Thursday, March 26, 2015
Binge shopping? German consumers have become real optimists and any worries about the current Greek crisis were clearly outweighed by low inflation and the strong labour market. German consumer confidence continued its recent upward trend. The GfK index increased to 10.0, from 9.7 last month, and is now at its highest level since October 2001. Interestingly, the willingness to buy increased to the highest level since November 2006. Over the last months, Germans have really started to spend it. Retail sales have seen an unprecedented uplift, increasing by a total of almost 6% since September last year; by far the best 4-months-performance ever. This is not a debt-driven shopping palooza but rather an indulgence-and-there-is-no-alternative consumption boom. On the back of the strong labour market, wage increases, low inflation and low interest rates, private consumption has become an important growth driver. Looking ahead, the factors behind consumption growth last year should remain intact this year. Given that Germans’ willingness to save has dropped to all-time-low, it seems that the ECB’s low interest rate has also reached German consumers. Only time can tell whether latest signs of de-saving are only a temporary phenomenon driven by low interest rates or a more structural and cultural shift. Fact is that households’ savings rate has dropped to the lowest level since 2001. All in all, even if we don’t expect excessive binge shopping, today’s consumer confidence indicator confirms our view that private consumption should be an even more important growth driver this year.
Wednesday, March 25, 2015
The gradual improvement continues. Germany's most prominent leading indicator, the Ifo index, just increased for the fifth month in a row to 107.9 in March, from 106.8 in February, indicating that the economy has gained further momentum. While the current assessment component improved to 112.0, from 111.3, expectations increased to 103.9, from 102.5 in February. Optimism has returned to the German economy. Strong growth in the fourth quarter of 2014, combined with low energy prices and the weak euro exchange rate have boosted confidence in the economy. However, before getting overly enthusiastic, one should keep in mind that hard data at the beginning of the year were less impressive than soft data. Moreover, today’s Ifo index is still only slightly above its average of the last five years. Looking ahead, the role of domestic demand as an important growth driver of the German economy should increase again this year. The strong labour market, wage increases, low inflation and de-saving on the back of record low interest rates should lead to strong consumption. In addition, exports should also pick up further as a result of the lower euro. The only unknown for stronger domestic demand is private investment. Here, favourable financing conditions have not yet led to a significant increase. The main reasons for still muted investment are probably the lack of strong incentives and continued uncertainty, the latter stemming the ongoing Greek crisis and the Russian-Ukrainian conflict. Consequently, the main risks to the positive German outlook come from the outside world. All in all, it looks as if the ECB and QE enable the German economy to extend its golden cycle without any new reforms. In fact, the economy is like a sailboat which only needs to hoist the sail and lean back to relax. Strong tailwinds could bring the strongest economic performance since 2011.
Thursday, March 5, 2015
As expected, the ECB today kept interest rates unchanged at its meeting in Cyprus. While Draghi was surprisingly upbeat on the economic outlook and the impact of QE, he kept a stringent stance on Greece. The ECB’s macro-economic assessment sounded as if the ECB is a bit inebriated by its own QE announcement. It was the most positive and optimistic assessment in a long while. Words like “broadening” and “strengthening” had not been used in combination with the Eurozone recovery for quite a while. In more detail, the ECB emphasized a “significant number of positive effects” from latest monetary policy decisions, as for example improved financial market conditions, financing conditions and lower borrowing costs. Moreover, the ECB stressed the fact that confidence indicators had also improved recently. Finally, lower energy prices and the weaker euro exchange rate should also contribute to the Eurozone recovery. This more positive take on the Eurozone economy was also reflected in the latest ECB staff projections which foresee GDP growth coming in at 1.5% in 2015 (from 1.0% at the December projections), 1.9% in 2016 (from 1.5) and 2.1% in 2017. It was for the first time since 2007 that the ECB projects a single year with GDP growth above 2%. With regards to inflation, ECB staff revised downwards its projections for this year due to lower actual inflation rates. More generally speaking, the ECB expects a very gradual increase of inflation over the coming years. In detail, ECB staff projections now foresee headline inflation to come in at 0% this year (from 0.7%), 1.5% in 2016 (from 1.3%) and 1.8% in 2017. To be fair, Draghi said that the ECB’s staff projections were conditional of a full implementation of all announced monetary policy measures. Don’t even dare thinking about tapering before QE has actually started. As for QE, Draghi revealed some interesting details. The ECB will start the actual government bond purchases next week Monday. Draghi repeated the January wording that the ECB will buy 60bn euro per month until the end of September 2016 and, in any case, until the ECB sees “a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2%”. The latter gives the ECB a lot discretionary power to alter the programme if need be. Draghi explicitly said that the ECB would buy government bonds with negative yields only if yield are not lower than the deposit rate. This would currently only exclude 2 year German government bonds. During the press conference, there were also several questions on Greece, QE and ELA. The bottom line of Draghi’s answers was that the ECB would only buy government bonds rated lower than investment grade if the countries are in a bailout programme and the programme is not in a review period. Moreover, the ECB could not buy more than 33% of a single issuer. For Greece, all of this means that the ECB could at the earliest start purchasing Greek bonds only in June or July, if and when Greece has reimbursed the bond expiring in June which the ECB had (partly) purchased under the old SMP programme. Finally, Draghi also said that ELA for Greek banks had been extended by 500 million euro. The ECB’s stance on Greece has definitely not softened. Overall, the ECB’s macro-economic assessment was much more upbeat than in previous months. It looks as if at least the ECB is a strong believer in the positive economic impact of its own QE programme. Admittedly, it would have been difficult for the ECB not to be positive but today’s euphoria was in our view almost a bit overdone. The warning that the more positive outlook should not lead to complacency and that now governments had to “contribute decisively” to the recovery was a standard part of the ECB’s introductory statement. However, it remains to be seen how credible this call on governments will be if at the same time the ECB will make an enormous advance payment in the form of its QE. To some extent this has some similarities with parents cleaning up their children's room and then asking them to do something as well. A strategy that might not make it into bestselling parenting guidebooks.