Friday, September 27, 2013

German September inflation below and not even close to 2%

Inflationary pressure in Germany is still hard to find. Based on the results of six states, German headline inflation dropped to 1.4% YoY in September, from 1.5% YoY in August. On the month, German prices remained unchanged%. Based in the harmonised European definition, headline inflation remained unchanged at 1.6%. Headline inflation is now at the lowest level in almost three years. Looking at the available components at the regional levels shows that headline inflation dropped on the back of negative base effects from oil prices and healthcare costs. Moreover, the usual drop of prices for leisure activities and packaged holidays after the summer vacation period also contributed to benign inflation developments in September. It looks as if these days, the only inflationary forces in Germany can be found in Bavaria. To be precise: in Munich at the Oktoberfest. Between 2002 and 2012, the price of one litre of beer rose by 42%. In the same period, beer prices in restaurants were only up by around 20%. On a somewhat more serious note, inflationary pressures in the Eurozone’s biggest economy are still hard to find. The often expected catching up of German prices and wages is still not happening. For the Eurozone, this has at least two implications: i) rebalancing remains a cumbersome process and ii) the ECB can continue with its highly accommodative monetary policy.

Still in the action zone - ECB preview

Only a short respite? In normal circumstances, the ongoing stabilisation of the Eurozone economy should give the ECB enough comfort to relax a bit. However, three factors are still disturbing the ECB’s comfort zone: the Fed, higher money market rates, and lacklustre credit growth. Words still seem to be the first line of defence to shield the Eurozone from higher interest rates and a stronger euro. However, the strategy of words without deeds could soon wear out. Consequently, we still expect further ECB action in the next 6 months, with liquidity operations being the preferred option. Find our ING ECB preview here:

Tuesday, September 24, 2013

German Ifo increases in September

Stabilising at a high level. Germany's most prominent leading indicator, the Ifo index, increased marginally in September to 107.7, from 107.6. While the current assessment component dropped slightly, expectations improved again. Today's Ifo provides further evidence that fears about a sharp slowdown of the German economy in the second half of the year were overdone. As so many quarters before, the third quarter started with opposing signals. While confidence indicators point to continued strong growth, hard data disappointed in July. The sharp drop of industrial production and weak retail sales have again casted doubts about the strength of the German economy. In our view, these doubts should soon fade away and today's Ifo provides welcome support for this view. The gradual filling of order books since the beginning of the year combined with some inventory reduction bodes well for industrial production in the coming months. Moreover, the recoveries of the US and UK economies, signs that the Chinese landing is a soft rather than a hard one and the tender stabilization of the Eurozone economy should support German exports. At the same time, with the wage increases of the last two years and record-low unemployment private consumption should also remain an important growth driver. The great unknown for the German growth outlook is private investment. The increase in the second quarter was welcome news but it is too early to tell whether this investment recovery is here to last. On the second day after the federal elections, all political parties are still digesting the results, preparing for the upcoming negotiations to form the next government. Yesterday’s comments from leading politicians suggest that the only feasible option is a grand coalition between chancellor Merkel’s CDU and social-democratic SPD. However, negotiations won’t be easy and could be cumbersome as the SPD will play "hard to get". The economy will obviously hardly provide any arguments to speed up the negotiations: it continues to cruise along smoothly.

