Thursday, November 29, 2012

German unemployment rate unchanged in November

German unemployment dropped by a non-seasonally adjusted 1,900 in November, bringing the number of unemployed down to the lowest level since November last year. Currently, 2.751 million people are without a job. However, today’s improvement is the weakest November improvement since 2004. In seasonally-adjusted terms, unemployment increased slightly, leaving the seasonally-adjusted unemployment rate unchanged at 6.9%.

Supported by the strong labour market, private consumption has become an important driver of German growth. Since the beginning of 2010, private consumption has grown by an average 0.3% QoQ. Of course, this is nothing compared with the shopping frenzy experienced in other countries in the past.

Looking ahead, however, it is doubtful whether private consumption can really take over the baton as main growth driver for the German economy. Employment expectations in the manufacturing sector have entered negative territory, most open vacancies are temporary jobs and several companies have reintroduced short-time work schemes.

German unemployment looks set to increase further. This increase, however, should only be a very mild increase, mainly located in the export industry. Companies operating in domestic sectors, as eg the construction sector and health services, still have a strong demand for labour. The lack of qualified workers and employees continues to be a pressing issue in some sectors, indicating that the labour market could enter a two-speeded period.

Today’s numbers provide further evidence that the labour market is gradually losing steam. However, the lack of qualified employees and still strong labour demand in domestic sectors should make the current slowdown a very gradual one. In fact, if the external environment improves quickly, the slowdown could not only turn out to be gradual but also very short-lived.

Monday, November 26, 2012

Eurogroup decides on Greek fudge

Eurozone finance ministers finally agreed on measures to grant Greece two additional years for austerity and structural reforms. These measures remain highly conditional and are no guarantee to avoid debt forgiveness in the future.

During last night’s Eurogroup meeting, the Eurogroup gave the principle green light to pay out the next tranche of the bailout programme amounting to 43.7bn euro. At the same time, the Eurogroup agreed on several possible measures to grant Greece two additional years for its austerity measures and structural reforms.

The possible measures are the following: i) a lowering by 100bp of the interest rate charged to Greece on the bilateral loans of the first bailout package; ii) a lowering by 10bp of the guarantee fee costs paid by Greece on the EFSF loans; iii) an extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years; iv) a commitment by Member States to pass on to Greece's escrow account, an amount equivalent to the profit the ECB and national central banks make on their Greek bond holdings under the SMP programme.

To benefit from the above measures, however, Greece will also have to play its role. In fact, the above measures will only be implemented gradually and only under certain conditions to restore debt sustainability. To ensure Greek debt sustainability without debt forgiveness, the Eurozone agreed on a series of measures. The escrow account has become more important as not only all privatization revenues have to be transferred to this account but also the “targeted primary surplus as well as 30% of the excess primary surplus”. Moreover, a debt-buy-back could also be part of restoring debt sustainability. However, this programme is anything but certain as the rather vague official formulation of “the Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.”

Taking all these measures together, the Eurogroup provided the expected fudge to keep Greece in the Eurozone. It is obvious that even the Eurogroup does not expect that this was the last word on Greece. Even if debt forgiveness was not mentioned, the sentence that Eurozone countries will consider further measures to ensure that Greek debt can reach 124% of GDP in 2020 and a level “ substantially lower than 110% in 2022” is rather telling.

At first glance, the political will to give Greece two additional years for austerity and reforms has finally been substantiated. However, as so often in the past, there are still some elements in the Eurogroup’s decision that look clear and good at the end of a long Brussels’ night but which could lose their congeniality after sunrise. Here are just a couple of them: the Eurogroup’s commitments remain highly conditional, some national parliaments (like the German Bundestag) still need to agree to the measures and the debt-buy-back scheme looks anything but certain. Chances are high that this month’s meetings were not the last night-breaking discussions on Greece.

After three meetings this months and a total of more than 24 hours of discussing and negotiating, the Eurozone countries have put their money where their mouth is. The political will to reward the Greek austerity and reform measures has already been there for a while. Now, this political will has finally been supplemented by financial support. However, it is clearly not a carte blanche for Greece but rather a very tight leash.

