Wednesday, October 30, 2013

German inflation drops in October

Inflationary pressure in Germany is further fading away. Based on the results of six states, German headline inflation dropped to 1.2% YoY in October, from 1.4% YoY in September. On the month, German prices dropped by 0.2% MoM. Based on the harmonised European definition, headline inflation decreased to 1.3%, from 1.6% in September, and is now at the lowest level since October 2010. Looking at the available components at the regional levels shows that headline inflation dropped on the back of negative base effects from oil prices and healthcare costs. Moreover, the end of university tuition in Bavaria and further price discounts on leisure activities and packaged holidays also contributed to benign inflation developments in October. Looking at consumer prices, inflationary pressure is still hard to find. Consequently, when it comes to German price developments the biggest concern for the ECB is currently probably rather tripled prices of a single construction site in Frankfurt East than headline inflation numbers. Dropping inflation rates in Germany are both bad and good news. Bad news for the rest of the Eurozone as it complicates the required price rebalancing across the Eurozone, risking a race to the bottom. But also good news for German consumers. With record high employment and nominal wage increases, dropping inflation rates should further support private consumption. At least in Germany, one of Mario Draghi’s new bromides should come true: “with low inflation you buy more stuff”.

German labour market remains source of stability

Source of stability. German unemployment dropped by a non-seasonally adjusted 47,800 in October, bringing the total number of unemployed to 2.801 million, the lowest level since November 2012. In seasonally-adjusted terms, unemployment increased by 2,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.9%. The Fall revival of the German labour market turned out to be slightly softer than normal. However, with these numbers, the German labour market still remains an important growth driver. Record high employment combined with yet another increase in real wages (+1% YoY since the beginning of the year) bodes well for private consumption. And, indeed, retail sales and new car registrations in the first two months of 3Q confirm continued consumption growth. Nevertheless, today’s numbers should not deviate from the fact that the German labour market has probably reached its natural level of unemployment. The de facto stagnation of both unemployment and employment rates since the beginning of the year sends a clear signal. The impact from ageing, with the baby boomer generation leaving the labour market, and immigration could become the most important drivers of unemployment rates in the coming year. Moreover, there is another element which could affect the labour market significantly: the current coalition negotiations on a minimum wage. The social-democrats have presented a nation-wide minimum wage of 8.50 per hour as a demand they will not let go. The impact of such a minimum wage on the German labour market is controversial. Opponents of minimum wages argue that they hurt jobs, supporters say that they combat exploitation and social inequality. Even historical evidence from other countries is not straight forward but provides arguments for both opponents and supporters. Economics is not an exact science. Therefore, the proof will simply be in the eating. In the short run, a minimum wage would not only increase the lowest wages but probably also wages currently (slightly) above 8.50 per hour. Households’ purchasing power could temporarily increase. To some extent, a minimum wage in Germany would mark the end of a long journey which started with the labour market reforms in the early-2000s. After the introduction of a minimum wage, it will be hard to squeeze additional positive effects out of the labour market. To continue the current job market miracle or start a new one, a minimum wage should be flanked by additional measures to create new jobs. Even children know that only redistributing the pie eventually leads to an empty plate.

Wednesday, October 23, 2013

Eurozone - No history in the making?

This week’s summit of European leaders will probably not make it into history books as another bold step towards further Eurozone integration.

When European leaders meet today and tomorrow for their Fall Summit, the sense of urgency to take further reforms towards more Eurozone integration seems to have faded away. The latest positive developments in the Eurozone economy and the just started German coalition negotiation talks have clearly lowered the ambition level at this Summit.

More than a year ago, European Council President Van Rompuy presented his first blueprint toward a genuine economic and monetary union. Back then, the proposal was richly filled with new ideas for further integration. The ‘’vision thing” consisted of four building blocks: an integrated financial framework, an integrated fiscal framework, integrated economic policy framework and democratic legitimacy and accountability. The proposals were an attempt to go beyond the patchwork created by the reforms over the last years, consisting of two-packs, six-packs, fiscal compacts and all kind of other regulations. Let’s be clear, the measures taken since 2010 have been impressive and unprecedented, but since the presentation of Van Rompuy’s blueprint, the reform fervour has slowed down.