Monday, September 23, 2013

Historical night with Queen Mutti

The rather dull election campaign ended with a big bang and an election evening which made history. The German elections turned out to be unexpectedly nail-biting. As expected, it was already clear with the first exit polls at 6pm CET that Angela Merkel’s CDU would become the biggest party. In fact, Merkel reversed the outcomes of the past two elections, in which she did not manage to sustain the opinion poll results on Election Day, and led her party to its best result in 20 years. Moreover, last night offered a couple of other historical moments. Merkel’s junior coalition partner, the liberal FDP, missed the 5% threshold and will for the first time ever have no seat in parliament. At the same time, the anti-euro party, the Alternative for Germany, had an impressive performance, gaining 4.7% of all votes. At the beginning of the evening, an absolute majority for Angela Merkel seemed possible. With the official preliminary result, however, the next government can only be a grand coalition of CDU and SPD or CDU and Greens. The theoretically possible option of SPD, Greens and Linke has repeatedly been ruled out by both the SPD and Greens, and again last night. The other theoretical option, new elections, is also very unlikely in Germany. All of this means that the Germans will very likely get the coalition they have been looking for, at least according to latest surveys. This is a so-called CDU and SPD grand coalition. It is in fact the only realistically possible combination. Negotiations, however, will not be easy. The next government has a unique opportunity to use the current economic good times to ensure Germany’s leading position beyond current growth success. For a long while, Germany has benefited from the earlier reforms of the mid-2000s under former chancellor Schröder and, quite paradoxically, fiscal stimulus during the first part of the financial crisis under Merkel’s first government. Examples of this include car scrap schemes and subsidised short-term work schemes. In recent years, zealousness for reform has clearly slowed down. Therefore, it does not come as a real surprise that in OECD studies Germany often stands at the bottom of the list when it comes to newly implemented reforms. In our view, the biggest challenges for any new German government are to ensure that the economy remains the powerhouse of the Eurozone and can keep its leading position in world markets. To this end, the economic good times should be used to tackle important policy issues such as ageing and pension, investment and innovation, the final shift to renewable energies, and Europe. Germany is still amongst the fastest ageing economies of all European countries. Despite earlier reforms and increased retirement ages, the pension and health care systems are still under pressure. There is a lack of qualified workers in the health and elderly care sector and there have been recent discussions on civil servant pensions. Moreover, the new German government should not be complacent and should use the still-good economic times to invest in the future. Over the last decade, Germany has created a widening investment gap, both for public and private investments. Possible areas for investments are, for example, infrastructure (railways, highways), the expansion of broadband networks, and also energy transformation (including storage systems and smart grids). Energy transformation as such will of course also require significant attention. The shift from nuclear power to renewable energies is far from being finalised. In the short term, a possible coalition of CDU and SPD would clearly have to deal with campaign differences on whether to increase or cut taxes and what kind of minimum wage the country needs. Beyond these issues, however, a grand coalition would have a broad base in parliament, and, equally important, in the Upper House (Bundesrat) to bring forward necessary investment projects, further reforms of the pension system and next steps towards further Eurozone integration. For the Eurozone, a grand coalition would probably continue the current crisis management but with a softer hand. Eurobonds are unlikely but some new European investment initiatives and a soft push towards hidden burden sharing could be the result of a grand coalition. Even a kind of redemption fund, a Eurozone bank resolution fund and far-reaching integration could eventually enter the Eurozone’s centre stage with a grand coalition. All in all, a dull election campaign ended with a big bang and an election evening which made history. Germany has not become a political monarchy but Queen Mutti remains the undisputed political leader.

Friday, September 20, 2013

Monday's thoughts post-Bavaria and pre-federal election thoughts

Link to our ING publication.

Wednesday, September 11, 2013

Gapend over de finish

Gapend hang ik over mijn eigen column. De Duitse verkiezingen zijn zo saai als de wedstrijd van Die Mannschaft tegen de Faeröer-eilanden. Alles is eigenlijk wel tot op het bot geanalyseerd en ongeïnspireerde campagnes laten heel Duitsland langzaam indommelen. Toch zegt mijn buikgevoel dat het eindspel spannend zal worden. 

 Verkiezingen in tijden van een goed draaiende economie zijn bijna nooit opwindend en de campagnetijd in Duitsland is behoorlijk saai. De enige grote thema's waar de twee kanshebbers op het kanselierschap zich echt onderscheiden zijn het wel of niet invoeren van een minimumloon en de verlaging of verhoging van de belastingen. Andere thema's, zoals Europa, komen nauwelijks ter sprake of blijven bij de meeste Duitsers niet hangen. 

