German Ifo takes a dive in February

Wake-up call. Global events have finally reached German companies’ boardrooms. At least this is one conclusion of today’s Ifo reading. Germany’s most prominent leading indicator, the just released Ifo index, dropped to 105.7 in February, from 107.3 in January; the third decline in a row and the lowest reading since January 2015. Particularly expectations have taken another sharp hit from recent market turmoil, the adverse impact of low oil prices and renewed concerns about a slowing of the Chinese economy, dropping to 98.8 in February, from 102.3 in January. Remarkably, the current assessment component increased to 112.9, from 112.5 in January, indicating that it is fear rather than an already felt decline which is troubling German companies. Earlier this morning, the German statistical office had released details of GDP growth in the final quarter of 2015. The data showed that growth was mainly driven by consumption, more from the public than the private sector, and the construction sector. Net exports had been a severe drag on growth, with (QoQ) exports actually dropping for the first time since 2012. Although looking positive at first glance, these GDP data are already telling a slightly less optimistic story about the German economy. Despite the strong labour market, low inflation, low oil prices and higher wages, private consumption growth slowed down in the final quarter. Back to today’s Ifo index. As so often in the past, even though they probably the most internationally-oriented companies in the world, it took German companies a while to realize that the world outside of Germany has changed. For a while, the cooling of the Chinese economy and the slowdown in emerging markets was more than offset by strong demand from the US and a rebound of activity in some Eurozone countries. Currently, however, as low oil prices are denting US growth prospects, the US economy could no longer be the strong safety net for German exports and industry that it was in 2015. As paradox as it might sound, low oil prices currently seem to do more harm than good to the German economy. All in all, today’s Ifo index sends a strong wake-up call to the German economy: the easy and carefree life on the island of happiness seems to come to an end. For the time being, solid domestic activity should avoid any real negative surprised. Growth on the back of the public sector, consumption and construction activity might shield the German economy from external headwinds, but is clearly not a strategy for sustainable growth in the medium run. Just ask the majority of Germany’s Eurozone peers.

Het heilige geloof

De Duitse kerken klagen over te weinig instroom. Van de minder dan 60 procent Duitsers die in een kerkregister zijn opgenomen, gaat slechts een fractie vaker dan alleen met Kerstmis en Pasen naar de kerk. Net als in veel andere landen is het belijden van het christelijke geloof tanende. Maar een ander geloof heeft nog altijd veel aanhangers in Duitsland. En het aantal dienaren groeit: het geloof in het recht.

Duitsland heeft anderhalf keer zo veel advocaten per inwoner als België, dubbel zo veel als Nederland en Zwitserland en drie keer zo veel als het eveneens Duitstalige Oostenrijk. En het aantal advocaten stijgt nog altijd. In Duitsland vallen op dit moment veel heilige huisjes, het vertrouwen in de autoindustrie en in het ‘schaffen’ van de immigratiegolf, maar het vertrouwen in het recht zal als laatste vallen.

In de korte tijd dat ik weer in mijn vaderland woon, heb ik onvrijwillig meerdere ervaringen met advocaten opgedaan. De plaats waar ik woon staat bekend om haar hoge advocatendichtheid. De stad durft nauwelijks een nieuw beleid te voeren omdat ze juridische procedures vreest. Speel- en sportpleinen zijn door klachten een groot deel van de dag verplicht dicht: de buurtbewoners ervaren geluidsoverlast. Heb je een probleem met je buurman, je vrouw of desnoods je hond? Voer dan zeker geen goed gesprek en zoek ook niet naar pragmatische oplossingen waar iedereen mee kan leven. Nee, haal er onmiddellijk een advocaat bij.

In praatprogramma’s wordt bij elke show een professor in het recht uitgenodigd om feiten te beoordelen en te duiden. De instantie van het allerlaatste woord in Duitsland is niet de regering, het parlement of Bundeskanzlerin Angela Merkel, maar het Constitutionele Hof in Karlsruhe. Politieke en economische kwesties worden door burgers of belangengroepen, ook na eenduidige beslissingen door de politiek, aan de rode rechters van het Bundesverfassungsgericht voorgelegd.

Dat patroon en de behoefde om koste wat kost gelijk te halen voor de rechter wordt deze week weer ad absurdum geëtaleerd. De rode rechters van Karlsruhe buigen zich over het OMT, het obligatieopkoopprogramma van de Europese Centrale Bank. Nee, niet het huidige programma van grootschalige opkopen van staatsobligaties - QE voor de kenners - maar het programma dat nooit werd uitgerold. Dat alleen op papier bestond.

Maar dat is niet alles. Het is ook het programma dat het Europees Hof als wetmatig beschouwt. Jammer dat veel Duitsers niet de humor hebben om het satirische element in dat toneelstuk te zien.