Friday, November 23, 2012

German economy remains crisis-denier

Today’s GDP and Ifo readings have given some food for thought on the growth prospects of the German economy.

The second estimate of the statistical office confirmed that the German economy defied the euro crisis once again in the third quarter. GDP growth in the Eurozone’s biggest economy came in at 0.2% QoQ, from 0.3% in 2Q. Growth was driven by net exports, with exports up by 1.4% QoQ, government (0.4% QoQ) and private consumption (0.3%). Investments were down by 1.7% QoQ. Inventory reductions, however, illustrated further signs of crisis vulnerability.

Unfortunately, it looks as if these positive GDP data could soon be nothing more than the memories of the good old days. Signs of a further cooling of the German economy are increasing. Order books have become alarmingly thin, industrial production is dropping and German businesses have become downbeat. Earlier this week, a survey among businesses showed that for the first time since 2009, there was a majority of pessimists regarding the outlook for 2013. Uncertainty about the Eurozone was the most important factor hampering investment decisions.

However, any short-term cooling could turn out to be rather short-lived, as indicated by today’s Ifo data. The Ifo index surprised with an increase to 101.4, from 100.0 in October. This was the first increase since March 2012. The increase was driven by both the current assessment component (108.1, from 107.3) and expectations (95.2, from 93.2).

The increase came as a clear surprise but maybe only reflects typical German sobriety. Even if domestic demand should lose some steam due to a weaker labour market, the risk for the economy of falling off the cliff looks very limited. To the contrary, the creeping decoupling from the rest of the Eurozone – only 1/3 of German exports currently go to Eurozone peers – enables the economy to benefit quickly from any rebound of the global economy. In this regards, latest signs of improvement from the US and China were good news for German companies.

Solid fundamentals should spare the economy from the recessionary mix of structural reforms and austerity measures. The German economy might have lost its invulnerability but today’s numbers indicate that the economy should not join the race to the bottom most other Eurozone countries are currently in.

Wednesday, November 21, 2012

Eurozone - Haste makes waste

Eurozone finance ministers have a strong affinity for cliff-hangers. Last night’s almost twelve-hour meeting did not bring any conclusion on how to finance more time for Greece. The decision was postponed until next week Monday.

The only thing that is clear after last night’s Eurozone finance minister meeting is that nothing is clear. The Eurogroup postponed the decision on how to finance more time for the Greek adjustment to next week Monday. The phrase in the official statement that “the Eurogroup has had an extensive discussion and made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt” shows that disagreement remains deep.

For once, Greece had apparently no responsibility for the further delay. Indeed, the final statement praises Greece for having met all prior actions required ahead of the meeting, citing structural reforms, the budget for 2013 and the 2013-2016 medium term fiscal strategy. Data released yesterday by the Greek Ministry of Finance confirmed that progresses in the implementation of the adjustment are indeed being made, with the state sector budget execution ahead of schedule at end of October.

At the Eurogroup level, the two issues at stake still are: i) the financing of the Greek funding gap, resulting from two additional years to adjust, and ii) how to restore long-term debt sustainability. Finding the money for two additional years (up to 32bn euro) is probably the easier task than restoring debt sustainability. According to latest reports, Greek debt will rather be above 140% of GDP in 2020 than close to the official target of 120%. In euro, this gap in 2010 will probably amount to 70bn to 100bn. Finding such an amount requires lots of financial creativity as long as Eurozone countries do not want to embark on clean-cut solutions like debt forgiveness or a third package. The current deadlock seems to result from strongly diverging views between the IMF and the Eurozone on how to restore debt sustainability. While the IMF favours a clear-cut solution, most Eurozone countries seem to support a the fudge option, interpreting debt sustainability in a more flexible manner than the IMF.

Last night’s meeting has again shown that that the Greek case pushes the limits of Eurozone finance ministers’ financial creativity. Or to put it more positively: maybe ministers just follow the principle of haste makes waste.

