Monday, January 31, 2011

German retail sales drop

No quantum leap for German consumption, yet. This morning's data added to the latest disappointment on German private consumption. German retail sales, seasonally and inflation adjusted, dropped by 0.3% MoM, from -1.9% in November. With only one single month of growth, German retail sales have been on a downward trend since August.

With today's numbers, private consumption can hardly have been a growth driver in the fourth quarter. Nevertheless, despite recent disappointments, private consumption could become the growth surprise of 2011. Particularly wage developments could provide important tail wind. Last year, real negotiated wages only increased by 0.5% YoY. This small increase was probably driven by some fears of future job losses, short-time working schemes and the fact that many collective bargaining rounds were already finalized in 2009 or earlier. This year's collective bargaining will start soon and demands for wage increases range from 5% to 7%.

After today’s numbers it might sound like a whistling in the dark, but with increasing wages, dropping unemployment and pent-up demand, private consumption should become an important growth driver this year

Friday, January 21, 2011

Ifo at new record high

Boldly going where no Ifo has gone before. German business confidence surprised and continued its impressive performance of the last two years, increasing to a new record high. In January, the headline Ifo index increased to a smashing 110.3, from 109.9. While the current assessment weakened somewhat, expectations also hit a new record high.

The heaviest snowfalls in more than 40 years only weighed on companies’ current assessment but not on their optimism. Even if the strong weather winter was to return in the coming months, it would only delay but not stop economic growth. German fundamentals are currently simply too strong to derail the recovery any time soon. The diversified export mix, the labour market and a further strengthening of private consumption should put growth in 2011 on a broad footing. Moreover, Investment plans are back at their 2008-levels when the crisis stopped the recovery from broadening. Now, with interest rates at record-low levels and low credit hurdles (at least according to the latest Ifo surveys), the investment upswing should finally materialise.

Today’s Ifo sends a strong signal that the German economy will continue to power ahead. With a positive interplay between more investment and further job growth, the conditions to initiate a virtuous circle have hardly been better in the last fifteen years.

Thursday, January 13, 2011

Brand bij de brandweer

Tot nu toe was de Europese Centrale Bank de vliegende brandweer van de schuldencrisis van de eurozone. Noodlijdende banken? De ECB geeft ruimhartig bijna onbeperkte liquiditeit. Zwakke overheidsfinanciën? De ECB koopt staatsobligaties. Als er ergens een brand was, stond de ECB klaar om te blussen. Dit jaar kan het voor de Europese brandweer nog lastig worden. Er is namelijk vuur in eigen huis.

De inflatie is terug. In december steeg ze voor het eerst in meer dan twee jaar weer boven de magische grens van 2 procent. En het zal niet de laatste keer zijn. Sterk stijgende energie- en voedselprijzen kunnen de inflatie nog een tijdje boven 2 procent laten zweven. Daarbij komen stijgende inflatieverwachtingen en hogere looneisen in Duitsland. Het wordt moeilijk voor de ECB om haar onconventionele maatregelen te verkopen als deflatiebestrijding.

Natuurlijk volgt de ECB geen mechanisch inflatiebeleid, waarbij de rente automatisch stijgt zodra de inflatie boven 2 procent ligt. Een inflatie boven 2 procent is ook niets nieuws. Sinds 1999 stond de inflatie in de eurozone vaker boven dan onder 2 procent. Niets aan de hand, dus? Niet helemaal, want ook de inflatieverwachtingen lopen op en de loononderhandelingen in Duitsland kunnen de inflatie verder laten stijgen. Voldoende redenen voor hoofdpijn bij sommige centrale bankiers.

Een renteverhoging is nu niet aan de orde. De perifere landen van de eurozone staan er economisch nog veel te slecht voor. Een renteverhoging zou elk klein herstel in de kiem kunnen smoren. Voor de kernlanden van de eurozone is de rente misschien zelfs nu al te laag, maar de ECB zou een hogere inflatie kunnen tolereren als het vooral een hogere Duitse inflatie is. Dat zou deel uitmaken van de zogenaamde 'rebalancing' van de eurozone, met deflatoire trends in de periferie die leiden tot economische herstructureringen en meer export en inflatoire trends in de kernlanden die leiden tot meer consumptie en een verlies aan internationale concurrentiekracht. Maar leg dat eens uit aan een Duitse bevolking behept met het 'anti-inflatiegen'.

Als ook in Duitsland de inflatie boven 2 procent uitkomt (op dit moment staat ze nog op 1,7%), zal het anti-Europese sentiment weer opborrelen. Een stijging van de inflatie kan de laatste vonk zijn om de Duitse steun voor het europroject definitief te laten keren. Ook al lijkt het economisch niet zinvol de rente te verhogen, een symbolische renteverhoging voor de Duitse inflatiehaters in de loop van het jaar moet niet worden uitgesloten. Als het in het huis van de brandweer smeult, moet de brandweer eerst thuis blussen voor ze kan uitrukken om de rest te helpen.

Dit stuk verscheen eerder in het Belgische dagblad "De Tijd"

FIrst hawkish sounds from Frankfurt

The ECB just left interest rates unchanged. While Trichet was rather close-lipped on the sovereign debt crisis and possible new measures by EU leaders in the coming weeks, he sent a slightly more hawkish message on monetary policy. According to the ECB, interest rates remain “still” appropriate, suggesting that this is not self-evident anymore. Inflation will again be top of mind at the ECB in 2011.

The ECB’s macro-economic assessment has taken a shift towards more hawkishness. On growth, this shift was rather marginal and in the eyes of the Governing Council risks to growth are still “slightly” tilted to the downside. On inflation, however, the ECB sent a stronger message of hawkishness. The ECB now sees evidence of “short-term upward pressure on overall inflation, stemming largely from global commodity prices”. The phrase “while this has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon, very close monitoring of price development is warranted” sends a clear signal that the ECB stands ready to scotch any pass-through of energy and food prices into the economy.

Trichet is not getting tired of repeating and stressing the ECB’s inflation track record. Since the start of the monetary union, average inflation was 1.97%, neatly in line with the ECB definition of price stability. This track record could keel over this year. Food and energy prices are not likely to drop significantly any time soon and if the impact of higher commodity prices in 2007/2008 is of any guidance, headline inflation could easily remain above 2% throughout the year. If headline inflation was to remain at its December-level throughout 2011, Trichet’s most favourite inflation track record would increase to 1.99%.

At the current juncture, a rate increase would still do more harm than good. The Eurozone periphery is economically still too weak to stomach higher rates, the sovereign debt crisis is far from over and a rate hike would not stop commodity prices from increasing. However, for the Eurozone as a whole, the monetary stance is increasingly becoming loose. Up to now, the ECB has been the first line of defense – the fire brigade – of the Eurozone’s sovereign debt crisis management. Low inflation gave the ECB ample room to implement non-standard measures. Today’s meeting clearly indicates that the ECB is reprioritizing and that inflation developments will be top of mind throughout 2011.

It looks as if we do not need to wait for Axel Weber to become ECB president to see a hawkish ECB. The ECB headed by Jean-Claude Trichet can also send hawkish statements. Of course, all will depend on commodity prices and their pass-through but with today’s meeting chances of an earlier rather than later rate hike have increased.