Thursday, January 31, 2013

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.

Wednesday, January 30, 2013

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.

Tuesday, January 29, 2013

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.

Friday, January 25, 2013

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.

Tuesday, January 22, 2013

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.

Monday, January 21, 2013

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.

Tuesday, January 15, 2013

German economy confirmed as stability island

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 0.9% in 2012 (a non-calendar adjusted 0.7%). This outcome suggests that the German economy has entered contractionary territory in the fourth quarter, probably contracting by some 0.3/0.4% QoQ.

The economic recovery, the stable labour market and euro-crisis-driven record low interest rates have led to a further improvement of public finances in Germany. According to the statistical office, the government’s fiscal balance recorded a surplus of 0.1% of GDP, the best fiscal performance since 2007. In cyclically-adjusted terms, the fiscal balance should even be better. As a consequence, Germany has overachieved its own fiscal targets. The government has reached a balanced budget already four years before the official start of the legally-binding debt brake.

If the German economy were text-book example of a closed economy, it would still be an island of happiness. Record high employment, solid consumption, wage increases and a housing boom could have made 2012 another boom year. Unfortunately, the slowdown of exports in the second half of the year and delayed investments (despite record low interest rates) due to uncertainties surrounding the euro crisis weighed on growth.

Looking ahead, she sound economic fundamentals should ensure another solid growth performance in 2013: i) Private consumption should remain stable and could even benefit from further employment growth if the latest immigration trends continue. ii) The German economy should be one of the first beneficiaries of any pick up of the global economy. iii) Domestic investment could become the growth wildcard for in 2013. Financing conditions have never been more accommodative in Germany than at present and in addition many companies have increased their cash positions last year. If uncertainties surrounding the euro crisis and the global economy ebb away further, pent-up investment could become an important growth driver.

The German economy might not be an island of happiness any longer but it remains at least an island of growth in a still recessionary Eurozone sea.

Thursday, January 10, 2013

Still enjoying the magic - ECB keeps rates on hold

As expected, the ECB left interest rates on hold in its first meeting of the year. The ECB is obviously still enjoying the magic of its OMT announcement, knowing that the fate of the recovery is now in the hands of governments and the private sector.

The ECB’s macro-economic assessment was almost a verbatim copy of the December assessment. The ECB still expects a very gradual recovery in the course of the year and seems to take comfort from the recent improvement in confidence indicators and financial markets. ECB president Mario Draghi pointed out that the most encouraging signal was coming from financial markets. Lower bond yields, higher stock prices, record-low volatility, strong capital inflows into the Eurozone, a halt of deposit flight in peripheral countries and a reduction of the ECB’s balance sheet were on Draghi’s long list of illustrated market improvements. However, Draghi did not become overly enthusiastic, stressing that up to now there were no signs of an improvement of the real economy and that any recovery in the course of the year would be subdued. As a consequence, the risks to the ECB’s macro-economic analysis remained unchanged: risks to growth remained to the downside, while risks to price stability remained balanced.

According to Draghi’s comments, the call for a rate cut within the Governing Council has all but disappeared. In our view, another rate cut is therefore finally off the table. unless a renewed worsening of the economy would emerge.

Even if Draghi said that it was too early to declare victory and hesitated to adopt the latest improvement as the ECB’s success, today’s press conference had some hidden self-praise. The explicit reference to “reduced fragmentation” of financial markets as potential source of the expected recovery and the fact that “uncertainties about the resolution of sovereign debt and governance issues” disappeared as a risk to growth was a clear backslapper, at least for insiders.

It is obvious that the ECB enjoys its role as the successful crisis manager who averted an imminent break-up of the monetary union. The pure announcement effect of the ECB’s OMT programme has been so powerful in bringing down sovereign spreads and improving market conditions that the activation of the programme might never be needed.

Looking ahead, however, the ECB’s role as Eurozone crisis fighter might become less glamorous than in 2012. Simply because the ECB has run out of options to stimulate the real economy. Using the last ammunition left, a rate cut, would hardly have any impact on the real economy. It is hard to see that the ECB could invent anything similar to an OMT for the real economy. This means that while enjoying the magic, the ECB will secretly keep its fingers crossed, hoping that better financial market conditions and structural reforms eventually really lead to an economic recovery.

Grieks déjà vu voor Mutti

De Duitsers houden van 'Mutti'. Angela Merkels ster straalt aan het begin van dit verkiezingsjaar op ongekende hoogte. Haar grote tegenstander, de socialist Peer Steinbrück, schiet zich permanent in de eigen voet met graaiverhalen. Het beroemde Merkelse 'doormodderen' is inmiddels zelfs sexy geworden. En toch, een garantie voor een derde termijn is dat niet. Angela Merkel heeft op dit moment namelijk een Grieks déjà vu.

Merkels huidige regering is niet bepaald een succesverhaal. Wat in 2009 nog als een droomhuwelijk begon, ontpopte zich zeer snel tot een soapopera van huwelijksconflicten. Zo volgden in snel tempo de vertrekken van de elegante, maar niet zeer wetenschappelijke, Zu Guttenberg, de door verwaarlozing gefrustreerde bondspresident Köhler en het politieke brekebeentje bondspresident Wulff. De populariteit van Angela Merkel heeft daaronder niet geleden. Integendeel.