En zo kijkt Duitsland deze week weer doodserieus naar Karlsruhe. Wellicht ziet het Hof met het wankele Europese huis en de verzwakking van de Europese samenwerking nieuwe kansen? De kans is klein. Uiteindelijk moet Karlsruhe (en het Duitse volk) aanvaarden dat het Europese recht boven het Duitse staat. Een schok voor veel Duitsers, want na het geloof in de betrouwbaarheid van de Duitse auto valt daarmee het laatste heilige geloof.

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

 

 

German growth, new risks and Bayern Munich

Now it’s confirmed. The German economy ended the year with a decent growth performance in the final quarter. Despite increasing external headwinds, the German economy grew by 0.3%. This is slightly less than the first estimate for the annual growth number had suggested and probably the result of an entire batch of disappointing hard December data. Compared with the last quarter of 2014, the economy grew by 2.1%. Working-day adjusted, 4Q growth was 1.3% YoY. 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. Government consumption, a bit of private consumption and another surge in the construction sector supported growth, while at the same time net exports were a drag on growth. Without any doubt, the performance of the German economy since 2009 has been impressive. In 27 quarters, the economy only shrank three times. Moreover, over this period, the economy moved from a purely export-driven model towards a much more balanced model with domestic factors currently shielding the economy against external headwinds. Sadly, as impressive this well-known growth story might be, against the background of latest financial market turmoil, today’s German GDP data almost look like a relict of the good old days. They will do little to nothing to calm markets. Looking ahead, the year 2016 could be more challenging for the German economy than many had expected. Not only due to the refugee crisis and increasing political uncertainty but mainly due to increasing external headwinds. On top of the well-known risk factor like slowing China and emerging markets or a still struggling Eurozone, low oil prices and the possible weakness of the US economy could give the German economy a hard time. In particular, any slowdown of the US economy could turn out to be a double whammy for Germany. The direct impact through weaker demand from last year’s most important trading partner and the indirect impact through a stronger euro are in our view currently the biggest risks for the German economy. To some extent, there are similarities between Germany’s showcase soccer team Bayern Munich and the Eurozone’s showcase economy. At first glance, both performances look impressive and flawless. At second glance, however, weaknesses have emerged recently. These weaknesses have clearly increased the risk for both Bayern Munich and the German economy to surprisingly be knocked off their respective pedestals in the coming weeks and months. Carsten Brzeski

German industry disappoints in December

German industrial production dropped by a depressing 1.2% MoM in December, putting an end to a rather disappointing year for the German industry. This was the sharpest monthly drop since August 2014. On the year, industrial production was down by 2.2%. Looking at the details, there was only one bright spot in the production of intermediate goods (+0.8% MoM). All other sectors saw a decline in production. Parts of this December drop can be explained by the timing of the Christmas vacation which put parts of the production process on halt for almost two weeks in December. However, the fact that industrial production in the final quarter of the year was almost 1% lower than in the third quarter illustrates the general weakness of Germany’s former growth engine. At the same time, exports and imports both dropped by 1.6% MoM in December, narrowing the non-seasonally adjusted trade surplus to 18.8bn, from 20.5bn euro in November. December trade data show that German exporters have also started to suffer weaker foreign demand. Nevertheless, contrary to industrial production, the trade performance over the entire year 2015 was still positive. For most parts of the year, German exports benefitted from a weaker euro. Particularly, exports to the US have benefitted from the sharp depreciation of the euro since 2014. As a consequence, the US has become Germany’s most important trading partner in 2015, 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. Interestingly, help to offset weaker demand from emerging economies did not only come from overseas but also from next door. Exports to the Netherlands also increased strongly in 2015, making the Netherlands Germany’s third most important trading partners, taking both exports and imports together. All in all, this morning’s data were a painful reminder that not all is hunky dory in the Eurozone’s largest economy. In fact, the German “Wirtschaftswunder” has only some domestic magic left. With the strong labour market, low inflation, low interest rates and higher wages, consumption is strong and, in addition, services and the construction sector have become important growth drivers. The German industry, however, is still standing on shaky grounds. While the industry had been able to stomach the cooling of the Chinese economy, the slowdown of emerging markets, the euro crisis and geopolitical risks, it now seems as if extremely low oil prices and the slowdown of the US economy are simply two risks too much for the industry. Particularly, the possible US slowdown could turn out to be the biggest risk for the German economy as it could weaken the country’s most important export driver these days. Moreover, as capacity utilization in the industry is close to historical averages, an imminent investment boost also seems far from certain. Finally, last week’s new orders data combined with dropped product expectations, increased inventories and narrowed order books all do not bode well for industrial production in the coming months.

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