German labour market weathers economic slowdown but not the snow

Less magic but still sound. German unemployment increased by a non-seasonally adjusted 298,400 in January, bringing the number of unemployed to the highest level since March 2011. Currently, 3.138 million people are without a job. Despite the harsh winter weather, this January drop was the smallest January decrease since 2008. In seasonally-adjusted terms, unemployment even dropped, lowering the seasonally-adjusted unemployment rate to 6.8%.


During the last months of 2012, the German job miracle took a little breather. Cyclical support ebbed away and unemployment started to gradually pick up. This trend, however, masked the fact that the labour market had entered a two-speeded period. In the export industries, unemployment started to increase and companies revised their recruitment plans downwards significantly. At the same time, companies operating in domestic sectors, as eg the construction sector and health services, still had a strong demand for labour. The lack of qualified workers and employees in these sectors was and is a pressing issue.

Looking ahead, the two-speeded labour market could become a multi-speeded labour market. While demand for labour in the service industry has cooled off somewhat, recruitment plans in the construction sector have increased to the highest level in more than a year. At the same time, the employment outlook in the manufacturing and retail sector has started to clear up. On balance and taking these different speeds together, it looks as if total unemployment should remain relatively stable throughout 2013.

Today’s numbers confirm that the German job miracle has lost some of its magic. However, even without being miraculous, the labour market should remain growth-supportive.

Eurozone sentiment improves in January - danke schoen Deutschland

Still no positive contagion in real economy. At first glance, today’s economic sentiment indicators add to evidence that the worst of the euro crisis might be over. The European Commission’s economic sentiment index increased for the third consecutive month and stood at 89.2 in January, its highest level since June 2012. The increase was mainly driven by improvements in consumer confidence, manufacturing and the construction sector.

The headline numbers are encouraging, a closer look at the details, however, reveals an inconvenient truth. The improvement of economic sentiment was mainly driven by Germany (+2.5 on the index). In fact, excluding Germany from the Eurozone would have yielded an unchanged confidence index. Even worse, confidence in many peripheral countries experienced a set-back and dropped in Greece (-1.1) and Portugal (-1.9). Only Spain saw a minor improvement (+ 0.5). Moreover, France also moved further away from the Eurozone’s core, seeing economic sentiment dropping by 0.3. So much for Eurozone rebalancing.

Employment expectations in the Eurozone improved somewhat in January, reaching the highest level since July 2012. Looking at the crisis-hit Eurozone countries, however, shows that the employment outlook worsened in Greece and Spain and only improved in Portugal. The social impact from record high unemployment rates combined with the weak employment outlook could become the next big challenge for the euro saviours.

Earlier today, the ECB released its latest Bank Lending Survey. The results illustrate that the Eurozone is still in the middle of a double credit whammy. Net tightening of credit standards by Eurozone banks for loans to enterprises was broadly stable in 4Q and even increased for loans to household. At the same time, loan demand is still dropping. Eurozone banks continued to report a pronounced net decline in demand for loans to enterprises in 4Q. As regards the demand for loans to households, the net decline abated in 4Q but remained a decline.

Thanks to Mario Draghi’s confidence trick, the Eurozone has recently gone through a period of calm. Financial markets are cheerful, private capital is returning to Eurozone peripheral countries and structural reforms seem to bear some fruits. This is what Mario Draghi called “positive contagion”. Today’s data, however, illustrate that this positive contagion has not (yet) reached the real economy. It is a painful reminder that stabilisation does not automatically lead to a recovery. The road towards restoring growth in the Eurozone still seems to be a long one.

Did anyone say shrinking?

One of the latest "hot stories" is the so-called currency war. The theory goes that central banks try to weaken their currencies by excessive liquidity. This week's earlier repayments of the first 3yr LTRO has given rise to fears that a shrinking ECB balance sheet would contribute to a stronger euro. However, there is some solace for the supporters of the shrinking theory: the ECB's balance sheet is still much higher than eg the Fed's. It would require the repayment of almost the entire take-up of the two 3 yr LTROs to immediately bring the ECB's balance sheet to US levels.

Ifo points to quick end of German contraction

The crisis is over. At least in Germany and at least if one believes in the forecasting power of the Ifo. Germany’s most prominent leading indicator, the Ifo index, increased in January for the third month in a row and stands now at 104.2; its highest level since June last year. Both, the current assessment and the expectation component improved. Particularly the improvement of expectations is remarkable. The combined improvement in December and January was the strongest 2-months improvement since the summer of 2009.


The contraction in the fourth quarter of 2012 seems to be short-lived. With biggest fears of a Eurozone break-up fading away and the improved outlook for the US and China, prospects for the German economy are also clearing off. 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 business confidence has dropped in other core Eurozone countries like France and Belgium, German businesses are surfing on the wave of optimism. Is this the start of a core meltdown? German optimism could turn into reality as the main drivers behind the decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, labour market strength and favourable financing conditions.

With last weekend’s elections in Lower Saxony, domestic politics have finally reached the forefront of Germany’s main themes of 2013. Normally, growth and elections go hand in hand. However, it looks as if strong growth of the past years and the expected recovery are rather taken as a given than an achievement of Merkel’s coalition. Stupid or not, it looks as if the economy will not be an active campaign worker for chancellor Merkel. If the recovery unfolds, it is taken for granted. If the recovery does not unfold and unemployment starts to increase, the opposition looks likely to benefit. It currently looks difficult for chancellor Merkel’s coalition to win the September elections purely on the country’s economic performance.