Wednesday, November 14, 2012

The crisis-denier - German GDP up 0.2% QoQ in 3Q

The crisis-denier. According to a first estimate of the statistical office, the German economy once again defied all swan songs. Eurozone's biggest economy grew by 0.2% QoQ in the third quarter, from 0.3% in 2Q 2012. On the year, German GDP was up by 0.9%. Combined with stronger-than-expected French GDP growth (+0.2% QoQ in 3Q), chances have increased that Eurozone GDP growth (released at 11am CET) could be better than our forecast of -0.3% QoQ.

The decomposition of German growth will only be released at the end of the next week but according to the press statement of the German statistical office and available monthly data, consumption and net exports were the main growth drivers. The sharp drop of all confidence indicators since late-Spring has not yet been translated into a contraction of the economy. In fact, the real economy proves to be more resilient than expected. The strong labour market, wage increases but above all the good old friend exports are the main drivers of sustained resilience.

Looking ahead, however, at least the near term outlook for the German economy looks anything but rosy. It is hard to believe that the current decoupling of soft and hard data can last much longer. To be more precise, rapidly thinned out order books do not bode well for industrial production in the coming months. The negative industrial production reading in September gave already a bitter foretaste of worse things to come.

Looking beyond the near term, however, shows a somewhat more positive picture. Also in 2013, the German economy should once again be spared from the recessionary mix of structural reforms and austerity measures. Moreover, even if domestic demand should lose some steam due to a weaker labour market, the risk for the economy of falling off the cliff looks very limited. To the contrary, the creeping decoupling from the rest of the Eurozone – only 1/3 of German exports currently go to Eurozone peers – enables the economy to benefit quickly from any rebound of the global economy.

Today’s numbers have some similarities with Germany’s national soccer team. Even if the performance forbids any enthusiasm, it is still sufficient to keep the rest of the Eurozone in check…

Monday, November 12, 2012

Eurozone - Two more years

Last night’s Eurogroup meeting paved the way for Greece to stay in the Eurozone. Ministers decided on two additional adjustment years for Greece. Finding the money to fund these extra years, however, was postponed.

Last night’s Eurozone finance minister meeting was finally a meeting that ended before mid-night. European experience, however, also shows that shorter meetings are normally a sign of significant disagreement and that crucial decisions have simply been postponed. Yesterday’s meeting adds evidence to this experience. 

As expected, ministers agreed that Greece could have two more years to meet its fiscal target, shifting the goal of having a primary budget surplus from 2014 to 2016. These two years are a kind of reward for the Greek government. Notably, the official Eurogroup statement is full of praise for the undertaken efforts by the Greek government. Interestingly, the statement also refers to the efforts taken by citizens, a gesture of acknowledgement of the social impact of austerity measures and structural reforms. 

Of course, more time also means more money. Two additional years lead to an immediate funding gap of around 30bn euro which needs to be filled but also put the debt sustainability target of a debt ratio of 120% of GDP by 2020 at risk.

As regards the funding gap, no decision was taken last night. Eurogroup president Juncker announced that this issue should be discussed at another meeting on 20 November and at the latest on 28 November. These dates will give governments the chance to get the green light from national parliaments for changes to the Greek programme. As regards debt sustainability, media reports mentioned a debt ratio of 140% of GDP in 2020 in the new troika report.

The race on how to finance the new 30bn euro and how to restore debt sustainability is still open. Option range from a clean-cut third bailout package for Greece to debt forgiveness. In our view, probably none of these two options will eventually be chosen. The most likely outcome of the next two weeks should be a typical Eurozone fudge: lower interest rates on the current Greek loans and an extension of the loans. Imagination or creativity has no limits. Yesterday, Juncker offered another fudge, saying that the date of bringing the debt ratio down to 120% of GDP could simply be delayed by two years. But let’s be clear, even such a Eurozone fudge would be a covert Official Sector Involvement as rescheduling of debt obviously also has its costs.

Yesterday’s meeting was another small step in the Eurozone saga. The political will to keep Greece in the Eurozone had already emerged over the summer. Now, it looks as if all other elements have to fit into this political will. We remain confidence that the next tranche will be paid and that the Eurozone will also find an agreement on how to bridge the new funding gap in the next two weeks. Needless to say that the final decision on the next Greek tranche, a new financing gap and debt sustainability will not be the end of the matter.

