Thursday, December 18, 2014

Ifo signals conciliatory year-end

Conciliatory year-end. German business confidence confirmed the decent rebound of the economy in the final quarter of the year. Germany's most prominent leading indicator, the Ifo index, just increased for the second month in a row to 105.5 in December, from 104.7 in November. While the current assessment component remained unchanged, expectations increased to 101.1, from 99.7 in November. A rather disappointing year for the German economy comes to an end. The impressive growth performance of the first quarter was more than offset by a subsequent soft spell, which took longer than expected. The former growth miracle had quickly lost its glamour. With an average quarterly growth rate of 0.2% since early 2013, the German economy has morphed almost unnoticed from the Eurozone’s splendid growth engine to one-eyed in the land of the blind. In recent weeks, some of the worst concerns have subsided, though not disappeared. The Ukraine-crisis has calmed down, without being solved; the rest of the Eurozone should continue to recover, albeit at a too low pace; and the negative impact from the timing of the summer vacation has finally disappeared. Even better, lower energy prices and the weaker euro should make a decent short-term stimulus package for the German economy. As experienced in the past, the German economy is one of main beneficiaries from lower energy prices and a weaker exchange rate. Over the last twenty years, German exports to non-Eurozone countries have shown a rather unique correlation with exchange rate movements. Relatively immune against currency strengthening but strongly benefitting from currency weakening. A lucky pattern not all Eurozone countries have experienced. This positive effect should start to kick in in the coming months. Moreover, lower energy prices have already boosted every German’s disposable income by 25 euro per German. Last but not least, the fact that next year several public holidays will fall on weekends should add some 0.2%-points to GDP growth. Currently, probably the two biggest downside risks to a rosier German near-term outlook are Russia and complacency. As regards Russia, German exports to Russia have already suffered under the sanctions and the Russian slowdown, currently standing 22% below last year’s level. The current ruble crisis should now have a broader impact on German exporters as it should also affect products that did not yet fall under the sanctions. Even if Russia currently only accounts for roughly 2.5% of all German exports, direct and indirect repercussions from the current ruble crisis cannot be excluded. As regards the second risk, a recovery on the back of an external stimulus package also bears the risk of further self-complacency and a resistance to start new reforms. This year’s weakness provided further evidence that the economy is still too dependent on exports. Despite running at full employment and an almost closed output gap, private consumption has not been able to give a strong boost to the economy. Private consumption’s annual average growth rate between 2010 and 2014 almost doubled that of 2005-2009. However, at only 1% it was good but not good enough. The same holds for investment. With some slight upward momentum this year, it is still far too weak to close the gap with investment in most other developed economies, which widened between 1995 and 2009 when domestic investments grew by only 0.1% per year. There clearly is enough room for improvement. All in all, today’s Ifo reading gives a conciliatory end to an exciting but also disappointing year of the German economy. The economy once again defied premature swan songs. It’s now time to take a deep breath and enjoy Christmas, even if there is no reason for excessive backslapping.

Monday, December 8, 2014

More rebound evidence

More evidence for Germany’s rebound. October trade data just added to recent evidence that the Eurozone’s largest economy gained some momentum at the start of the fourth quarter. Exports dropped by only 0.5% MoM, from a strong +5.5% MoM in September. As imports dropped by 3.1% MoM, the seasonally-adjusted trade balance improved to 20.6 bn euro, from 18.6bn in September. The trade balance with Germany’s Eurozone peers was only slightly positive and exports to the rest of the Eurozone are only up 1.9% YoY. The fact that German exports to non-Eurozone countries are up by around 7% on the year illustrates the economy’s gradual decoupling from the rest of the Eurozone. German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, over the last twenty years, German exports to non-Eurozone countries have shown a rather unique correlation with exchange rate movements. Relatively immune against currency strengthening but strongly benefitting from currency weakening. A lucky pattern not all Eurozone countries have experienced. The exchange rate channel remains in our view the strongest argument for the ECB’s QE efforts. Indeed, going back to bigger macro-economic simulations indicates that ECB president Draghi was right in pointing to the negative impact on inflation from lower oil prices, rather than any positive effects for growth. As a rule of thumb, a depreciation of the (trade-weighted) euro exchange rate by only 5% could add some 0.3%-points to Eurozone GDP growth. To get the same impact from oil, prices would need to fall by at least 50%. At the current juncture, the weakening of the trade-weighted exchange rate has been less accentuated than the weakening vis-à-vis the US dollar. If it stayed at its current levels throughout 2015, the nominal effective exchange rate would only be 2.5% below its 2014 average. This seems to explain why ECB president Draghi prefers to use falling oil prices as a means to get QE, rather than hoping for the direct healing impact from oil. Looking ahead, even if it might hinder new structural reform efforts, a weaker euro is probably the best thing that could happen to both Germany and the Eurozone.

Sunday, December 7, 2014

German economy makes good start into Q4

The end of the soft spell? German industrial production continued its rebound and increased by by 0.2% MoM in October, from 1.1% in September. On the year, industrial production was up by almost 1%. The increase was mainly driven by the production of intermediate and consumer goods. Moreover, production in the construction sector increased by 1.4%. Today’s data add to the encouraging data from last week when new orders increased by 2.5% MoM in October, after 1.1% in September. Even if the new order data might be slightly blurred by bulk orders, the latest positive trend from the industrial sector suggests that the initially weird sounding explanation of too many vacation at the same time during the summer was a valid reason for the economy’s weakening in the third quarter. Now that all Germans are finally back at work, the industry is rolling again. This is also confirmed by the fact the inventory build-up seems to have stopped in October. For the first time since June, inventories dropped again in November. Looking ahead, the German economy should benefit from a very special stimulus package. As experienced in the past, the German economy is one of main beneficiaries from lower energy prices and a weaker exchange rate. This positive effect should start to kick in in the coming months. Moreover, the fact that next year several public holidays will fall on weekends should add some 0.2%-points to GDP growth. Disappointing economic data since the summer months had given rise to a more general discussion about the state of the German economy. Were the numbers the start of a longer-lasting stagnation or just a soft spell? With today’s numbers the answer is clearly: a soft spell. And, even better, the soft spell should be over in the final quarter. Nevertheless, the economic rebound should not deviate from the fact that the German economy is exhausting the successful structural reforms from the past to the extremes. Even if the soft spell is over, self-complacency is definitely misplaced.

Thursday, December 4, 2014

Draghi’s oil front against QE-opponents

Despite no action at today’s ECB meeting, president Draghi sent strong signals that QE will start next year. The inflationary number of Draghi using the word “QE” was probably the broadest hint he could give. The ECB’s macro-economic assessment has become grimmer. Particularly, the ECB’s view on growth looks much more pessimistic than three months ago. In its latest projections, ECB staff now expects GDP growth to come in at 1.0% in 2015 and 1.5% in 2016. Back in September, this was still 1.6% and 1.9%. The revision to the 2015 forecasts are probably the sharpest downward revisions within one quarter ever. Interestingly, the narrative behind these growth forecasts has not changed. The ECB still believes in a modest economic recovery on the back of domestic demand and the global recovery. Risks, however, remain to the downside. As regards inflation, the ECB sounded more alarmed. The fact that staff projections had been revised downwards seems to be the main cause for the following QE-signals. ECB staff now expects inflation to come in at 0.7% in 2015 and 1.3% in 2016, from 1.1% and 1.5% respectively in the September forecasts. These revisions reflect mainly lower oil prices in euro terms and the impact of the downwardly revised outlook for growth During the press conference, Draghi repeatedly used the lower inflation forecasts and the fact that energy prices had dropped further in the last two weeks as the main reason for concerns. In our view, the importance oil prices have received in the ECB’s current monetary policy discussions is a bit unclear. In earlier times, the ECB would have tended to ignore short-term effects from oil price fluctuations on headline inflation. Now, it seems as if Draghi is using oil as an argument to convince the last QE-opponents. However, it is remarkable that Draghi was relatively muted on the positive impact from lower energy prices on oil. Earlier this week, for example, IMF chief Lagarde had said that the current drop in oil prices could add 0.8% on growth in most advanced economies. The scene is clearly set for QE. Draghi’s comments during the Q&A could hardly leave any doubt: the ECB is determined to start some kind of QE in 2015. Here are the key sentences: According to Draghi, the ECB will “reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments. We will also evaluate the broader impact of recent oil price developments on medium-term inflation trends in the euro area. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures.” Moreover, the slight change in tone that the ECB now “intended” and no longer “expected” the current measures to reach the size of the balance sheet from 2012 was the last evidence of the ECB’s determination. So, where does all of this leave us now? Here are the facts: the ECB will discuss QE in the first quarter of next year. In our view, this will not yet take place in January as too few new information will be available by then. As regards the balance sheet, we will get the second TLTRO on 11 December. Then, the run-off of the two earlier 3-year LTROs (accounting for roughly 280bn euro) could in the short run even reduce excess liquidity in the Eurozone. Moreover, the March TLTRO will be the first one where the take-up is depending on net lending and not the loan stock. Add to this the next staff projections and the ECB should have all information needed to go all the way. This makes us comfortable to stick to our current forecast of (an announcement of) a first intermediate QE in the first quarter, followed by sovereign QE in the second quarter, unless the Eurozone economy stages an unexpected growth revival. Obviously, not all ECB members, not even all members of the ECB’s Executive Board, are fully supportive on the role of the balance sheet in the ECB’s decision-making. However, the continued emphasizing of low inflation will make it very hard for even the purest Germanic monetarists to eventually block QE.