 Otto Normalverbraucher ligt dus niet wakker van de verkiezingen. Merkel wel. Niettegenstaande zij volgens de peilingen nog steeds ruim voorligt op haar tegenstander Peer Steinbrück (SPD), is er een kentering zichtbaar. Gedoodverfde winnaars in peilingen krijgen tegen het einde van campagnes altijd te maken met kiezersmoeheid. Volgens mij zijn er minstens drie redenen waarom de verkiezingsuitslag op 22 september nog veel mensen zou kunnen verrassen: Beieren, het televisieduel en het verleden.   

Wat veel niet-Duitsers niet weten, is dat er aanstaande zondag al wordt gestemd in Beieren, waar de nieuwe deelstaatregering moet worden gekozen. Merkel kan in Beieren eigenlijk alleen maar verliezen. Op dit moment lijkt het erop dat de CSU, de Beierse zusterpartij van Merkels CDU, de volstrekte meerderheid haalt en de liberale FDP de kiesdrempel van 5 procent niet haalt. Goed nieuws voor Merkel, zou je denken. Maar neen. Zo'n uitslag wiegt Merkel-stemmers nog verder in slaap - aangezien hun stem niet meer nodig lijkt voor de overwinning - en duwt strategische kiezers mogelijk naar de FDP. Een onverwacht goed resultaat voor de SPD geeft Steinbrück een beslissend duwtje in de rug. 

 Sinds het grote televisieduel tussen Merkel en Steinbrück ruim een week geleden is er een eigenaardige sfeer ontstaan in Duitsland. Er zijn kleine tekenen van een kentering. Terwijl Angela Merkel recentelijk nog de onaantastbare regentes van Duitsland was, zijn er nu meer en meer stemmen en publicaties met een duidelijk kritischer toon. De terughoudende en soms aarzelende stijl van Merkel wordt ineens openlijk aangevallen. Misschien is het alleen een stormpje in de media om de kijkcijfers op te krikken. Maar misschien is het toch meer.

 Een blik op de geschiedenis laat zien dat Merkels CDU sinds 1998 in de verkiezingsnacht nooit zo veel stemmen haalde als een maand ervoor werd voorspeld in de peilingen. Het onbesliste televisiedebat heeft bij de oppositie de hoop aangewakkerd dat de geschiedenis zich herhaalt. 

 Die Mannschaft heeft dinsdag met ongeïnspireerd spel nog ruim gewonnen en gaat gapend richting WK. Merkel haalt de overwinning zeer waarschijnlijk ook, maar met meer angstzweet dan verwacht. 

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

Letter from Brussels: Hilfe von Goethe

Für ihre Arbeit müssen die Frankfurter Zentralbanker Datenreihen analysieren und wissenschaftliche Papiere lesen. Um die neueste Herausforderung zu bestehen würde der EZB ein einfacher Griff zu Goethe helfen. Die EZB ist einfach nicht zu beneiden. Die Rezession im Euroraum ist endlich beendet, da steht schon ein neues Problem vor der Tür: steigende Kapitalmarktzinsen. Der langsame Abbau der lockeren Geldpolitik in den USA und übertriebene Erwartungen der Märkte über den bevorstehenden europäischen Aufschwung haben das Potential, den leichten Aufschwung des Euroraums ziemlich schnell im Keim zu ersticken. Zur Bekämpfung dieser neuen Bedrohung gehen der EZB leider die Instrumente aus. Eine weitere Senkung des Leitzinses ist im Anblick der letzten Konjunkturindikatoren nicht mehr zu rechtfertigen. Was bleibt, ist also der letzte Trumpf der Zentralbanken: Kommunikation. Wie Magier versuchen die Notenbanken auf der ganzen Welt in diesen Wochen die Finanzmärkte mit Worten zu zähmen. Die EZB scheint dabei ihre magischen Wirkungen dabei am höchsten einzuschätzen. Sie handelt ganz nach dem Motto „warum einfach, wenn es auch schwierig kann“ und koppelt das Versprechen niedriger Leitzinsen nicht an ökonomische Indikatoren. Das Prinzip, sich niemals festlegen zu wollen, bleibt heilig. Diese Prinzipientreue könnte sich noch als fauler Zauber entpuppen. Was, wenn die Inflation wegen höherer Ölpreise wieder anzieht? Oder was, wenn die deutsche Unmut über zu niedrige Leitzinsen weiter zunimmt? Märkte vergessen schnell und der Glaube in gegebene Versprechen kann schnell verfliegen. Warum folgt die EZB also nicht der amerikanischen, britischen oder japanischen Notenbank und koppelt ihr Versprechen niedriger Leitzinsen z.B. an die Kerninflation oder sogar an die Arbeitslosigkeit? Ein solcher Schritt würde den Euroraum gegen unnötige steigende Kapitalmarktzinsen schützen können. Es könnte so einfach sein. Denn schon Goethe wusste: in der Beschränkung zeigt sich der Meister. Diese Kolumne erschien am Wochenende in der "Euro am Sonntag"

