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.

November Ifo beats estimates

An island of happiness after all? German businesses showed an interesting reaction to the recent series of uncertainties and turmoil. In fact, despite not so positive hard data and new uncertainties stemming from the refugee influx and latest events in Paris, German businesses remain a bunch of optimists. Germany’s most prominent leading indicator, the just released Ifo index, increased to 109.0 in November, from 108.2 in October, offsetting last month’s drop. Interestingly, both the current assessment and the expectations component increased. In fact, expectations increased to their highest level since May last year. Today’s Ifo reading suggests that the German business community is filing the Volkswagen scandal as a one-off and also shrugs off the risk from a possible Chinese and emerging markets slowdown as well as new uncertainty stemming from the Paris events. Still, the positive Ifo reading is a bit of a conundrum as it is not entirely matched by positive hard data. In our view, hard data since the start of the year showed that the German industry is actually going through rough times. Latest industrial production data suggested that the summer slump was more than only vacation-driven. In fact, the industry has underperformed since the beginning of the year, being confronted with several external headwinds. Currently, an additional headwind could be low, or better too low, oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, latest survey data send opposing signals. While latest PMI and Ifo data give rise to new optimism, the combination of inventory build-up and dropping new orders has clearly weakened the normally strong safety net for the German industry. Moreover, the facts that capacity utilization remains close to its historical average and companies do hardly see equipment as a constraint to production suggest that a self-driven investment spurt is currently not in the cards. It will take some more weeks before the final verdict can be made on which survey indicator actually is the best growth predictor. Currently, markets are not only watching German data to get insights on the German economy but also to get an idea of what the ECB can and will do at next week’s meeting. While stronger-than-expected confidence indicators could motivate some ECB members to pitch the old Prince song “When doves cry” and argue against new ECB action, Draghi’s determination at the October meeting combined with continued underlying economic weaknesses and the absence of any inflationary pressure should be decisive in launching QE2.

Confirmed: Consumers saved the German economy

German GDP growth in Q3 was confirmed at 0.3% QoQ. The second estimate of German GDP growth shows that growth in the third quarter was mainly driven by domestic factors. Private consumption and government consumption grew by 0.6% and 1.3% QoQ respectively. At the same time, domestic investments dropped by 0.3% QoQ and net exports shaved off 0.4 percentage points of growth. The fact that inventories contributed positively to GDP growth (0.2 percentage points) does not really bode well for the fourth quarter. In fact, at least in the third quarter, the German economy has finally become what many international critics had been demanding for a long while: a domestically-driven economy. Interestingly, since the third quarter of 2014, private consumption private consumption has now been on the strongest non-stop expansion since the start of the monetary union. Record high employment, increased nominal wages, low interest rates and low energy prices remain an important growth driver for the economy. Now that the year 2015 has entered home stretch, the year in review stories will again become popular. Looking in the rear-mirror, the year 2015 has been another rollercoaster ride for the economy even if most Germans hardly noticed it. However, the series of external (and sometimes even domestic) shocks the German economy was confronted with has been impressive. Just think of sanctions for Russia, Greece dancing on the edge of an euro exit, China’s slowdown, emerging market troubles, VW, refugees and now terroristic attacks. Needless to say that most – if not all – of these challenges or factors will still be in place next year. To cope with the ongoing and new challenges, the economy will need a more sustainable investment boost. Just banking on the current strength of domestic consumption could be a dangerous strategy. Moreover, a possible consumptive expansion of fiscal policies would obviously increase short-term growth prospects but would do little to substantially increase the economy’s growth potential. Particularly in a possible scenario, in which new uncertainties resulting from the terroristic attacks could further dent investment activity. In short, the second estimate of German Q3 GDP data confirmed that the worst nightmares have not come true. Consumers saved the economy and offset the industrial slump of the summer months, yielding the German economy’s fifth consecutive quarter with positive growth.

German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

Disappointing IP data doesn't bode well for Q3 GDP

More headwinds. German industrial production disappointed in September, adding to evidence that the Chinese and emerging market slowdowns are also leaving their marks on the Eurozone’s largest economy. Industrial production dropped by 1.1% MoM in September, from an upwardly revised decline of 0.6% in August. On the year, industrial production is now only up by 0.2%. Looking at the details, the weakening in industrial production was driven by almost all sectors, with an outstanding drop of 3.2% MoM in consumer goods. Even the stronghold of the industry, the construction sector, dropped by 0.9% in September. The summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. Over the last couple of months, the industrial safety net of low inventories and filled order books has become thinner. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the economy, yet. Since the end of last year, industrial production has remained flat. In the same period, exports have grown by 1% on average each month. Strong confidence indicators, sluggish production and booming exports. This seems to be the new conundrum of the German economy, bringing back the memories of the discussion on a possible “bazar economy”. Today’s data shows that the German industry has not been able to fully escape the negative impact of the slowdowns in China and other emerging markets. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Looking ahead, it does not look as if industrial production is about to accelerate any time soon. Although production expectations have increased in recent months, the reality of weaker order books and stable inventories looks somewhat less promising. For next week’s Q3 GDP release, today’s data do not bode well. Industrial production is down on the quarter, construction activity is up on the quarter, putting all hopes on net exports and private consumption. We still have to wait for Monday’s trade data but with today’s data our current estimate of 0.3% QoQ growth in Q3 all of a sudden looks rather optimistic.