Thursday, November 27, 2014

German inflation drops in November

Based on the results of six regional states, German headline inflation dropped to 0.6% YoY in November, from 0.8% in October. On the month, German prices remained unchanged. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation decreased to 0.5%, from 0.7% in October, and stands now at its lowest level since February 2010. A quick look at the available components at the regional levels shows that the drop in headline inflation was not only driven by lower energy prices but also some tentative second-round effects on consumer goods and a drop in prices for vacation destinations and package tours. Looking ahead, the recent drop in energy prices – if sustained and if not offset by strong currency weakening – could push German headline inflation further down. Corrected for the euro depreciation vis-à-vis the US dollar, oil prices have dropped by more than 15% since last November. Not all of this price drop has yet been passed through to consumer prices. However, as German employment just reached another record-high in October, this drop in inflation should be inflationary rather than deflationary. Just think of Draghi’s famous words “with low inflation, you can buy more stuff”. At the current juncture, price expectations of both consumers and producers remain solidly anchored in Germany. According to today’s economic sentiment indicators from the European Commission, price expectations by both consumer and producers have slightly come down in November but remain close to their respective historical averages. Interestingly, price expectations in the service sector have now increased for three months in a row and are close to all-time highs. This might be the result of higher wages and maybe also the introduction of the minimum wage. For next week’s ECB meeting, today’s German inflation data could be the prelude of another downward revision of the ECB’s inflation forecasts. Back in September, ECB staff had projected an average inflation rate of 1.1% for 2015 and 1.4% for 2016. Even without any significant changes to the growth outlook, the latest drop in energy prices should be sufficient to automatically lead to lower inflation forecasts. Remember that last month, ECB president Draghi had described two “contingencies” for further action: the current measures are not enough to reach the new (soft) balance sheet target, and a worsening of the medium-term outlook for inflation. Obviously, next week will be too early to give an assessment on the first contingency but with lower inflation projections, one of the two lights needed to start QE could already be lit green next week.

Wednesday, November 26, 2014

Abracadabra from Brussels?

Today, the European Commission will present its long-awaited investment plan. Risks are high that it will not be the big game changer.

It has probably been Brussels’ least guarded secret of recent weeks: Jean-Claude Juncker’s investment initiative is supposed to give the new European Commission and the entire European economy a kick-start. A ballpark figure of around €300bn has been circulating for a while. Today, the European Commission will present its plan on how to achieve the targeted amount.

Based on the available information circulating in the media, Juncker's plan should consist of a new investment fund that will give guarantees for private sector investors. The funds own financial means could be around €21bn, according to latest reports, €5bn from the EIB and €16bn from the EU. These guarantees should – in theory – attract almost €300bn of venture capital and private funds for projects identified by the European Commission. The focus of these project will be on infrastructure, energy and high-speed internet.

In our view, this means that hardly any new public money will be invested. The EU funds will very probably come from existing budgets and projects and whether the EIB’s €5bn will be new guarantees or only specially devoted funds remains unclear. Public funds will only be used as “first loss” guarantees. This means that without private sector money, not a single euro will be spent.

As regards the now known technical details, the biggest problem is of course the wished for multiplier. Making €315bn out of €21bn would make any magician jealous. The current construction would indeed cap the risk and therefore increase interest from private investors. However, the problem in our view is the expected return (or yield) on these investments. The identified projects are typical "public goods" projects, where it is hard to calculate an expected yield on the investment. However, this yield is what private investors will be looking for.

With the current low levels of interest rates, it might have been easier for governments to borrow money in the market rather than fixing and promising expected returns on investment for private investors. But to allow for that, one would need another change in the stability programme, effectively keeping investment expenditure outside the current expenditure budget, something Germany is most likely to resist.

All in all, it looks as if Juncker’s plan will not be the big game changer but rather a non-starter. Unless magic is joined by a miracle. As so often in the past, this would transform an excellent idea ultimately into a missed opportunity. To be clear, it should not be the Commission that has to be blamed, but the willingness of member states to chip in fresh money. As long as the Commission – or, for the sake of simplicity, Europe – does not have own funds, any financial attempts to revive growth are deemed to fail. This would be a pity as the underlying idea is good: find European projects and start investing to stimulate short-term growth but also, and more importantly, potential growth. This could have been the kick-start for the new Commission and the boost for new European growth visions, but instead Europe seems to have a new fund of hope rather than one of hard commitment.

Monday, October 27, 2014

Downward slide continues

Downward slide continues. German business confidence dropped for the sixth month in a row in October, illustrating the Eurozone’s biggest economy has reached a dangerous stage between soft spell and longer-lasting almost-stagnation. Germany's most prominent leading indicator, the Ifo index, just decreased to 103.2, from 104.7 in September. Both the current assessment and the expectation component slowed down. Particularly the weaker expectation component, which dropped to its lowest level since December 2012, is a reason for further caution. Latest soft data has rather increased than decreased the degree of diffusion, maybe even confusion. While last week’s PMI and consumer confidence indicator had given hope that the economy would slowly recover from the psychological shock waves from the summer, today’s Ifo index is less encouraging. Trying to get some grip on the current state of the economy requires a lot of instinctive feel. At the current juncture, it is still hard to tell whether solid domestic demand can offset weaker industrial activity; and if for how long. While the strong labour market and low interest rates are supporting private consumption and the construction sector, the export-oriented industry is still going through a dry spell. However, the latest reductions in backlogs and optimism stemming from new Chinese bulk orders show that the risk of drying-up is still relatively small. Looking ahead, Germany’s export industry will face several opposing trends in the next months: on the negative side, with France and Italy stagnating, demand from the Eurozone should remain weak. On the positive side, however, the strong US recovery and renewed demand from China bode well for exports. In our view, the German economy is neither near the abyss, nor close to a period of self-complacent honky-dory. It is in a longer-lasting transition period from the end of the positive reform cycle to the challenges an ageing economy is facing. Even if it is does not make sense to use single economic data as a barometer on whether or not the government will decide on growth-enhancing measures, the general need for more domestic investment in Germany remains. Last week’s European Summit, which took place off markets’ radar screens due to the stress test excitement, did not provide any further guidance. While statements in the final summit conclusions like “…the urgency of the prompt implementation of measures to boost jobs, growth, competitiveness…” sounded promising to those hoping for additional fiscal stimulus, the Germanic sentence “structural reforms and sound public finances are key conditions for investment” underlined that the face-off between Germany and the rest of Europe on how to revive the Eurozone economy is far from being solved. In the short run, lower energy prices and the weaker euro exchange rate are already a small stimulus package for the German economy. However, it is a package which will rather delay than advance new structural reforms.

Friday, October 3, 2014

Eurozone - Heading towards Animal Farm?

The latest announcements have shown that the Eurozone is heading towards another showdown on the right balance between austerity and growth.

The Eurozone is preparing for yet another showdown on the right balance between austerity and growth. Italy, but even more so France, laid down the gauntlet to EU partners in recent days, presenting fiscal plans which would clearly be in strong contrast with the Eurozone’s fiscal framework. In addition, the latest comments by the IMF, the ECB and the OECD, all basically calling for more active fiscal stimulus, have also heated up the debate. A new showdown between Italy and France on the one side and Germany plus some fiscal hardliners on the other side is clearly in the making.

The discussion on growth versus austerity has become an almost religious debate. Without choosing sides, let’s have a quick look at what wiggle room the strengthened fiscal framework is offering. For countries with a fiscal deficit below 3% of GDP, read Italy, the fiscal rules offer a decent portion of flexibility. Countries still have to reach balanced budgets in the medium-term and have to stick to their own national debt brakes (if they have implemented them already) but the adjustment pace can be flexible. The flexibility allows for government investments. At least if these are investments in projects co-financed by the EU under regional development policies for poorer regions, European networks, or the connecting Europe facility. Moreover, there is room for major structural reforms that have "direct long-term positive budgetary effects, including by raising potential sustainable growth”. However, the problem is that these reforms actually have to be implemented already.

As regards countries with a fiscal deficit above 3%, read France, the flexibility of the fiscal rules is very limited. As long as countries are still in the so-called excessive deficit procedure, flexibility is limited to extending the deadline to reach the 3%-deficit target. In the case of France, however, the deadline has already been extended twice; in 2009 and in 2013. According to the fiscal rules, such a deadline can only be extended in the case of unexpected adverse economic events. While the financial crisis qualified as such an event, it is hard to see that the failure to implement structural reforms or stagnating growth can be considered unexpected.

Today, everyone seems to talk about flexibility again. Obviously, some economic common sense should be welcome but at the same time let’s not forget that bending the rules in the early 2000s had laid the grounds for unsustainable and uncontrollable public finances almost ten years later. Of course, there is wiggle room in the new fiscal surveillance framework and it looks as if there is new momentum in the Eurozone to also support the demand side of the economy. However, it will not be an easy balancing act. In this context, the biggest challenge will be to treat Italy and France differently. Treating France differently than other countries in the so-called excessive deficit procedure could damage the long-term credibility of the fiscal framework and would clearly have the scent of Animal Farm: all (pigs) are equal, only some are more equal than the others.

In our view, the situation is more delicate than it looks like. However, the most probable outcome of the current controversy is still a bit of more accommodative fiscal policies, without letting austerity disappear, a bit of German goodwill topped with a bit of European investment (eventually maybe even supported by some ECB QE).

Thursday, October 2, 2014

ECB shows some of the money

More questions than answers? At its meeting in Naples, the ECB unsurprisingly decided to keep interest rates unchanged. Moreover, the ECB presented some details of the already announced ABS and covered bond purchasing programmes. ECB president Draghi’s comments at the press conference have increased rather than decreased the likelihood of more action to come. The ECB’s assessment of the Eurozone economy remained unchanged and was almost a verbatim copy of the September assessment. The entire macro-assessment can nicely be summarized with Draghi’s own word: “I have always said that the recovery is weak, fragile and uneven”. Nothing to add here. In ECB language this means that risks to growth remain to the downside. As in September, the ECB stopped giving a direction for risks to the inflation outlook. As regards the ECB’s asset-backed securities purchase programme (ABSPP) and covered bond purchase programme (CBPP3), the ECB presented some technical details after the press conference. The ECB’s purchasing programmes will start in mid-October (covered bonds) and the fourth quarter (ABS) and will run for two years. The details of the ABS programme are limited to purchases of senior tranches and follow more or less the current principles or guidelines of the ECB’s collateral policies. The ECB decided to also accept assets from Greece and Cyprus, but only under certain caveats and additional conditions. In the press conference, Draghi suggested that the ECB would only accept assets from these two countries if they were running under (EU) programmes. This, however, was not reflected in the published texts. Consequently, this could clearly hinder the Greek government’s latest attempts to exit the second bailout programme without a follow-up. The most important issue of the ABS purchasing programme, however, remains unanswered. The controversy about the riskier ABS tranches has apparently not been solved, yet. Remember that several Eurozone governments, particularly France and Germany, had already given the ECB the cold shoulder, refusing to guarantee mezzanine tranches. However, without purchases of the riskier ABS tranches, the programmes will be handicapped before they start. In the official text, the ECB only said that details of purchases of mezzanine tranches will be published at a later stage. In general, the ECB refrained from answering two important questions on the ABS and covered bond purchasing programmes: will there be a country distribution and what will be the total volume? Regarding the volume of all purchases, Draghi made the latest new soft target, the size of the balance sheet, a bit softer. He said that the “potential universe” of all eligible ABS and covered bonds was 1 trillion euro. On top of that come the TLTROs. Returning the ECB’s balance sheet to its size of 2012 (which would require an increase of 1000 billion euro) was an instrument rather than a goal. The ECB obviously sticks to its current strategy of repairing the transmission channel of monetary policy. All measures are aimed at supporting the supply side of the credit economy, ie banks. At several occasions during the press conference, Draghi stressed that monetary policy alone could not restore growth in the Eurozone. He called several times for more (implementation of) structural reforms, the use of fiscal room for manoeuvre and demand-side policies. Whether this was another invitation for Eurozone governments to join another grand bargain, or just another desperate cry in the dark remains to be seen. The experience of the last years, however, tells us that the ECB’s advance payments have hardly ever been matched by equivalent government actions. In this context, the fact that Draghi mentioned the ECB’s unanimous commitment “to using additional unconventional instruments” three times compared with only one time last month is in our view a clear signal that the ECB is determined to do more and even bolder action if necessary.