Thursday, September 5, 2013

ECB meeting - more of the same

It was not exactly a surprise when the ECB today announced to keep its interest rates unchanged. And judging from the press conference, the ECB has not suddenly become wildly optimistic. The easing bias remains in place.
If anything, macro-economic developments since the last meeting have improved. Still, the ECB is far from becoming over cheerful. In fact, the ECB’s macro-economic assessment was only a taking-stock of latest developments but not a change in expectations. A particular green shoot according to Draghi was the fact that domestic demand was the main driver of the growth pick-up in the second quarter. In terms of wording, the former “stabilisation in economic activity” has become “a gradual recovery”. Interestingly, this change in wording was not really reflected in the last ECB staff projections. As regards growth, the ECB staff revised its projections upwards for this year to -0.4% (from -0.6%) and downwards for next year to 1.0% (from 1.1%). As regards inflation, ECB staff now expect 1.5% this year (from 1.4%) and 1.3% (unchanged) for next year.

Notably, Draghi remarked that he couldn’t share enthusiasm about the recovery. According to him, the shoots were “very very green”. Risks to the economic outlook were still on the downside. In fact, next to the traditional risks like “recent developments in global money and financial market conditions and related uncertainties” and the lack of structural reforms, a new downside risk was presented: higher commodity prices in the context of renewed geopolitical tensions. Moreover, Draghi seemed to be concerned about the recent reduction of excess liquidity and its potential impact on money market conditions. The ECB will remain “particularily attentive” on liquidity developments. In our view, a clear hint that new liquidity injections and an extension of the full allotment procedures beyond July 2014 are still valid policy options for the ECB.

With the still rather pessimistic economic outlook, new potential downside risks and concerns about money market developments, it did not come as a surprise that Draghi confirmed the ECB’s easing bias and the fact that “rates will remain at present or lower levels for an extended period of time”. Judging from his comments on possible discussions on a rate cut today, a rate cut seems to be off the table for the time being but it is not in the trash bin, yet.

As expected, there were many questions on the ECB’s formulation of forward guidance. Up to now, the ECB’s forward guidance has differed from other central banks by not linking it to an economic variable. Listening to Drgahi today, we have the feeling that this will not change in the near future. The ECB is still very reluctant to go all the way. Instead, Draghi gave other clear hints at what market participants should look in the coming months. Remarks like “our mandate is to maintain price stability” or “we look at headline inflation not other definitions of inflation” sent a clear message that interest rates will not move as long as headline inflation forecasts remain comfortably below 2%. The inflation forecast of 1.3% for 2014 is currently probably the strongest argument in favour of unchanged rates. However, eventually the ECB could still be pushed into a situation in which it has to follow its other central bank peers. Just think of a possible oil price shock.

All in all, today’s ECB meeting just confirmed what we already knew. Rates will remain low for a long while but “forward guidance – the ECB-style” remains a shaky concept. If the ECB ever decide to release minutes, the minutes of today’s meeting will definitely not be in great demand.