The biggest achievement since last summer is the single bank supervisor. The current discussions on a possible Eurozone bank resolution mechanism, however, illustrate that already the second step of Van Rompuy’s first out of four building blocks is controversial. While the Commission is pushing for a new European authority with far-reaching powers, the German government, in particular, is arguing in favour of a coordination system, consisting of national resolution authorities. Yesterday, German newspapers reported that – currently acting – Chancellor Merkel could approve a "Single Resolution Mechanism" for failing banks, provided three conditions are met: i) the SRM should only cover the Eurozone's 130 largest banks; ii) there should be clear bail-in rules; and iii)  national parliaments should agree to any public money used to recapitalise banks.

It remains very hard to understand where the German government is heading to. Over the last years, there has been a regular back-and-forth between Treaty changes and plans to strengthen European institutions on the one hand, and more inter-governmental solutions on the other hand. Of course, the sword of Damocles hangs over each step towards further integration, embodied by the German Constitutional Court. However, sometimes the Karlsruhe argument also looks like a welcome negotiation tool. It has happened several times in the past: crucial decisions were initially opposed due to the Treaty change argument but eventually nevertheless embraced, though often in a stripped version. As regards to a bank resolution mechanism, we would still expect the next German government to agree to a common Eurozone solution which is preceded by the already agreed bail-in cascade and which is funded exclusively by the financial sector. With the SPD in the next government, chances that German taxpayers’ money could ever be used to bail out other Eurozone banks have dropped to zero (if they were ever higher).

This week’s European Summit should not bring any news on the banking union or the vision thing. More than a year ago, the political promise of further Eurozone integration was reason enough for ECB President Mario Draghi to give his “whatever-it-takes” speech. It was a kind of advanced payment. Eurozone leaders still need to speed up their visionary reform efforts if they want to get even with Mario Draghi.

Tuesday, October 22, 2013

Towards a new bubble?

Yesterday’s Bundesbank report could bring international attention back to the German real estate market. Despite tentative signs of regional exaggerations, a text book bubble does not seem to be in the offing (yet).
Over the last years, there have been several indicators nicely illustrating the decoupling of the German economy from the rest of the Eurozone. Confidence indicators, unemployment rates and fiscal deficits have moved into different directions than in most other Eurozone countries. Another macro variable which has shown a totally different development is the housing market. While real estate prices have been dropping in many Eurozone countries, sometimes as the consequence of bursting bubbles, Germany has been experiencing a new real estate boom. Over the last years, prices at the national level have increased by an annual rate of around 3%.
However, national data mask vast regional differences. Prices in urban areas have spiked over the last years. Between 2009 and 2012, for example, apartment prices have increased by around 80% in Berlin. In other cities, prices increased by 15% to 30% during the same period. These developments have given rise to discussions about a possible bubble on the German real estate market. Yesterday, the Bundesbank weighed in and presented an analysis showing that prices in urban cities could be up to 10% higher than the level which can be explained by demographic and economic factors alone. In the attractive large cities, this possible overvaluation could be as high as 20%.
In our view, there are several factors behind the sharp increase in urban house prices: record low interest rates, migration from rural to urban areas and increased foreign appetite for German real estate. To a large extent, price increases are the result of a typical demand-and-supply dilemma. Demand for real estate in German cities is increasing sharply, while the supply remains hardly unchanged. This increased demand is also reflected by the fact that home ownership – which in Germany is traditionally much lower than in most European countries – has increased in recent years. At the same time, there are no reasons, yet, to call the latest developments the start of a typical bubble as experienced in other countries before. Mortgage growth has remained limited, loan-to-value ratios in Germany have been stable at around 80% and the large majority of Germans still prefer mortgages with fixed rather than variable rates. Signs of a debt-fuelled bubble are hard to find.
Even if the Bundesbank’s assessment of a fundamental overvaluation looks justified, prices – at least in urban areas – could in the short run still further increase on the back of low interest rates and limited supply.