De verliezer in het droomhuwelijk is de liberale coalitiepartner, de FDP. De niet-waargemaakte beloften van belastingverlaging, het cliëntelisme voor hoteliers en artsen hebben het imago van de partij enorm beschadigd. De partij is in een identiteitscrisis beland en heeft sinds de Bondsdagverkiezingen van 2009 een reeks zware nederlagen geleden in de deelstaten. FDP-bashing is in de mode en ook de partij zelf doet aan nietsontziende zelfkastijding.

Angela Merkel kijkt zwijgend toe. Wat kan het haar schelen? Minder stemmen voor de FDP zijn vaak meer stemmen voor de CDU. Zo wordt de FDP gereduceerd tot het kleine noodzakelijke kwaad van deze coalitie. Desnoods stapt Merkel na de verkiezingen in het bootje met haar concurrent Peer Steinbrück en komt er een herhaling van de grote coalitie van de periode 2005-2009. De verkiezingscampagne van Merkel is daarom ook helder: de fouten niet zelf maar door anderen laten maken en in september de coalitiepartner zelf kiezen.

De strategie van Merkel werkt echter alleen maar zolang de FDP de verkiezingsdrempel haalt en ook in de volgende periode weer in het parlement zit. Als de FDP in het niets oplost en Merkels CDU geen absolute meerderheid haalt, is er een grote kans op een linkse regering onder Peer Steinbrück, met andere linkse partijen, en is het politieke leven van Merkel afgelopen.

Voor Angela Merkel wordt de FDP daarom steeds meer het Griekenland van de Duitse politiek. Ongeliefd, maar onvermijdelijk en niet in staat zichzelf te redden. Merkel kan met een kleine en zwakke FDP leven, maar niet zonder. Net als een grexit zou een 'FDP-exit' grote politieke gevolgen kunnen hebben.

Het is onduidelijk welke reddingspakketten Merkel voor de liberale partner kan bedenken. Misschien uitgeleende stemmen in plaats van uitgeleend geld? Hoe dan ook, uiteindelijk zal zij - net als bij Griekenland - uit puur eigenbelang een hand moeten uitsteken.

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

Wednesday, January 9, 2013

Too little, too late? German IP stabilises in Nov

Industrial stabilisation. After three consecutive months of decline and an accumulated drop of more than 4%, German industrial production finally showed some signs of stabilisation. In November, industrial production increased by a meagre 0.2% MoM, from a 2.0% drop in October. On the year, industrial production is down by 2.9%. The drop was driven by a decline in the production of consumer goods (-2.2% MoM) and energy (-3.3% MoM). The construction sector grew by 1.0%, from -1.6%.

Today’s data is the final piece of evidence of an entire batch of industrial data, showing that the German economy has slipped into contraction in the fourth quarter. Comparing October/November with 3Q, retail sales are down, net exports have turned into a drag on growth and the construction sector has also weakened. It would need an unrealistic economic miracle in December to still avoid the contraction.

Looking ahead, however, strengthening external demand and sound domestic fundamentals should lead the way out of contractionary territory in the first half of this year. The lagged impact of higher wages should offset a slight worsening of the labour market and low interest rates combined with pent-up investment should support domestic demand. At least in Germany, the pass-through of low ECB rates and bond yields to bank lending rates seems to function properly.

All in all, this week’s data have provided more evidence that the German economy should have experienced the worst growth performance in 4Q since the first quarter of 2009.

Tuesday, January 8, 2013

German economy remains in contraction territory

Joining the Eurozone’s race to the bottom? Today’s German data sent two main messages: i) the economy has clearly entered contraction territory in 4Q, and ii) the path out of contraction will not be an easy one.

This morning, the statistical office reported that German exports dropped by 3.4% MoM in November, the sharpest monthly drop in more than a year. At the same time, imports decreased by 3.7% MoM, narrowing the seasonally-adjusted trade balance to 14.5 bn euro, from 14.9 bn in October. The November numbers are not a one-off but an extension of the current trend of weakening exports. Since May 2012, German exports have dropped by around4% on the back of a weakening global economy. Today’s data confirmed our view that exports should have turned from driver of growth into drag on growth.

Looking beyond the 4Q, latest positive sentiment indicators, like the prominent Ifo, have signalled a quick rebound of the economy in the first quarter. With a pick-up of global demand, exports could quickly return as the reliable growth driver. However, latest new order data illustrate that the way out of contraction will not necessarily be a straight upward-sloped line. German new orders dropped 1.8% MoM in November, from a 3.8% increase in October. While domestic new orders increased by 1.3% MoM, orders from non-Eurozone countries dropped by 6.5% MoM.

Thanks to its solid economic fundamentals and stable domestic demand, the German economy should not join the race to the bottom many other Eurozone countries are currently in. However, the German economy could end up humming the “things-will-get-worse-before-they-get-better” tune still for some time.