Friday, September 26, 2014

The Inbetweeners - German Economic Update

The economy has been on a roller coaster ride for quite some time. In the short run, fundamentals remain strong but preparations for the longer run should start quickly. Only judging from German GDP data, the economy has been on a roller coaster ride for quite some time. The impressive first quarter performance was followed by a disappointing contraction in the second quarter. This contraction had given rise to new speculations that the German second Wirtschaftswunder might already be over. Is it? The answer to this question is not easy and not straight forward. There are currently several, partly opposing, trends and developments affecting the economy’s growth prospects. In many ways, Germany is currently inbetween. Here are at least three: i) inbetween strong domestic demand and weaker external demand; ii) inbetween strong short-term fundamentals but weaker long-term prospects; and iii) somewhere inbetween the sometimes religious debate on growth versus austerity. The composition of second quarter growth sent two opposing signals for the German economy’s prospects: the sharp drop in the construction sector should have been a weather-driven one-off and should be reversed in the third quarter. Demand for housing continues to be strong, backed by low interest rates and low homeownership ratios. The inventory build-up seen in the second quarter, however, was less encouraging for activity in the third quarter. Moreover, the only marginal improvement of new orders from other Eurozone countries shows downside risks for the German economy do currently not mainly come from geopolitical tensions but rather from longer-than-expected weak demand from Eurozone peers. It is still too early to tell which of these opposing trends will eventually predominate. This is why Germany is an inbetweener. In our view, the solid fundamentals, domestic demand and exports to the US still form a substantial safety net against widespread fear and a period of economic drought in Germany. Looking beyond the short term, however, the economy and policymakers face new problems. The current strength of the German economy is still the result of structural reforms from the early 2000s. In fact, the economy has reached the final stage of textbook business and reform cycle: from the sick man of Europe to structural reforms and wage moderation to regained competitiveness and increasing exports to dropping unemployment and strengthening domestic demand to wage increases and a fully self-sustained recovery. Additional stimulus will have to come from new structural reforms. Otherwise, Germany could have problems facing its long-term challenges like ageing, an investment gap and surviving global competition. One of the crucial questions for long-term growth prospects is how the industry will react to emerging market economies’ attempts to climb up the quality ladder. Or put differently, what will happen if and when emerging market economies are able to produce same quality products as the Germans. In this context, new developments and trends known as industry 4.0 are of high importance. To manage the transition from the rosy short-term to the rather challenging long-term, investments play an important role. Both public and private investments have remained sluggish in the current recovery. At the same time, however, several investment-intensive sectors offer an enormous potential to improve Germany’s long-term growth. Just think of infrastructure (rail, road but also internet), transition towards renewable energies and education. Up to now, the government has been reluctant to address this issue, giving the impression of some kind of complacency and refusing calls to use the still good (economic and fiscal) times and extremely low interest rates to tackle weak investments. This could change. In recent weeks, there has been anecdotal evidence of a slight, subliminal change within the government, with for example the start of an expert group on new investments. More emphasis on investment would be a shift in policymakers’ stance on austerity and structural reforms. In the European debate, German policymakers have been relatively quiet, hardly commenting on increased calls for more growth and demand-oriented policies. There are, however, some domestic signals that Germany is giving up its principle of leading by example. The German mantra of austerity and structural reforms seems to wobble; at least domestically. In the latest debate on how to reform the German system of transfers between the federal states, a proposal by finance minister Schäuble foresees that the debt brake for the states could be eased. Moreover, the issuance of common bonds of all federal states is also discussed. Last year, the federal government and some regional states issued already one common bond for the first time ever. Needless to say that these changes to the own transfer system would have a strong signalling effect to the rest of Europe. All in all, despite the still strong fundamentals, Germany seems to have reached an interesting transitional period in many different ways, making it the economy of the inbetweeners.

Wednesday, September 10, 2014

Vreemdeling in eigen land

Na ruim een week in de nieuwe oude heimat blijkt het wel weer wennen. Mijn zoon kreeg op de eerste training van zijn nieuwe voetbalclub te horen dat 'wij in Duitsland op tijd beginnen' nadat hij drie minuten te laat was omdat we de weg even kwijt waren. Mensen lopen niet bij rood licht over straat, ook al zijn er in geen velden of wegen auto's te bekennen. En in de supermarkt schallen reclamespots voor orthopedische inlegzolen en lijfrentes. Welkom in Duitsland, het land van regels, vergrijzing en slaapliedjes van gedroomde bestaanszekerheden. Het verbaast niet dat de Duitsers de ECB niet meer begrijpen. Na het laatste besluit van de ECB afgelopen week waren bijna alle Duitse economen in Mainhatten razend. Volgens hen was Mario Draghi echt te ver gegaan. Wat had het aankopen van privéschuldpapier nog met monetair beleid te maken? Veel. Na Draghi's whatever-it-takes om de eurozone bij elkaar te houden, is het nu een whatever-it-takes om stagnatie en Japanse toestanden in de eurozone te voorkomen. De strategie is duidelijk. De ECB doet er nu alles aan om de aanbodzijde van de kredietgroei op gang te krijgen. Met conditionele liquiditeit, het aankopen van ABS en pandbrieven en uiteindelijk ook de bankenstresstests is er geen excuus meer: aan de banken ligt het dan niet meer als de economie niet groeit. Maar wat als de oorzaak niet de banken zijn, maar de zwakke vraag naar kredieten? Dan helpt alleen nog de Draghi-bag. Betaal elke burger maandelijks 250 euro via de belastingdiensten van de verschillende lidstaten. De eurozone telt zo'n 330 miljoen inwoners, dus na een jaar heeft de ECB haar balans ook met 1.000 miljard euro vergroot. Dat is wat Draghi nu op een ingewikkelde manier ook probeert te bereiken. Gegarandeerd. Burgers zouden met dat geld schulden aflossen of meer besteden. Als de ECB dan ook nog zou aankondigen dat de maandelijkse overboekingen zo lang doorgaan totdat de inflatie weer boven 2 procent staat, gaat dat geld ook daadwerkelijk in de conjunctuur en niet alleen in de spaarpot. Vooral in Duitsland lijkt zo'n Draghi-bag een groot hersenspinsel. En ja, het is monetaire financiering, in strijd met de Verdragen en het vermindert de druk op regeringen om meer te hervormen. Maar wat als zo'n Draghi-bag wordt verbonden aan verplichte structurele hervormingen? Zou dat niet een onconventionele maar ook zeer controverse en efficiënte manier zijn om Japanse toestanden in Europa te bestrijden? Hardop roepen zal ik dat in Duitsland beter niet, anders sturen ze mij nog naar de kerkers van de Bundesbank met een prop in mijn mond. Misschien ben ik in België 'onDuitser' geworden dan ik eigenlijk zou willen toegeven. Maar ik voel steeds meer voor het inruilen van principes tegen pragmatische oplossingen. Ik vrees dat ik toch een beetje een vreemdeling in eigen land ben geworden. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Thursday, August 14, 2014


Waarom hebben Nederlanders zulke grote oren? Omdat alle kinderen door hun vaders bij de Duitse grens bij de oren omhoog worden getild met de woorden: kijk daar woont de wereldkampioen voetbal...Een flauwe, maar op dit moment weer zeer populaire mop in Duitsland. Een kleine troost voor alle Nederlandse kinderen: als ze vandaag omhoog worden getild, kijken ze ook neer op een stagnerende economie. Als er niets geks gebeurt, zullen de nieuwste cijfers van Eurostat vanochtend bijna historisch zijn. Voor het eerst sinds het begin van de crisis is de economie van de eurozone harder gegroeid dan de Duitse. Vooral voor de Duitsers is dat een schok. Zijn ze, nu ze eindelijk wereldkampioen voetbal zijn, opeens de titel Europees groeikampioen kwijt? De crisis in Oekraïne en de Europese sancties voor Rusland worden vaak genoemd als oorzaak voor de recente afzwakking van de Duitse economie. Naar mijn gevoel iets te populistisch gedacht. De componenten van de Duitse groeiprestatie worden pas eind augustus bekendgemaakt, maar de beschikbare maandelijkse macrocijfers vertellen alvast een ander verhaal. De Duitse groeistop is home made. De logische correctie in de bouw na een uitzonderlijk sterk eerste kwartaal door het milde winterweer, en uitzonderlijk veel vrije brugdagen in mei in combinatie met voortdurende economische zwakte in Italië en Frankrijk zijn de redenen voor de groeiteleurstelling, niet Rusland of Oekraïne. Maar wat niet is, kan toch nog komen? Zeker, maar niet zozeer via de export, maar via andere kanalen. Een lang aanhoudende onzekerheid door geopolitieke conflicten kan Duitsland het meeste pijn doen, waardoor de broodnodige binnenlandse investeringen opnieuw worden uitgesteld. Zonder investeringen en met aanhoudende problemen in Frankrijk, Italië en China ligt het lot van de Duitse economie in de handen van een beetje consumptiegroei en export naar de VS en het VK. Dat is mooi meegenomen, maar niet genoeg voor aanzienlijke - en houdbare - groei in de komende jaren. De titel Europees groeikampioen zal Duitsland ook na de cijfers van vandaag nog zo snel niet verliezen. Niet door zijn eigen kracht, maar omdat de andere landen de kracht ontberen om Duitsland naar de kroon te steken. De groei in Nederland lijkt vanwege technische factoren uitzonderlijk hoog, de Spaanse consumptiegebaseerde groei onhoudbaar hoog, België vertoont tekens van stagnatie en Frankrijk en Italië zullen nog lange tijd worstelen met economische hervormingen. Voor Duitse beleidsmakers moeten de cijfers van vandaag echter een duidelijk signaal zijn dat het ouderwetse 'weiter so' een gevaarlijke strategie is. De tijd is echt gekomen om binnenlandse investeringen te stimuleren, zowel door de overheid als door bedrijven. Het enige risico van die strategie zijn zure kinderen met flaporen bij de buren... Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

Wednesday, August 13, 2014

The end of the Wirtschaftswunder?