Sunday, October 20, 2013

Let the negotiations finally begin

This week, the official coalition talks between Angela Merkel’s CDU and the social-democratic SPD can finally start. It probably did not need any phone calls from other Eurozone leaders, but finally, three weeks after the elections, official coalition talks in Germany will start this week. Two weeks of so-called exploratory talks had limited the options for Angela Merkel to one: the social-democratic SPD. It does not seem to be love at first sight, but on Friday both parties, CDU and SPD, announced that they were ready for official coalition talks. Yesterday, the SPD party convention gave the final green light. The SPD convention’s “yes” was sweetened by the party leaders’ list of key demands of Angela Merkel. These demands include (i) the introduction of a nationwide minimum wage of €8.50, (ii) equal pay for men and women, (iii) a financial transaction tax, (iv) more investment in infrastructure and education, (v) a strategy to boost growth and employment in the Eurozone, (vi) equal pensions for seniors in the former West and East Germany, (vii) the ability to have dual citizenship, (viii) measures to make it easier to combine work with family life, (ix) a cap on rents and (x) stricter penalties for tax evaders. In our view, these demands should hardly have the potential to derail the upcoming coalition talks. On some issues, like for example the minimum wage, the CDU had already moved towards the SPD’s position in recent days. Other issues have been phrased rather vaguely, opening the door for compromises. More controversial issues like the call for tax increases have been dropped. Once a coalition deal is struck, the SPD is still set to seek final approval in a poll of its grassroots members. The negotiations might not even be the biggest challenge, at least not for the SPD.

Tuesday, October 15, 2013

German ZEW strong in October

Still going strong. Today's ZEW index gives the impression that analysts believe in the invulnerability of the German economy. The ZEW index which measures investors' confidence increased once again in October and stands now at 52.8, from 49.6 in September. This is the highest level since April 2010. At the same time, however, investors have become slightly less positive about the current economic situation. The current assessment component dropped to 29.7, from 30.6 in September. The new dark clouds coming from the other side of the Atlantic have not yet blacked out analysts’ optimism. Today's ZEW index fits into the gradually improving picture of the German economy in the third quarter. After a disappointing start in July, all hard economic data has pointed to a stabilization of the economy at around its trend growth rate of 0.3% to 0.4% QoQ. The big unknown in this scenario of continued strong economic growth in Germany is the US debt crisis. Over the last years, the German economy often turned out to be debt crisis beneficiary. As long as the Eurozone debt crisis did not totally escalate, the German economy benefitted from low interest rates and a relatively weak exchange rate. At the current juncture, however, it is very hard to see how the German economy could benefit at all from the latest debt crisis: the US debt crisis. At best, an escalation of the US crisis could increase Germany’s safe haven status in international bond markets. Interestingly, Germany’s exposure to US government bonds is rather limited, amounting to roughly 1.5% of GDP. A further appreciation of the euro exchange rate and a sharp economic slowdown in the US would be a severe hit to the German economy. Let’s not forget that the US has again become Germany’s most important non-Eurozone trading partner. Today’s ZEW index confirms the positive prospects for the German economy. Let’s hope these positive prospects are still intact after the end of this week.

Wednesday, October 9, 2013

Politieke poker in Duitsland

De karavaan is alweer verder getrokken. Internationale media en commentatoren hebben de Duitse verkiezingen alweer afgerond. Angela Merkel heeft gewonnen. Punt, ander onderwerp. Gek, want wat nu volgt, is spannender en bepalender voor de toekomst dan enig welk moment in de campagnetijd. We zitten midden in een politiek pokerspel. 

Direct na de verkiezingsuitslag leek het alsof bondskanselier Merkel een hoge prijs moest betalen voor haar indrukwekkende overwinning. De gedoodverfde coalitiepartner, de verliezende sociaaldemocratische SPD, speelt 'hard to get' en heeft met de aangekondigde ledenraadpleging over een mogelijk regeringsakkoord een zwaard van Damocles boven de onderhandelingen gehangen. De achterliggende gedachte is duidelijk: Merkel heeft geen alternatief, dus is dit het moment om ons wensenlijstje te verzilveren. 

Hoog spel van de SPD, want juist vandaag komt een alternatief in beeld. Nadat enkele kopstukken bij de groenen zijn opgestapt, lijkt de weg vrij voor een nieuwe, minder ideologische generatie die een samenwerking met Merkel als nieuwe profileringskoers ziet. De eerste gesprekken worden vandaag gevoerd. Met de gesprekken met de groenen zet Merkel het politieke pokerspel voor een nieuwe Duitse regering briljant naar haar hand. Na de afgang van de liberale FDP, lijken de groenen zich te willen profileren als het nieuwe liberale alternatief en staan ze plotseling veel opener voor een coalitie dan amper twee weken geleden. De groenen weten ook dat veel van hun kiezers uit de hogere middenklasse komen, die ook de traditionele achterban van de FDP was. Een coalitie met Merkel kan het vehikel of het noodzakelijke kwaad zijn om de droom van een echte en volledige 'Energiewende' waar te maken. 