Thursday, November 8, 2012

ECB meeting - All Quiet in Frankfurt

As expected, the ECB kept its powder dry at today’s meeting. Rates on hold and no other measures to support the Eurozone economy. Instead, lots of backslapping for the new crown jewel, the OMT program.

The ECB’s macro-economic assessment remained virtually unchanged. The ECB does not close its eyes to the Eurozone reality, expecting no improvement of economic activity towards the end of the year. It looks as if next month’s ECB staff projections will join the crowd of downward revisions for 2013 growth. As regards inflation, the ECB still expects headline inflation to drop below 2% in the course of next year. The closely monitored balance of risks remained unchanged. According to Draghi, risks to the economic outlook remain on the downside. Risks to the outlook for price developments remain broadly unchanged.

Ahead of today’s ECB meeting, there had been some new speculation about a possible rate cut when Mario Draghi yesterday said at a speech that the “risks of inflation are currently very low over the medium term”. Some market participants had interpreted this as a dovish signal, even worthwhile breaking the so-called Purdah period ahead of ECB meetings. Today’s press conference shows that the speculations were premature. The ECB’s bias remains unchanged. Of course, there still is a bias towards easing but it is not an imminent rate cutting bias.

In fact, Draghi’s countless repetitions of the importance of the OMT program indicates that the ECB currently does not consider rate cuts as an effective tool to tackle the recession. Draghi confirmed that the ECB stood ready to activate the program. However, activation required a country to ask for an ESM program. There was no OMT without a program.

The OMT remains the crown jewel in the ECB’s anti-crisis toolbox. However, as Draghi rightly said, with the OMT, the ECB has put in place a fully effective backstop for the Eurozone. A backstop against the tail risk of a Eurozone break-up. In our view, however, the OMT is not the magic bullet that can also restore growth. Even with structural reforms, austerity measures and an active OMT, chances are high that the ECB will need to come up with additional measures to support the Eurozone economy. A rate cut, even if it will not come next month, could be part of the measures.

All in all, today’s meeting was almost a non-event. The information content was close to zero. If the ECB ever starts a reassessment of its transparency policy, today’s meeting provides an argument to shorten the press conferences.

Wednesday, November 7, 2012

Lang zal Mario leven...

Een goede Duitser baalt dezer dagen. De eerste verjaardag van Mario Draghi aan de top van de Europese Centrale Bank (ECB) is voor veel Duitsers namelijk geen feest. In hun ogen heeft de Italiaan, voor wie inflatie even vanzelfsprekend is als tomatensaus bij pasta, de heilige Bundesbank de nek omgedraaid en de basis gelegd voor een nieuw tijdperk van ellende. Maar heeft Mario Draghi het echt zo slecht gedaan?

Zeker is dat het eerste jaar van Super Mario de geschiedenisboeken ingaat als het jaar waarin de ECB zich eindelijk van de Duitse Bundesbank kon emanciperen door vrijwel alle taboes te doorbreken.

De eerste taboebreuk was de Duitse afkeer van de zogenaamde tweederonde-effecten. De inflatievrees verleidde de ECB onder Jean-Claude Trichet liefst twee keer tot misplaatste renteverhogingen omdat de ECB zich blindstaarde op de Duitse economie. De renteverhogingen in 2008 en ook weer afgelopen jaar waren verhogingen voor de Bundesbank, verblind door het Duitse herstel. Nog geen vijf weken in dienst, maakte Draghi deze renteverhogingen van 2011 weer ongedaan.

De tweede taboebreuk was de benoeming van Peter Praet als hoofdeconoom van de ECB. Ook dat was een zet van Draghi. Voor het eerst in de geschiedenis geen Duitser op die positie. Het Duitse ECB-bestuurslid Jörg Asmussen kreeg een andere functie, die veel beter bij zijn politieke achtergrond paste.

 De derde taboebreuk ligt voor de hand, het OMT-programma. Dat is het nieuwe wondermiddel van de eurozone, waarmee de ECB onbeperkt staatsobligaties wil opkopen van landen die een beroep doen op het Europese noodfonds. Bundesbank-voorzitter Jens Weidmann stemde als enige tegen het programma en speelde daarmee handig in op het nationale Duitse trauma van staatsfinanciering door de centrale bank en van hyperinflatie.