The German economy contracted in the second quarter of 2014, for the first time since 4Q2012 (or after switching to the new national accounts: 1Q13). According to the first estimate of the statistical office, German GDP dropped by 0.2% QoQ, from a slightly downward revised increase of 0.7% QoQ in the first quarter. On the year, the economy still grew by 0.8% (working day corrected 1.2%). GDP components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that the downturn was driven by weaker net exports and investments, consumption should have been positive. The final jury is still out - at least until 11 am CET when Eurozone GDP data will be released - but the German contraction has clearly increased chances that for the first time since 2007 the Eurozone has outpaced its own growth engine. However, in our view, this does not mark a turnaround in the euro crisis but is rather a symptom of the current common race to the bottom. As long as the second and third largest Eurozone economies (France and Italy) are struggling to accelerate their reform pace, the German economy will remain the Eurozone’s main growth engine. Returning to the German economy, today’s stagnation as such is no reason to get overly concerned. Contrary to a common belief, the stagnation is not so much the result of crisis in the Ukraine and European sanctions on Russia but it’s rather homemade. Or better: homemade and Eurozone-made. The reversal of the mild-weather-effect on the construction sector, an unusual amount of holidays in May combined with ongoing problems in France and Italy should have been the main drivers of the slowdown of the German economy. While the direct impact of geopolitical risks on the German economy was limited in the second quarter, ongoing or even further worsening tensions around the world obviously don’t bode well for the second half of the year. Probably not so much through the export channel but through the return of uncertainty and fear. The latter could once again delay the urgently needed rebound of domestic investments. In the short run, the German economy can remain the Eurozone’s growth engine as the strong labour market and higher wages will support private consumption and strong growth in the US and the UK should more than offset export losses elsewhere. Without stronger domestic demand, however, such a growth model could quickly become unsustainable. All in all, today’s GDP data do not mark a turnaround in the euro crisis but for Germany they are a strong reminder that too much economic complacency can easily backfire.

Tuesday, July 15, 2014

German ZEW sends further signs of caution

While the World Cup trophy just landed in Berlin, the German ZEW index sends more signs of caution. The ZEW index, which measures investors’ confidence, continued its recent downward trend and decreased in June for the seventh month in a row and now 27.1, from 29.8 in June. This is the lowest level since December 2012. At the same time, the current assessment component dropped for the first time since November 2013. Latest data releases have increased concerns about a stagnation of the German economy in the second quarter. Weak industrial production, a sharp correction in the construction sector and the reversal of the positive weather effect from Q1 do not bode well for second quarter growth. This is not only bad news for Germany but for the entire Eurozone. Currently it seems as if only a return of strong net exports and/or a real consumption boom can avoid a stand-still of the economy in the second quarter. Only die-hard optimists and soccer fanatics would argue that the German victory at the soccer World Cup would be sufficient to boost private consumption. Contrary to the German Summer Fairy Tale of 2006, soccer enthusiasm is very unlikely to ignite economic confidence. Back in 2006, both the national soccer team and the economy had been written off and successes came as huge positive surprise. Combined with a very special atmosphere, a new national self-confidence and, most importantly, earlier implemented reforms, the summer of 2006 brought confidence back. Even if any macro-economic impact from soccer successes can not be supported by statistics, the magic of 2006 remains (for some it there was a correlation, for others it was only coincidence). This time around, however, even the unexplainable magical interaction between soccer and the economy should be very limited. The German economy is already doing well, consumer confidence is at a 7 ½-year high and private consumption has become an important growth driver. Despite all euphoria, the World Cup title did not come as a real surprise. It was more the final stage of continuous work and improvement over a longer time period. As much as we would like to see it, but hopes that the 2006 magic between soccer and economics can be repeated are based on wishful thinking rather than on facts. Even if cheering masses in front of the Brandenburg Gate today could give rise to different ideas, soccer is what has always been: the most wonderful pastime in the world.

Sunday, July 6, 2014

Return(ed) to mainland

No more island? German industrial production dropped sharply in May, showing that earlier risk factors like slowing emerging market economies, including China, and geopolitical conflicts do have an impact on the German economy. In May, industrial production dropped by 1.8% MoM, the third consecutive drop. The last time industrial production had dropped for three months in a row was in the summer of 2012. On the year, industrial production is now still up by 1.2%. Today’s drop was driven by a decline in production in manufacturing, intermediate goods and consumer goods. Moreover, the correction in the construction sector continued (-4.9% MoM). In fact, the construction sector has by now lost all gains of the last months and is back at the level of early 2013. Today’s industrial production data adds evidence that the German industry is currently treading water. Already last week, German new orders had dropped by 1.7% MoM in May, with the sharpest drop coming from orders from outside the Eurozone. Interestingly, orders from Eurozone peers had risen for the second month in a row. To be clear, there is no reason to worry. It is more a question of level and change. The overall level of industrial activity is still strong and the safety net for the German industry, richly filled order books and low inventories, is still boding well for the coming months. However, the stimulus for a further acceleration is currently missing. In fact, latest data give the impression that the dichotomy between soft and hard data has returned to Germany. While sentiment indicators, despite recent softening, still point to solid growth, hard data is less encouraging. This dichotomy seems to be an ever-returning phenomenon of the recent German economy. Over the last quarters, the dichotomy always disappeared by itself, with statistical revisions, the weather or domestic demand eventually turning out as the missing link. This time around, it seems to need a return of strong net exports and/or a real consumption boom to avoid a stand-still of the economy in the second quarter. It could take until the third quarter before the dichotomy disappears again. Until then, today’s industrial production data show that the German island of happiness has been brought back to mainland.

Wednesday, June 25, 2014

EU Summit preview: Flexible, more flexible, Cameron?

They will not bend it like Beckham but when European leaders meet in Brussels this week, they are likely to present varying forms of flexibility. Flexible and rigid. These have probably been the best two key words describing the main issues of this week’s European Summit: flexibility on the Eurozone’s fiscal rules and rigidity in the power game on the nomination of the next president of the European Commission. As regards to the Eurozone’s fiscal rules, the economic stagnation in France and Italy combined with the overall rather anaemic recovery of the Eurozone has revived the debate on growth versus austerity. Irony or not, it is mainly the countries, which up to now have not really been glowing with structural reforms, that are now pushing for more fiscal wiggle room. It is also the same countries which have not built in automatic correction mechanisms in their national debt brakes under the so-called fiscal compact. The basic idea behind a new initiative of mainly social democratic governments is to give countries more time for fiscal consolidation in return for structural reforms. Moreover, it should be possible to exclude certain investments and the costs of economic reforms from nominal fiscal deficits. Many social-democratic leaders suggested that the fiscal framework should be applied in a more flexible way. In our view, these attempts of publicly watering down the Eurozone’s fiscal framework are mainly hot air and much ado about nothing. The discussions on flexible interpretations of the rules are as old as the rules themselves. The calculation of the so-called cyclically-adjusted fiscal balances has already shown how complex and open for interpretations these methodologies can be. Moreover, the Eurozone’s fiscal rules already provide more time to adjust in a period of very low or negative GDP growth. Of course, as long as it is a tit-for-tat, including structural reforms into the fiscal equation can make sense. However, this can be better done by clear-cut and strict commitments and supervision than by new methodological tricks. Moreover, let’s not forget that earlier proposals by Germany to introduce binding reform contracts between countries had been rejected by many. The basic principle for economic rules to work is that they should be easy and simple. Further complexity by adding proxies for structural reforms could make sense economically but would make the fiscal framework even more complicated. Monitoring of fiscal policies would then definitely be an art, not a science. It is obvious that flexibility will be one of the buzz words at this week’s Summit. However, the interpretation of flexibility is likely to differ. While several countries led by France and Italy seem to advocate new rules with new flexibility, Germany will stick to the flexibility under the current rules. As long as there is no agreement on any binding framework for structural reforms, it is very hard to see Germany agreeing to any changes of the fiscal framework. The other big topic that will address at least some government leaders’ flexibility is the first stage of European musical chairs: the nomination of the next president of the European Commission. Remember that government leaders have to propose a candidate who will then have to be nominated by European Parliament. Despite earlier reservations, a consensus amongst government leaders to support Jean-Claude Juncker has emerged. Only British Prime Minister Cameron and his Hungarian colleague Orban are still publicly opposing Juncker. Cameron suggested earlier that failing to get his way may increase the chances of a UK exit from the EU. This threat, however, has turned out to be an own goal. Many other European politicians showed little understanding for what some called tactical exaggeration with Cameron’s aides now seemingly resigned to defeat on Juncker’s appointment. Cameron is in a difficult position having promised a referendum on EU membership should his Conservative Party win the 2015 General Election. He has said that he would campaign in favour of remaining in the EU so long as the UK’s relationship with the EU can be renegotiated with certain EU powers “brought back” under domestic control. With Juncker in charge the perception – rightly or wrongly – is that Cameron will be less likely to win any concessions. With the Labour Party currently leading in the UK polls it is possible that the proposed referendum never takes place. However, the Labour leadership is coming under pressure from its own backbenchers to offer it given that UKIP, the anti-EU party that “won” the recent European parliamentary elections, is starting to eat into its support. However, another interesting aspect of all this is the increased polarisation in the UK population’s thinking on its relationship with the EU. UKIP’s surge in the polls has been attracting headlines, but we also see that a greater proportion (and rising) of the UK's population are in favour of staying in the EU. However, it isn’t a majority being led by positive sentiment to Europe – it is more the fear factor of what might happen should the UK leave with people worried about jobs and growth. If there is a form of negotiation that brings some powers back to the UK then approval to stay in the EU rises to 57% according to a recent YouGov poll. However, if no EU concessions are won by the UK government, which would lead to a widespread press revolt and could quickly lead to a reversal in the polls, there is a high probability that the UK leaves the EU in 2016/17. If this occurs, the assumption is that the UK will quickly be allowed into the European Free Trade Association (with Norway, Switzerland, Iceland and Liechtenstein), which basically would give the UK population what it wants – access to the single market without the political ties. It would also allow Europe to press on with greater integration without having to continually make amendments to appease the British. That said, there may be some concern within Brussels about losing the UK given it is still a large, important (and rapidly growing) economy that positively contributes to the EU’s coffers. Some may also take the view that having the UK within the EU also helps boost the EU’s own global influence – US President Obama has recently explicitly stated he wants to see the UK remain part of the EU. Furthermore, demographics do not look good for the EU and losing the UK (whose demographics are dramatically different) may intensify worries over the outlook for the EU’s population, growth and wealth over coming decades. All in all, this week’s Summit almost looks like sports event with government leaders bending and stretching their flexibility. As in real sports, overstretched flexibility can sometimes lead to unexpected injuries. This piece is a co-production together with my ING colleague and UK expert James Knightley