De SPD zal de gesprekken met gemengde gevoelens volgen. Ja, er zijn aarzelingen om een regering met Merkel te vormen. Zeker in een situatie waarin de partij veeleer naar links wilde doorbuigen. De grootste vrees van de SPD is dat ze net zoals tijdens de laatste 'Grosse Koalition' tussen 2005 en 2009 weer met huid en haar wordt opgeslokt en met verkiezingsverlies wordt uitgespuugd door Merkel. Vooral de basis van de SPD is fel tegen een nieuwe grote coalitie. Maar een samenwerking van CDU en groenen is evenmin in het belang van de SPD. Als de groenen zich als de nieuwe liberalen ontpoppen, zal het moeilijk worden hen over vier jaar te overhalen in een linkse regering te stappen. 

Wellicht passen Veggie Day en Oktoberfest dit jaar nog niet samen. De gesprekken vandaag met de groenen zijn echter een meesterlijke zet van Merkel, omdat de prijs voor een coalitie met de SPD weer daalt. Merkel houdt nu weer meer troefkaarten in haar hand dan twee weken geleden. Het is nu aan de anderen om kleur te bekennen en hun kaarten op tafel te leggen. De uitkomst van het politieke pokerspel in Duitsland blijft open.

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

August IP adds positive colours to German outlook

German industrial production rebounded in August, pointing to solid growth in the third quarter. Industrial production increased by 1.4% MoM, from a 1.1% decline in July. On the year, industrial production is up by 0.3%. The increase was mainly driven by strong growth in the production of capital goods (+4.4% MoM), while the production of durable consumer goods dropped (-2.1%). After two strong months, production in the construction sector declined by 1.9% in August. The German economy is gradually leaving the disappointing July numbers behind. While exports and retail sales still cast some doubts about 3Q growth, today’s industrial production numbers paint a more positive picture. It looks as if the German economy has returned to its trend growth rate of around 0.3-0.4% QoQ. Looking ahead, in the short term, the prospects for German industry remain positive. Industrial production should further benefit from the recent inventory reduction and the increase in new orders earlier this year. According to the latest surveys, companies have reduced their inventories to 2011-levels. In the medium term, however, the export engine is facing new challenges like for example the US debt crisis, only gradually stabilising Eurozone economies and weaker growth momentum in emerging markets. Solid domestic demand should remain an insurance against unexpected export surprises but any bigger investment initiatives, which eventually should come to light during the current coalition talks, could come right on time.

Tuesday, October 8, 2013

German new orders disappoint in August

Setback. German new orders dropped by 0.3% MoM in August. This was the second monthly drop in a row. On the year, new orders are still up by 2.8% but after the strong drop in July today’s numbers are a clear disappointment. The zig-zag pattern of the last year has been broken. Unfortunately in a negative way. Nevertheless, in the short term, the prospects for the German industry remains positive. Industrial production should further benefit from the recent inventory reduction and the increase in new orders earlier this year. According to latest surveys, companies have reduced their inventories to 2011-levels. In the longer term, however, the industry needs more fuel to return to full strength. Earlier today, the statistical office reported that German exports grew by 1% MoM in August, from -0.8% in July. At the same time, imports increased by 0.4% MoM, from 0.3% in July, widening the seasonally-adjusted trade balance to 15.6bn euro, from 15.0bn euro in July. As so often in the past, German exports seem to be immune against a stronger exchange rate. German trade data also suggest that the idea of Eurozone rebalancing might need some re-thinking. Since the beginning of 2011, unit labour costs in Germany increased by around 2.5% compared with the rest of the Eurozone, while they dropped sharply in Greece (-14%), Spain (-6%) and Portugal (-5%). Up to now, while these changes in relative cost competitiveness have supported export sectors in peripheral Eurozone countries, they have not harmed German exports. The reasons for the continued strength of German exports is manifold: just think of product specialisation, price insensitive demand and strong demand from non Eurozone countries. All in all, today’s data show that the German economy is only gradually recovering from the weak start of the third quarter.