Volgens de meeste Duitsers leggen die drie taboebreuken de basis voor een periode van hoge inflatie. Er zijn inderdaad de eerste tekenen van zeepbellen op de Duitse vastgoedmarkt en bij de Duitse staatsobligaties. Ze zijn niet te wijten aan te veel anticrisisbeleid van de ECB, maar wel aan te weinig anticrisisbeleid in de hele eurozone. Ze zijn de gevolgen van de vlucht naar veilige haven Duitsland en van kapitaal dat (weer) naar Duitsland komt.

Super Mario heeft (h)erkend dat de eurocrisis niet alleen een liquiditeits- en schuldencrisis is, maar ook een vertrouwenscrisis. Door zijn pragmatisch en proactief beleid helpt hij de eurozone te overleven. Als de prijs daarvoor het demythologiseren van de Bundesbank is, betaal ik die prijs graag. Laat het mijn Duitse vrienden niet horen, maar ik zing dezer dagen stiekem voor Mario. Lang zal hij leven in de gloria.

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

Merkel's thought leadership takeover?

It seems as if German chancellor Merkel wants to capitalise the current lack of a Eurozone thought leadership, trying to actively steer the integration debate.

At Yesterday, German chancellor Merkel spoke before the European Parliament, calling for far-reaching reforms of the monetary union. What she said was not new but it was another advance, trying to steer the European debate. According to Merkel, the Eurozone 2.0 required more common policies in the fields of financial sector regulation, fiscal and economic policies. The monetary union needs more coordination, not only of fiscal policies but also of other policies. Merkel mentioned a further harmonization of labour market and tax policies as further areas of closer coordination. To reach this goal, the Merkel again proposed a king of two-pillar strategy of stick-and-carrot. The stick would be a further loss of national sovereignty with far-reaching powers and authorities for the European Commission. Merkel even mentioned the possibility that the European Commission could directly intervene in national budgets. The carrot could be the so-called fiscal capacity, a Eurozone fund, which should reward successful structural reforms. The ultimate carrot of real financial burden sharing like for example Eurobonds, however, was not (yet) part of the official German strategy.

While the rest of the Eurozone’s government leaders have their hands full with enormous domestic tasks and challenges, the German government is slowly but surely filling the power vacuum as opinion leader in the euro crisis. Obviously, it would still take a couple for years before the German ideas and proposals could eventually be implemented. However, it looks as they are seriously trying to push the Eurozone into the German direction. Given the current (im-)balance of political forces in the Eurozone, Merkel’s chances of success look currently better than ever before.

Industrial slowdown continues

The slowdown continues. German industrial production dropped by 1.8% MoM in September, from -0.4% in August, providing further evidence that the economy’s backbone is quickly losing steam. In annual growth terms, industrial production is down by 1.2%. The drop was mainly driven by all manufacturing sectors. Only the construction sector recovered from its August decline, increasing by 2.7% MoM. Interestingly, despite today’s drop, industrial production was still stronger in 3Q than in 2Q.

The German decoupling from the rest of the Eurozone has come to an end. Strong trading ties with non-Eurozone countries had shielded the economy against the euro crisis. Now, with the global economic cooling in the second half of the year, this immunity is quickly fading away.

Looking ahead, latest indicators do not give much hope that the current downward trend will reverse any time soon. Business sentiment has been on a Yesterday’s new order data was again a disappointment. In September, new orders from non-Eurozone countries dropped by almost 6%, while new orders from Eurozone peers even plunged by more than 11% MoM. At the same time, companies have started to increase inventories. The increasing discrepancy between built-up inventories and emptying order books does not bode well for the near-term outlook for the German industry. However, if the recent positive cyclical trends from the US and Chinese economies prove to be sustainable, the German industrial slowdown could be rather short-lived with a rebound in the first half of 2013.

Today’s industrial production data send a two-fold message: on the one hand, it confirms our view that the German economy could have avoided a contraction in the third quarter. However, on the other hand, it also confirms our view of gradual stagnation. In short, the German economy is stuttering but not (yet) plunging.