Tuesday, June 24, 2014

Ifo drops in June on back of weaker expectations

Levelling off. German business confidence dropped in June on the back of weaker expectations, illustrating that the earlier hard-headed optimism is slightly crumbling. Germany’s most prominent leading indicator, the Ifo index, just decreased to 109.7, from 110.4 in May. While the current assessment remained unchanged, the expectations component dropped to 104.8, from 106.2 in May. It is the first time since Spring 2013 that the Ifo has dropped for two months in a row. However, despite today’s drop the absolute level of the Ifo index is still high and there is clearly no reason to panic. The German economy continues to send mixed signals. On the positive side, the strong fundamentals with record high employment, low unemployment rates and extremely favourable financing conditions should ensure continued solid growth in the months ahead. Earlier today, the German statistical office released the latest wage growth data. On the year, real wages were up by 1.3% in Q1, the strongest increase since the first quarter of 2011. Interestingly, wages in the part-time sector increased the strongest (+4.6% QoQ in nominal terms) and at the same time the wage gap between the former West and East German states is narrowing further. Nominal wages in the former East increased by 3.3% QoQ and 2.4% QoQ in the former West. Overall, low inflation, wage increases and the introduction of the minimum wage bode well for private consumption this year. Despite the strong fundamentals, there are currently however also some negative factors weighing on German growth prospects. Two disappointing months in a row for industrial production suggest that the Ukrainian conflict and the Chinese slowdown could still have a stronger impact on the real economy than confidence indicator made us believe and that the Eurozone recovery is not (yet) strong enough to have a positive impact on the German industry. Moreover, France’s economic problems should not leave Germany unharmed, as France is still Germany’s most important trading partner. With the US and the UK going strong, there is no reason to start singing swan songs on German exports. However, the normally very reliable growth engine could sputter longer than expected. With the reversal of favourable one-offs from the first quarter (ie the strong growth contribution of inventories and the mild winter weather), a growth correction the second quarter is almost inevitable. However, today’s Ifo and particularly the unchanged current assessment component suggest that the slowdown will rather be of a technical than of a fundamental nature. Looking beyond short-term fluctuations, the bright prospects for domestic demand should offset any possible headwinds for exports from the far East and the nearby West.

Sunday, June 15, 2014

Prinzip Hoffnung

Eigentlich geht es Mario Draghi so wie Joachim Löw. Beide setzen alles daran, um endlich den großen Sieg zu landen. Der eine will den WM-Titel, der andere den Sieg über Rezession und Deflation. Beide setzen dabei auf die Offensive und auf das Prinzip Hoffnung. Joachim Löw setzt in Brasilien auf einen einzigen Stürmer. Er hofft auf den Torinstinkt anderer Mitspieler. Im Aufgebot von Mario Draghi gegen Rezession und Deflation gibt es nicht mal einen richtigen Stürmer. Alle Maßnahmen, die letzte Woche präsentiert wurden sind nicht die große Trendwende für den Euroraum und werden auch nicht zu einem Durchstarten des Kredit- und Wirtschaftswachstums führen. Die EZB-Entscheidungen erleichtern vor allem für südeuropäische Banken nochmals die Finanzierungskosten. Die Banken können vor allem über die sogenannte TLTRO vier Jahre an extrem billiges Geld kommen. Das sollte sich bei den Konditionen für Kreditkunden schon bemerkbar machen. Es bleibt allerdings dabei, dass das schrumpfende Kreditwachstum im Euroraum nicht nur ein Angebots- sondern auch ein Nachfrageproblem ist. Große Unternehmen sind im Augenblick häufig gut mit Kapital ausgestattet oder haben einen guten Marktzugang, so dass die Kreditnachfrage eher gering ist. Es sind vor allem die südeuropäischen Mittelständler, die schwer an neue Kredit kommen. Aber auch für sie bringen die EZB-Maßnahmen nur beschränkt Besserung. Letztendlich ist bei einer Kreditvergabe nicht so sehr der Preis von EZB-Geld entscheidend, sondern viel mehr das Kreditrisiko und das verändert sich nicht. So überwiegt bei Mario Draghi deutlich das Prinzip Hoffnung. Die Hoffnung, dass die neuesten Maßnahmen vielleicht im Herbst, nach den Ergebnissen des Bankenstresstests und weiteren Strukturreformen der Regierungen, wenigstens eine kleine Anschubhilfe für Kreditwachstum und Konjunktur leisten können. Da geht es Draghi dann doch besser als Joachim Löw. Der hat nicht bis zum Herbst Zeit. Gastbeitrag in der Euro am Sonntag vom 14.6.2014

Thursday, June 5, 2014

ECB enters unchartered territory - with one foot

The ECB today ignited monetary policy fireworks. With rate cuts, new liquidity measures to enhance the transmission mechanism and some hints at further unconventional measures, the ECB presented a policy package of last hope. This was as far as the ECB could go without getting lost in the unchartered territory of QE. The trigger for today’s action was probably the downward revisions of the ECB’s staff projections and the wider fear that the recovery could falter and deflation could become a threat. As regards growth, the ECB now expects GDP growth to come in at 1.0% in 2014, 1.7% in 2015 and 1.8% in 2016. Risks to this outlook are still to the downside. As regards the inflation outlook, the ECB revised all its forecasts down and now expects inflation to come in at 0.7% in 2014, 1.1% in 2015 and 1.4% in 2016. The earlier pick-up in inflation towards the end of 2016 has also become less likely. In its latest forecasts, ECB staff expects inflation to be at 1.5% in Q4 2016. So what did the ECB actually decide? Rates. The easiest measures were the rate cuts on all major interest rates. The ECB announced a 10bp rate cut for the refi rate (to 0.15%, from 0.25%) and the deposit rate (to -0.1% from 0%). At the same time, the rate on the marginal lending facility was cut by 35bp (to 0.4%, from 0.75%), thereby making the rate corridor symmetric again. Targeted longer-term refinancing operations. This will become the ECB’s version of a funding for lending scheme, or better a reversed funding for lending scheme. According to the ECB, these TLTROs will have a maturity of around 4 years. Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Lending to the public sector will not be considered in this calculation. The maximum volume of such TLTROs could amount to around 400bn euro. Two TLTROs will be conducted in September and December this year. Then, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark. The interest rate on these TLTROs will be fixed at the current ECB’s refi rate plus a fixed spread of 10 basis points. In our view, these TLTROs look like a reversed funding-for-lending scheme: the more lending commercial banks provide to the private sector, the more cheap funding they can get. Full allotment. The full allotment on all other liquidity operations was extended to December 2016. SMP sterilization. The ECB announced to stop the SMP sterilization. ABS purchases. The door for ABS purchases was kept open as the ECB decided to “intensify preparatory work related to” ABS purchases. According to ECB president Draghi, ABS would have to be based on real loans and not derivatives. Taken everything together, today’s package of policy measures is a strong one, underlining the ECB’s determination and willingness to act. However, as so often during the euro crisis, first-glance-enthusiasm doesn’t always last. Looking somewhat critically at today’s measures, the ECB has no guarantee that the economy and lending to the private sector can really be kick-started. The ECB is still dependent on banks. To some extent, the wish is still father to the thought. Nevertheless, with today’s measures, the ECB has at least sent three clear messages: i) the downward bias for rates is gone and rates have really reached the lower bound; ii) with the extended full allotment and the TLTROs the ECB rates will remain extremely low for at least another two years, if not even longer; and iii) if need be, QE – at least in the form of ABS purchases – could be started. Back in the summer of 2012, Draghi gave a whatever-it-takes moment for the existence of the Eurozone. Today’s measures are not yet a whatever-it-takes moment for the Eurozone economy but they are at least a good package which will give the Eurozone some additional monetary tailwind.