All in all, today’s Ifo index nicely illustrates the green shoots in the German economy. Even if the current harsh winter weather might delay the blossoming out somewhat, growth should return, leaving the contraction of the fourth quarter quickly behind.

Eurozone - Obviously enjoying the silence

At the first Eurogroup meeting of the year, Eurozone finance ministers gave the green light for the next tranche of the Greek loan and appointed a new Eurogroup president but postponed all other crucial and controversial issues.

Last night’s first Eurogroup meeting of the year reflected the general mood of important policymakers in the Eurozone: relax and take it easy, the worst of the crisis is over. Contrary to many meetings before, last night’s meeting was not heavily-loaded with crucial decisions. In fact, there were only two concrete decisions: i) Eurozone finance ministers took was to give the green light for the next tranche of the Greek loan, amounting to 9.2bn euro. 7.2bn euro will be for further bank recapitalisations and 2bn euro to finance the budget. And ii) Dutch finance minister Jeroen Dijsselbloem was officially appointed as successor of Jean-Claude Juncker as Eurogroup president. On all other issues, conclusions were postponed.

As regards Cyprus, the adjourned game continues. In fact, the Cypriot government already (unofficially though) asked for help last summer. Many Eurozone countries, above all the German, however, are hesitant to offer financial aid to a country they suspect to be a money laundering paradise. The German government was already reported as wanting to see Russia chipping in to the bailout, extending financial aid provided in 2011 when Russia provided a €2.5bn euro loan to Cypriotic banks.

No official figures have been put forward yet but wire reportes refer to a bailout package of around 17bn euro (which would be around 100% of GDP). A €17bn bailout would mean that Cyprus' debt - currently over 70% of GDP - would reach 170%, way more than the troika of international lenders has ever accepted as "sustainable" for other bailout states. One crucial question is therefore whether Cyprus, or better holders of Cypriotic government bonds, should receive a haircut. A Greek-style haircut could create new turmoil on bond markets as it would “aufheben” the earlier promise that the Greek haircuts were one-offs (even if the ESM Treaty includes the option of exceptional private sector involvement). Moreover, as most bondholders are probably the banks themselves, a Greek-style haircut could increase the recapitalisaiton needs. However, a bailout out without any private sector involvement should be hard to sell politically in some Eurozone core countries. As a consequence, privatisations and eventually some baill-in of bank debt owners could become part of any bailout agreement.

The other controversial issue of the coming weeks and months remains the direct bank recapitalisation by the ESM once the single supervisory mechanisme is up and running. Unsolved issues are obviously how much money the ESM could spend on bank recapitalisation without jeopardising the financial capacity to bailout more governments, whether ESM should be the first or rather the final line of defence, whether the ESM should be allowed to fund “legacy assets” (mistakes from the past) and whether direct bank recapitalisation could be applied retroactively (for Spain and Ireland).

Eurozone policymakers are obviously enjoying the calm on financial markets. The copious time spent on and the obsession with the right pronunciation of the name of the new Eurogroup president, Dutch finance minister Jeroen Dijsselbloem,suggests that imminent pressure to deliver concrete results has faded away. Let’s hope it does not lead to complacency.

Elections in Lower Saxony - Change, but no wind of change (yet)

Yesterday’s regional elections in Lower Saxony delivered a last-minute victory of the two major opposition parties. The government in Lower Saxony will change but the outcome was too close to call this a signal of wind of change at the federal elections in September. However, it was a clear signal that a third term in office for Angela Merkel is far from certain.
 
It was a neck-to-neck race between the current governing coalition (which as in Berlin consists of Merkel’s CDU and the liberal FDP) and the major opposition parties, the social-democratic SPD and the Green Party until midnight. Only then it became clear that the major opposition parties have a majority by one seat in Lower Saxony. A change of government in Lower Saxony.

The direct impact of such a change would be a new power equation in the Bundesrat (the council of states or Upper House), in which chancellor Merkel would be facing a majority of Social Democrats and Greens seeking to constrain her legislative agenda. However, as no major national policy initiatives are expected ahead of the federal elections and the opposition parties normally support Merkel’s euro crisis management, the short-term impact should remain limited.

The indirect, and more interesting, impact was another one: the outcome of the federal elections in September remains highly uncertain. There is no wind of change but the current government (both in Lower Saxony and Berlin) is far from moving towards an easy victory.

The big surprise of yesterday’s election was the comeback of the FDP, scoring an impressive and better-than-expected result of more than 9%. This gain was mainly driven by tactical votes of CDU voters to ensure that the FDP would clear the 5%-threshold necessary to remain in parliament. While the FDP staged an impressive comeback, the Pirate party which had breakout performances in 2011 and 2012 looks increasingly unlikely to play any important role at the federal elections in September. Quarrelling, chaos and an apparent lack of direction have resulted in voters screaming for the exits.

Almost nine months ahead of the next national elections the only certainty is that nothing is certain. The CDU, and above all Angela Merkel, remain highly popular. This popularity, however, is clearly no guarantee for another term in office for Angela Merkel. Yesterday’s elections also illustrate that even sharing this popularity with the liberal party by “lending” votes might not be enough. More rescue packages or a search for new strategic coalition partners might be needed. Otherwise, the chancellery could get an unexpected new landlord in September.

No need to be afraid of a stronger euro (yet)