ongoing slowdown of the Chinese economy. At the same time, exports to Russia were slashed further, dropping another 28% on the back of sanctions. On the positive side, exports to the US surged by more than 20%, reflecting the direct impact of the euro weakening. Moreover, exports to the UK (+14%) and Eastern European countries (+9%) compensated for weaker demand from China. Turning to Eurozone export partners, exports benefitted from the recoveries in both Spain (+14%) and the Netherlands (+9%), while exports to France remained sluggish (+3%). As a consequence, the US has become Germany’s biggest trading partner and for the first time in years should end the year on the number one spot, ahead of France. To some extent, the ECB’s QE programme and more specifically the weak euro have been an extremely well-targeted stimulus package for German exports. It nicely amplified export growth in the US and the UK, thereby offsetting the negative impact from slowing China. Not surprisingly, Germany is amongst the biggest beneficiaries of the weaker euro, seeing its exports to non-Eurozone countries growing at a faster rate than the rest of the Eurozone; except for Ireland. While German exports to non-Eurozone countries grew by more than 9% during the first nine months of the year, the Eurozone’s export increased by 6%. All in all, German exports have become an extremely mixed bag, always up for surprises and full of diverging trends. Due to too many economic slowdowns and geopolitical conflicts around the world, exports will continue having troubles gaining more momentum in the period ahead. However, as long as the monetary policy divergence on both sides of the Atlantic continues and the ECB continues with QE, exports should remain supportive to growth.

Column: De sterren voor 2016

Zelfspot is niet de meest opvallende karaktertrek van Duitsers. Zelfs na ruim een jaar weer in Duitsland te zijn, is de humorcultuurschok voor mij nog altijd wennen. Economen moeten hier het liefst ‘Herr Professor’ heten en bloedserieuze analyses voorstellen. Bij voorkeur zwaar aangezet, zoals ‘de vluchtelingen zijn de ondergang van Duitsland’ of ‘Mario Draghi rooft het spaargeld van alle Duitsers’. Dat heeft gewicht. Alleen is het jammer dat aan het eind van elk jaar blijkt dat ook humorloze humor geen garantie biedt voor trefzekere voorspellingen. Daarom nu mijn alternatieve poging om met on-Duitse humor een blik op het volgende jaar te wagen. Te beginnen met Griekenland. Door de aanhoudende politieke chaos, de uitblijvende groei en de volledige uitverkoop van het land kantelt de sfeer onder de Griekse bevolking. De Grieken willen definitief uit de eurozone. Alexis Tsipras wint ruimschoots het nieuwe referendum over de grexit. Deze keer houdt hij zijn verkiezingsbelofte. De Duitse bondskanselier Wolfgang Schäuble, na de zelfstandigheid van Beieren en de val van Merkel de nieuwe regeringsleider van een CDU/Groenen-coalitie, feliciteert Tsipras met de woorden: ‘Sie sind geschafft.’ Als 'wederopbouw Zuid' stuurt Schäuble nog het oude bestuur van Volkswagen en het organisatiecomité van het WK voetbal 2006 naar Griekenland. Ze moeten er bekijken of de Olympische Spelen niet permanent in Griekenland kunnen plaatsvinden en of ze geen milieuvriendelijke investeringen voor de Grieken kunnen binnenhalen. Op hetzelfde moment blijkt dat elke Chinees aan vier iPhonekopieën echt genoeg heeft en dat de consumptie instort. Waardoor de wereldeconomie in een recessie belandt. Na zijn verkiezingsoverwinning kondigt de nieuwe Amerikaanse president Donald Trump onmiddellijk een ongekend stimuleringspakket voor 2017 aan. In elke Amerikaanse stad, al is die nog zo klein, worden wolkenkrabbers en casino’s gebouwd. Trump overweegt ook om wolkenkrabbers uit Londen naar de VS te verhuizen, vanwege de enorme leegstand in de Londense kantoorgebouwen na de brexit. In het Midden-Oosten begint een valutaoorlog. Nadat de prijs van olie onder 20 dollar per vat is gedaald, geven de olie-exporterende landen de koppeling van hun eigen munt aan de dollar op. ECB-president Mario Draghi reageert onmiddellijk met QE3 en QE4. Tegelijkertijd publiceert Commissie-voorzitter Jean-Claude Juncker alweer een nieuw investeringsplan. Dit keer voor een Europees ruimtevaartprogramma. Als er eindelijk leven op andere planeten wordt ontdekt, kan dat de eurozone, door de nieuwe exportmarkt, eindelijk de broodnodige duw uit de recessie geven. Zoals de lezer wel merkt, heeft de aloude Duitse dijenkletshumor mij ook al aangestoken en neemt deze column het glazenbolkijken voor 2016 niet serieus. Echt, wie heeft er eind 2014 de grootste crisissen van 2015 voorspeld? Maar zoals bij elke goede grap zit er misschien toch een druppel waarheid in… Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

ECB gifts disappoint after unwrapping

Santa Mario did not turn into the Grinch, the Christmas monster. However, his long-awaited early Christmas afternoon left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve. At its long-awaited meeting, the ECB today cut the deposit rate to -0.3%, from -0.2%, while leaving all other interest rates unchanged. In addition, the ECB decided to extend the deadline of QE purchases to at least until March 2017, from earlier September 2016, and to introduce other measures, broadening the scope of the monthly purchases. For the first time in a long while, ECB president Draghi underachieved and delivered less than the market consensus had expected. As a result, the euro appreciated and bond yields increased immediately after the policy decision. So what exactly did the ECB decide? Basically five things: i) a 10bp cut in the deposit rate; ii) an extension of the formal deadline of monthly QE purchases to at least March 2017, from earlier September 2016; iii) reinvestments of the principal payments of the securities purchased “for as long as necessary”; iv) the inclusion of regional and local government bonds in the monthly purchases; and v) an extension of fixed-rate tender procedure and full allotment for refinancing operation until the end of 2017. What the ECB did not announce was a bigger cut of the deposit rate, a cut in the refi rate or an increase of the monthly asset purchases. The discrepancy between what the ECB did and did not announce raises the question of the ECB’s ratio behind it and the arguments. Looking at the ECB’s macro assessment, it looks as if almost unchanged growth and inflation forecasts as well as a positive assessment of the impact from QE up to now laid the grounds for the ECB’s rather reserved policy reaction. In more detail, ECB staff now expects GDP growth to come in at 1.7% next year (unchanged) and 1.9% (from 1.8% in September) in 2017 and inflation to accelerate to 1% (from 1.1% in September) next year and 1.6% (from 1.7%) in 2017. The underlying story is still the same one of a gradual recovery with downside risks to growth and inflation. According to Mario Draghi, all ECB measures taken so far have increased the inflation forecasts by 0.5 percentage points for 2016 and 0.3 percentage points for 2017. They also boosted GDP by 1 percentage point over the period 2015 to 2017. Moreover, the ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought and that the ECB itself was surprised by the latest resilience of the Eurozone economy and the estimated positive impact of QE so far. Looking ahead, today’s decision still leaves all doors open for more monetary stimulus, in case the outlook for both growth and inflation were to worsen again. In the short term, however, it leaves the destiny of the euro exchange rate mainly in the hands of the Fed. For ECB watchers, today’s meeting was an important lesson not to take Draghi’s overachieving for granted. All in all, today’s ECB meeting, which was expected as an early Christmas present party, turned out to be a bit of a disappointment, maybe better matching the current Zeitgeist in the Eurozone: no copious and excessive gift party but more introvert modesty.