Draghis geldpolitischer Voetbal Totaal

Mit Mann und Maus in den Angriff, um endlich das entscheidende Tor gegen Krise, Rezession und Deflation zu schießen. So kurz vor Beginn der Fußball-Weltmeisterschaft hat EZB-Präsident Mario Draghi sich für Italiener untypisches Offensivspiel entschieden. Eine Art geldpolitischer Voetbal Totaal. Anfang Mai gab Mario Draghi sein geldpolitisches Catenaccio auf. Der Satz, dass die EZB „komfortabel“ war mit neuen Maßnahmen im Juni hat seitdem die Phantasien von Marktteilnehmern beflügelt. Aber was kann die EZB eigentlich liefern? Viel und gleichzeitig wenig. Eigentlich bestehen fast alle theoretischen Instrumente nicht den Praxistest. So riefen die anglo-sächsischen Analysten sofort nach Quantitative Easing. Sie meinen damit das Aufkaufen von Staatsanleihen, Unternehmensanleihen und anderen Wertpapieren. So wie die amerikanische und britische Notenbanken es schon vorgemacht haben. Vergessen wird dabei allerdings, dass die Höhe von Renditen auf Staatsanleihen schon länger kein Problem mehr ist. Und gleichzeitig ist es nur schwer vorstellbar, dass die EZB z.B. ein französisches Abweichen von Sparzielen mit dem Aufkaufen von Staatsanleihen belohnen würde. Ganz zu schweigen von den Schlangen, die sich in Deutschland vor dem Bundesverfassungsgericht bilden würden. Zudem können sich Unternehmen, die selber Anleihen ausgeben, vor Nachfrage gar nicht retten und brauchen wirklich keine zusätzliche Unterstützung der EZB. Bliebe nur ein Programm zum Ankurbeln der Mittelstandskredite. Die EZB überlegt daher, dem brachliegenden Markt für verpackte Mittelstandskredite neues Leben einzuhauchen. Nicht einfach in Zeiten von Bankenstresstests. Ein letztes Instrument, das häufig genannt wird, sind negative Einlagenzinsen. Normalerweise verzinst die EZB Geld, das Geschäftsbanken bei ihr kurzfristig parken mit dem Einlagenzins. Ein negativer Einlagenzins würde Banken beim Geldparken eine Gebühr aufbrummen. Es gibt zwei theoretische Argumentationen hinter so einem Schritt. Einerseits soll so eine Parkgebühr Banken dazu anregen, die Kreditvergabe wieder anzukurbeln. Anderseits könnte eine Parkgebühr auch ausländische Investoren abschrecken und so den Wechselkurs des Euro etwas abschwächen. Wie so häufig überzeugt die Theorie allerdings nicht in der Praxis. Einige kleinere Länder haben in den letzten Jahrzehnten mit einem negative Einlagenzins experimentiert; zuletzt z.B. Dänemark. Während die Kreditvergabe fast gar nicht reagierte, sah man wenigstens einen kleinen Einfluss auf den Wechselkurs. Ob das jedoch auch im Euroraum funktioniert, ist mehr als fraglich. Ausländische Investoren, die in letzter Zeit wieder vermehrt südeuropäische Staatsanleihen gekauft haben, werden durch negative Zinsen überhaupt nicht tangiert. Ganz im Gegenteil. Weiterer EZB-Aktionismus könnte das Vertrauen in den Euroraum weiter stärken und sogar zu einer Aufwertung des Euro führen. Draghi scheint überzeugt vom Angriffsfußball. Daher wird es heute wohl eine altherkömmliche Leitzinssenkung geben, garniert mit Elementen nach dem Motto „nützt es nicht so schadet es auch nicht“ wie dem negativen Einlagenzins und mehr Liquidität. Vielleicht hätte jemand Draghi sagen sollen, dass der niederländische Voetbal Totaal zwar die Herzen der Fans, jedoch nie einen WM-Titel gewonnen hat.

Friday, May 23, 2014

German Ifo sounds first note of caution

A first note of caution. German business confidence dropped in May, illustrating that the earlier hard-headed optimism is slightly crumbling. Germany’s most prominent leading indicator, the Ifo index, just decreased to 110.4, from 111.2 in April. Both the current assessment and the expectation component slowed down. Particularly the drop in current assessment component is noteworthy, as it was the first drop after four consecutive increases. The expectation component dropped to 106.2, from 107.3, and now stands at its lowest level since October 2013. The absolute level of the Ifo index is still high and no reason to panic. However, today’s drop combined with the earlier drop in the ZEW index and the PMI manufacturing confirms our view of an upcoming slowing of the economy. Earlier today, the statistical office confirmed the impressive growth comeback of the German economy in the first quarter of 2014. The economy grew by 0.8% QoQ, from 0.4% QoQ in the last quarter of 2013. In fact, the GDP components show that the German economy is already in the midst of a significant rebalancing as growth in the first quarter was exclusively driven by domestic factors. Private consumption was up by 0.7% and investments – to a large extent due to the positive impact of the mild winter weather on the construction sector – accelerated by 7.4% QoQ. Net exports actually shaved off 0.9%-points of GDP growth. Since the beginning of 2011, private consumption has actually outperformed net exports as the growth engine of the German economy. While private consumption has on average contributed 0.2%-points to GDP growth each quarter, the average growth contribution of net exports has been zero. So much for the criticism of an economy that is too dependent on exports. However, before getting too excited about the first quarter growth performance, the rebalancing and the prospects for the coming months, it’s time to sound a note of caution. Since late-2012, the Ifo index has had a mixed performance tracking German GDP growth. It is still very good in tracking the trend of the economy but not the level. Moreover, there are a couple of arguments in favour of a growth correction in the second quarter: the reversal of favourable one-off’s from the first quarter (ie the strong growth contribution of inventories in Q1 and the mild winter weather) as well as increasing headwinds for exports from the East. All in all, today’s data sent two messages: for the time being, the German economy it is still playing in a league of its own; at least in the Eurozone. Unfortunately, as a prominent German soccer team experienced recently, no economy and no soccer team is invincible forever.

Wednesday, May 21, 2014

High importance but low interest - what to expect from the European elections

For financial markets, the direct impact from this week’s European elections should be limited. The indirect impact, however, should not be underestimated. Up to now, the interest for this week’s European elections remains very limited. Despite the fact that for the first time ever the biggest European parties each nominated a single front-runner to increase the ties with the voters (and Europe), the voter turnout will probably be lower than the 2009 all-time low of 43%. Since the first European elections in 1979, the importance and powers of the European Parliament has constantly increased, while at the same time voter turnout has plummeted. Back in 1979, the voter turnout was still 63%. Some commentators have argued that a further drop in the voter turnout could put the legitimacy of the European Union is at stake. At the same time, it has become an unpleasant tradition that European elections are often used as national protest votes. A closer look at the parties’ political manifestos shows that with the recent calm on financial markets and some improvement in peripheral countries, the economic crisis has not only disappeared from front page news but also seems to have lost importance to most political parties. Looking at the different party manifestos shows that on average the economic crisis is only the fourth or fifth important topic. Other topics like the environment or foreign policy often receive more attention. In short, the conservative parties propose a consolidation of the current crisis management, including the finalizing of the banking union. The Liberal Party has put forward more automatic sanction for the fiscal framework, while the Social-democrats are proposing the mutualizing of responsibilities in EMU but also an end to the Troika missions in its current set-up. The Green Party is still in favour of a debt redemption fund, Eurobonds and the separation of banks activities, while the left-wing socialists stand for the biggest u-turn in economic policies with debt forgiveness, an end to austerity and privatisation, direct government financing by the ECB and an end to the entire new fiscal framework. Obviously, in European elections, these manifestos and promises have to be taken with an even bigger pinch of salt than at national elections. First of all, the European Parliament has to confirm the next European Commission and its president but its influence on economic policies can be limited. Moreover, national party siblings do not necessarily subscribe to the European ideas of their same party family. This leads to a funny situation in which national party manifestos can differ from the European ones. From a financial market’s point of view, this week’s elections should have a first-round and a second-round impact. The first-round impact and markets’ main attention currently seems to focus on the results of the euro-sceptic parties at both the left- and right-wing political spectrum. Latest polls suggest that these parties altogether could take between 25% and 30% of the 751 European Parliament seats. Currently, it sometimes looks as if more attention is given to the smaller, extreme parties than to the others. In our view, it is also striking that political campaigns in Europe are often limited to whether to be in or out Europe or whether voters want more or less Europe than on details and policy options. Anyway, in our view, as long as euro-sceptic parties remain below or at the predicted 30% of all seats, the impact for markets and the European economy should be limited. Up to now, most euro-sceptic parties have not been able to develop a significant level of coordination, preventing them from having influence in actual policy decisions. Moreover, the remaining 70% of non-euro-sceptical parties will simply be forced to work closer together in the next mandate. In addition, let’s not forget that despite increased powers, the overall influence of the EP in the Brussels decision-making process is limited. While the first-round effects from this week’s election should be limited, the second-round effects could be more explosive. What are these second-round effects? In our view, these second-round effects are at least twofold. The first one could be an institutional clash. As often stressed during the election campaign, the next European Parliament will – for the first time ever – have to confirm the next president of the European Commission. This is why the big parties all nominated their own front-runner, who should then become the next Commission president. However, the Treaty text leaves some room for interpretation, stating that European governments nominate a candidate “taking into account the elections to the European Parliament”. This candidate will then be elected by European Parliament. Comments by some government leaders suggested that a compromise candidate should not be excluded, possibly leading to a clash between Parliament and the Council. The other second-round effect, and probably the biggest risk for the EU, markets and economic policies, will be indirect through the impact increasing populism has on domestic politics and, in turn, the position of governments towards Brussels. In this regards, the results in France, Italy and Greece will be very important as they could again derail national politics and policies, giving rise to renewed discussions and controversies about austerity, reforms and debt sustainability. All in all, in the near term, this week’s European elections should be a non-event for financial markets. However, the second-round and spill-over effects on national politics could bring back some shivers to Brussels and financial markets.

Wednesday, May 14, 2014

German economy booms on back of mild winter weather

As good as it can get? The German economy staged the expected impressive performance in the first quarter of 2014. According to the first estimate of the German statistical office, the economy grew by 0.8% QoQ, from 0.4% QoQ in 4Q13. On the year, German GDP is up by 2.3%, from 1.4% in 4Q13. The individual growth components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that growth was exclusively driven by domestic demand. Particularly the construction sector, driven by the mild winter weather, should have been an important growth engine. Looking ahead, two opposing trends will affect the future growth path of the economy. On the positive side, the elements of Germany’s economic success formula are almost unchanged: the strong labour market, wage increases and the construction sector should support growth in the coming quarter. Moreover, low inventories and richly filled order books should support industrial production, at least in the short run. On a more negative side, the weakening of Germany’s biggest trade partner, France, combined with the ongoing geopolitical crisis close to Germany’s backyard and the Chinese slowdown, the former growth engine exports is currently only running at half speed. The factor which could tilt the balance between positive and negative elements is investment. It’s the German growth wild card. Having been a drag rather than a push-factor for growth over the last years, domestic investment has started to gradually pick up last year. Gross operating surpluses at all-time highs, strong liquidity positions and some capital repatriation argue in favour of strong investment growth. On the other hand, however, capacity utilisation rates are only at, but not above, historical averages and recent surveys show that German companies hardly see equipment as a constraint for production. At the same time, credit growth is also shrinking, not growing. In our view, domestic investment should continue to pick up, but only at a subdued level. Investment growth this year should rather be a cyclical rebound than a structural shift, showing that creditless recoveries do exist. All in all, Germany has again cemented its role as the Eurozone’s economic powerhouse. The current growth pace can hardly be maintained and some slowdown to more normal growth rates is in the offing. However, any complaints about the upcoming slowdown would be complaining on a high comfort level.

Thursday, May 8, 2014

Trade data mark weak end of a strong quarter

German exports dropped in March, confirming the shot-across-the-bow feeling from other industrial data earlier this week. As just reported by the Federal Statistical Office, German exports dropped by 1.8% MoM in March, the sharpest monthly drop since May 2013. At the same time, imports dropped by 0.9% MoM, narrowing the seasonally-adjusted trade balance to 14.9 bn euro, from 15.8 bn euro in February. As already reflected in other industrial data, the month March saw a stronger real economic impact from the Ukrainian crisis and the Chinese slowdown than confidence indicators had suggested. It seems as if recent events have only accelerated a trend that became already visible at the start of the year: German exports to Russia had already dropped to only 2.6% of total exports in the first months of the year, the lowest level since late-2010. Looking ahead, the destiny of German exports remains in the hands of its good old trading partners in the West outside of the Eurozone. The US and the UK remain Germany’s biggest non-Eurozone trading partners, with the share of exports to the UK recently rising to the highest level since 2005. All in all, with ongoing geopolitical problems and the slowing emerging economies, it looks as if Germany’s famous export engine could still be sputtering for a while. After today’s trade data, the bean counting for next week’s first quarter GDP release can start again. The available monthly data suggest another strong growth performance. The construction sector alone should already contribute some 0.4 percentage points to GDP growth. Add to this strong retail sales, low inventories and, despite the latest weakening, still slightly positive exports and all the ingredients for another acceleration of the German economy are there. We expect German Q1 GDP growth to come in at 0.7% QoQ.

Verbal acrobatics and a cliffhanger from Brussels

As expected the ECB kept its powder dry at today’s meeting. However, what started off as a rather dull meeting developed into a very exciting press conference. At some point in time, Draghi’s comments looked almost as acrobatic as many performances at Tuesday’s semi-final of the Eurovision song festival. However, in the end, Draghi had prepared everyone for new ECB action at the June meeting. The start of today’s ECB press conference was rather dull. The introductory statement was almost a verbatim copy of the one from the April meeting. According to the ECB, the gradual and weak recovery will continue, while at the same time inflation will remain low for a prolonged period of time. Interestingly, the ECB has put somewhat more emphasis on possible downward risks to the recovery. For the first time, the ECB mentioned private loan developments already in the part on the economic analysis and not only in the monetary analysis part. In addition, Draghi’s comments during the press conference on geopolitical risks also showed that the ECB has become somewhat more cautious. As regards the exchange rate, Draghi’s comments made listeners almost dizzy. Initially, Draghi defended the ECB against all external advice and criticism. He also said that the exchange rate was not a policy target. Later on, however, the exchange rate was called a “serious concern” for the ECB, which could not only have a negative impact on inflation but also on the recovery. Again the recovery. Looking ahead, Draghi gave the final goodbye to his predecessor’s famous “we-never-precommit”. The ECB’s forward guidance, which started last summer, had already been a first emancipation from the no-precommitment. Today’s statement that the Governing Council was dissatisfied with the current inflation path, was not accepting it as a fact of nature and was therefore comfortable with acting next month. Boom. This very last comment was supported by Draghi’s comment that “further information and analysis concerning the outlook for inflation and the availability of bank loans to the private sector will be available in June”. Moreover, Draghi stressed the next staff projections as an essential new piece of information in June. Of course, every next meeting will have new and more information than the previous one. However, with today’s press conference it will be hard for the ECB to take some “manana-manana” attitude. To the contrary, with his comments on the exchange rate and hints at possible June action, Draghi has pushed the ECB into a corner from which it will be very hard to escape. Nevertheless, in our view, it is not a given that the ECB will really act in June. In fact, on the back of better-than-expected Q1 GDP data, growth might even be revised upwards for this year. And what if the inflation forecast for 2015 and 2016 remains unchanged? And what if credit growth has improved slightly? It is exactly these uncertainties which kept the ECB from already acting today and might prevent it from acting in June. All in all, taking a step back and just looking at the facts, not a lot has changed with today’s ECB meeting. In our view, the real new thing is that the ECB has become more concerned about the strength of the recovery and has clearly put more emphasis on the exchange rate. . For the rest, any next steps remain conditional on the June staff projections. Admittedly, with today’s comments, Draghi has clearly presented a cliff hanger which makes it hard for the ECB not to come up with a brandnew episode of monetary action at the June meeting.

Wednesday, May 7, 2014

Ongevraagd advies

Druk werkt averechts. Dat heb ik bij de opvoeding van mijn kinderen uit eigen ervaring moeten leren. Op belangrijke momenten werkt het beter om vertrouwen te hebben in het gezond verstand van het kind, hopelijk versterkt door een goede opvoeding. Ook in Europa zien we dat patroon terugkeren. Alleen hebben sommige Europese politici geen vertrouwen in het gezond verstand van de Europese Centrale Bank. Telkens weer komen ze aandraven met 'goede adviezen en wenken'. En hopla, daar gingen ze weer. Franse politici vervielen weer in de oude nationale reflex. Als het niet goed gaat met de eigen economie en puinruimen moeilijk en pijnlijk is, roept Frankrijk graag de hulp van buitenaf in. De makkelijke weg is het laten oplopen van de overheids- tekorten en druk uitoefenen op de ECB om de munt te verzwakken. De Fransen zijn niet alleen. Het succes van de ECB als onomstreden crisismanager geeft velen een sinterklaas- gevoel. Nationale en Europese politici vinden blijkbaar dat de ECB de macht heeft om te geven en nemen. Politici becommentariëren op Twitter beslissingen van de ECB. In de campagne voor de Europese verkiezingen lijkt iedereen zijn wensen naar de ECB te sturen. Verzwak de euro, help de kmo's, koop overheidsobligaties en doe met een magische ingreep onmiddellijk de werkloosheid verdwijnen. Is dat kinderlijk geloof in de almacht van de ECB of een afleidingsmanoeuvre voor het gebrek aan eigen kracht, macht en visie? Wat politici, vooral in de media, graag vergeten, is dat artikel 130 van de Europese verdragen de ECB verbiedt om advies van regeringen, politici en andere instellingen te vragen of aan te nemen. Kwestie van de ECB te beschermen tegen sterk fluctuerende politieke wenslijstjes. Maar, eerlijk is eerlijk. De ECB heeft zelf bijgedragen aan het vol van verwachting kloppende hart van politici, het IMF en de OESO. Het aanwakkeren van speculaties over op handen zijnde nieuwe acties van de ECB deed de spanning stijgen. Daarbij moet de centrale bank oppassen niet méér te suggereren dan ze kan waarmaken. Alle mogelijke opties zijn op papier en in theorie sterker dan in de praktijk. Denk aan het opkopen van staatsobligaties. Frankrijk laat het begrotingstekort oplopen en de ECB koopt als beloning Franse staatsobligaties? Onvoorstelbaar. En als de ECB kmo-leningen van de banken of in de markt koopt? In theorie zouden dan de kredietvoorwaarden voor kmo's gunstiger moeten worden. Maar de markt voor die leningen is behoorlijk opgedroogd. Bovendien lijkt het onwaarschijnlijk dat de ECB - terwijl zij ze bezig is de risico's van de banken in kaart te brengen - die risico's zelf zou over- nemen. De ECB is zich goed bewust van haar zeer speciale verantwoordelijkheid. Nu politieke druk uitoefenen werkt eerder averechts en helpt niemand. Anders dan mijn kinderen is de ECB oud genoeg om helemaal zelf te beslissen. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Thursday, April 24, 2014

German Ifo beats expectations in April

Happy-go-luckies or down-to-earth pragmatists? In any case, German businesses surprised once again with an almost hard-headed optimism in April. Germany’s most prominent leading indicator, the Ifo index, just increased to 111.2, from 110.7 in March. Even more surprising, both the current assessment and the expectation component improved. The current assessment component increased to 115.3, from 115.2 in March, and stands now at its highest level since April 2012. At the same time, the expectations component rebounded from the March decrease and stands at 107.3, from 106.4. After a weaker ZEW index and yesterday’s PMI increase, today’s Ifo index illustrates that financial market participants seem to be more worried by possible cold headwinds from the East than economic participants. It looks as if currently German businesses stick to the facts and do not get concerned by eventualities. And the facts up to now speak a clear language. Order books, both domestic and foreign, are still growing, inventories are low and activity in both manufacturing and services is picking up. Moreover, the exceptionally mild winter weather has boosted construction in the first months of the year. For the first quarter, construction should have been an important growth driver for the entire economy. Even if the sector would not grow at all in March, it could add around 0.5%-point to German GDP growth. However, despite today’s surprisingly strong Ifo and the expected growth acceleration of the German economy in the first quarter, it would be foolish to turn a blind eye to possible downside risks for the economy. With the Ukraine crisis, Chinese uncertainties and emerging markets slowing down, more and more gusts of wind, particularly from the East, could easily disturb the current spring fever on the Eurozone’s island of happiness

Tuesday, April 15, 2014

German ZEW drops again in April

Starting to get petrified? The German ZEW index just dropped for the fourth months in a row. The ZEW index, which measures investors’ confidence, decreased significantly in April and now stands at 43.2, from 46.6 in March. At the same time, however, the current assessment component surged to the highest level since June 2011 and stands at 59.5, from 51.3. The geopolitical conflict close to Germany’s backyard, concerns about the Chinese economy and the recent equity market correction have clearly dented investors’ optimism. After the excellent start to the year, the German economy is now starting to feel some headwinds. In this regards, the latest drop in exports could have been a warning forerunner of a worse-than-expected export performance this year. Looking at the potential downside risks stemming from outside the Eurozone, a too strong euro is one of the least problems for the German economy. In fact, the discussion about a strong exchange rate has to be broadened beyond the euro-dollar rate. While the euro-dollar exchange rate is currently more than 7% higher than one year ago, the trade-weighted exchange rate of the euro has only strengthened by around 3.5%. Neither for the economy nor for the ECB this strengthening qualifies as – to use former ECB president Trichet’s word - being “brutal”. Today’s ZEW index sends two messages, which perfectly characterise the current state of the German economy. The economy had an excellent start to the new year, gaining new momentum. However, with the Ukraine crisis, Chinese uncertainties and emerging markets slowing down more and more gusts of wind, particularly from the East, could easily disturb real spring fever on the island of happiness.

Thursday, April 10, 2014

Vriendelijke spoken, ze betaan

De angst voor een nieuw monster in de eurozone waart weer rond. De lage inflatie van de afgelopen maanden en de krimpende kredietgroei heeft het spook van de deflatie teruggebracht. Deflatie, is dat niet het gedrocht dat volgens de leerboeken de hele economie in een neerwaartse spiraal stort? Gelukkig bestaat het leven uit meer dan leerboeken economie. Daarom weten we dat niet alle spoken slecht zijn. De leerboeken brengen een duidelijke boodschap: deflatie is slecht. Een gevaar voor de economische groei, want dalende prijzen leiden mogelijk tot uitstellen en afwachten door consumenten en bedrijven. Daarnaast maakt deflatie het moeilijker schulden af te lossen, omdat de uitstaande schulden steeds meer waard worden. Kortom, deflatie is een monster dat we moeten vrezen, luidt de klassieke theorie. Niet zo snel! Zelfs als de prijzen een klein beetje dalen, hoeft dat lang geen reden te zijn voor deflatievrees en economische neergang. De ik ben-toch-niet-gek-campagne van een bekende Duitse winkelketen toonde overtuigend aan dat dalende prijzen consumenten niet tegenhouden om geld uit te geven. Het lijkt onwaarschijnlijk dat een consument bij een deflatie van 0,5 procent of 1 procent de aankoop van een nieuwe koelkast een jaar uitstelt. Bovendien zijn er enkele goede redenen waarom de inflatie in de eurozone zo laag is: algemene en eurospecifieke. De ruk naar beneden is al langer bezig. Door de zogenaamde hedonistische berekeningsmethode houdt de inflatie rekening met kwaliteitsverbeteringen van producten. De komst van een nieuwe iPhone, ook al kost die net zo veel als de oude een jaar geleden, heeft een negatieve impact op de inflatie. Globalisering en arbeidsmobiliteit hebben ook een neerwaartse druk op lonen en prijzen gezet. Op dit moment komen er nog de lagere energie- en voedselprijzen bij, en de structurele veranderingen in Zuid-Europese landen. Kortom, de lage inflatie in de eurozone is eerder een zegen dan een gevaar. Japan geldt voor velen als de beste illustratie van de kwalijke effecten van deflatie. Daarbij wordt vergeten dat niet de dalende prijzen van consumptiegoederen het probleem waren, maar een leeggelopen zeepbel op de huizenmarkt en op de beurzen. Terwijl de prijzen van goederen sinds 1998 jaarlijks met slechts 0,4 procent daalden, zakten de huizenprijzen en beurskoersen met ongeveer 90 procent en krompen de balansen van de banken fors. Japan toont dat een langdurige bankencrisis het ware spook is dat de eurozone moet vrezen. Het is tijd om een monsterlijk hoofdstuk aan de economische leerboeken toe te voegen. Een hoofdstuk dat behalve aan kwaadaardige spoken ook aandacht besteedt aan vriendelijke geesten zoals in de film 'Monsters Inc', of meer vintage: 'Casper' of 'I dream of Jeannie'. Deze column verscheen vandaag in het Belgische dagblad "De Tijd".

Sunday, April 6, 2014

Feb industrial production - German economy is powering ahead

Full speed ahead. German industrial production continued the positive trend of the last months, increasing by 0.4% MoM in February. In January, industrial production grew by 0.7% MoM. On the year, industrial production is now up by 5%. The February increase was driven by the manufacturing sector (+0.5% MoM) and the production of intermediate goods (+1.3% MoM), while production in the energy and construction sector declined somewhat. Despite today’s drop of 0.1% MoM, the German construction sector is booming. Over the last four months, the construction sector has grown by a monthly average of 1.6% and order growth of more than 10% yoy suggests that the boom should continue. For the first quarter, construction should have been an important growth driver for the entire economy. Even if the sector would not grow at all in March, it could add around 0.5%-point to German GDP growth. More generally speaking, latest hard data has closed the gap between buoyant confidence indicators and weak economic activity. Since the start of the year, hard economic data has accelerated. Looking ahead, the German economy should gain further momentum. The formula for success is still the same: the labour market remains tight, order books are filled and inventories are at a 2 ½ -year low. The big unknown in this success formula remains domestic investment. Having been a drag rather than a push-factor for growth over the last years, domestic investment has started to gradually pick up last year. Gross operating surpluses at all-time highs, strong liquidity positions and some capital repatriation argue in favour of strong investment growth. On the other hand, however, capacity utilisation rates are only at, but not above, historical averages and recent surveys show that German companies hardly see equipment as a constraint for production. In our view, domestic investment should continue to pick up, but only at a subdued level. Investment growth this year should rather be a cyclical rebound than a structural shift. All in all, today’s numbers confirm once again that a strong growth performance, at least in the first quarter, is in the making. The German economy is powering ahead.

Thursday, April 3, 2014

ECB meeting - The art of doing nothing

As expected, the ECB kept its ammunition dry. Rates were left unchanged but ECB president Mario Draghi sharpened up the ECB’s language to again stress its determination to act (if needed). The ECB’s macro-economic assessment was almost a verbatim copy of last month’s. Economic activity is bang in line with the ECB’s base case scenario. The gradual recovery should continue, although the ECB still sees downside risks to the economic outlook. Interestingly, the exchange rate was still not mentioned as one of these downside risks. As regards inflation, ECB president Draghi remarked that he had been surprised by the March drop in headline inflation. However, contrary to the inflation data ahead of the November rate cut, the March inflation surprise would not have any significant impact on the ECB’s inflation outlook. In the ECB’s view, the timing of Eastern should push up inflation in April and the base case scenario of a gradually accelerating inflation rate until the end of 2016 remains unchanged. Risks to this scenario are still balanced but, remarkably, the exchange rate was explicitly mentioned as a risk factor. During the Q&A session, it became also clear that the ECB is not so much concerned about deflation but rather of a prolonged period of a very low inflation. In the absence of any real action, the ECB provided markets with the expected verbal action. One entire paragraph in the ECB’s introductory statement was dedicated to stress the ECB’s determination to act. “We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time…The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” There are clearly two key take-aways from this sharpened language: i) the ECB is on even higher alert than before; and ii) unconventional measures, including the for markets so important QE, are backed by all ECB members. Listening to Draghi during the press conference and looking at the available options, however, still leaves us with the impression that QE will not happen any time soon. Draghi’s reference to the Fed and the totally different institutional set-up in the US and the Eurozone indicated that any Fed-style QE, which bypasses banks, is highly unlikely. Interestingly, given his comments it looks as if the option of a negative deposit rate currently has fallen into the category of unconventional measures. For the time being, the ECB sees low inflation as the result of positive supply shocks and temporary factors. In fact, the current period can still be filed under Draghi’s earlier label “with low inflation, you can buy more stuff”. However, today’s press conference signalled that the ECB has increased its state of high alert. Given the expected reversed Easter bunny effect on prices next month, it looks unlikely that the ECB will act at its May meeting. The June meeting, with the next round of ECB staff projections, should be the ultimate litmus test for the ECB’s sharpened determination. If then the 2016 inflation outlook shows lower numbers than the current 1.5%, new ECB action looks probable. This does not necessarily have to be QE. Draghi’s comment that the ECB had not yet reached the end of its conventional measures indicates that a refi rate without a negative deposit rate cannot be excluded. All in all, the bottom line of today’s ECB meeting is that the famous “we stand ready to act” has been stretched to its maximum. No further verbal stepping up possible. The ECB seems to be well aware of the downside risks and implementation difficulties surrounding unconventional measures. Still, the ECB mentioned them to maintain its own credibility. The risk of this strategy can be found back in Goethe’s The Sorcerer’s Apprentice. “beware of the spirits that you call ”. From here on, a further verbal stepping up seems impossible. In a way it’s a gamble, either the recovery continues and inflation picks up again, or the ECB will have to act in June, even if it’s only a small refi rate cut. Carsten Brzeski

Friday, March 28, 2014

German CPI data brings no relief for ECB

Inflationary pressure in Germany remains low. Based on the results of six regional states, German headline inflation dropped to 1.0% YoY in March, from 1.2% in February. On the month, German prices increased by 0.3% MoM. Based on the harmonised European definition (HICP), and more relevant for ECB policy making, headline inflation decreased to 0.9%, from 1.0% in February. Looking at the available components at the regional levels shows that the drop in headline inflation was mainly driven by lower energy prices, the continued decline in communication costs and last year’s Easter Bunny. In 2013, Eastern was in March which pushed down prices for vacation trips. While there hardly is a 100%-guarantee for anything in economics, it is for sure that the negative effect from Eastern will be reversed next month. Today’s inflation data do by no means signal any deflationary tendencies in the German economy. To the contrary, inflation data should rather be filed under Mario Draghi’s famous label “with low inflation, you can buy more stuff”. Unless energy prices unexpectedly drop further, today’s reading should mark the trough in German headline inflation this year. Due to reversed base effects, headline inflation should increase in the coming months before flattening out over the summer months. For the ECB, however, German inflation data could cause another headache in Frankfurt. Earlier today, Spanish March inflation was reported at -0.2% YoY, from 0.1% in February, increasing the odds that Eurozone headline inflation has slowed down further in March. While latest confidence indicators have confirmed the ECB’s base case scenario for the economic recovery, inflation has and probably also will fall short of expectations. We don’t think that the ECB will react to a single data release but Monday’s inflation data could tip the balance in a Governing Council which does not seem to have made up its mind yet. At the current juncture, we still think that the ECB’s preferred next policy option is to do nothing. First of all, current deflationary tendencies are mainly the result of supply shocks with potentially positive consequences (lower energy and food prices, improvement of competitiveness). Secondly, headline inflation should accelerate in the coming months due to reversed base effect. Finally, the instruments the ECB has available in its toolbox largely look like illusionary giants: giant from a distance but rather unimpressive in terms of effectiveness, practicability and indisputability. All of this means that most likely outcome of next week’s ECB meeting is that the ECB will continue talking the talk in order not to have to walk the walk.