Wednesday, September 30, 2015
Good news with a bit of blush. German unemployment dropped by a non-seasonally adjusted 87,600 in September, bringing the total number of unemployed down to 2.708 million. In seasonally-adjusted terms, unemployment increased by 2,000, leaving the seasonally-adjusted unemployment rate unchanged at 6.4%. The late-summer revival of the German labour market turned out to be softer than normal. In fact, today’s September numbers are the worst September performance of the German labour market since 2002. However, in our view, this is probably the effect of the summer vacation ending in September in more regional states than normally and not a sign of a structural weakening of the labour market. Interestingly, latest numbers show that the success story of the German labour market does not only hold for a couple of lucky ones but is actually spreading across the entire market. Last year, the number of people working in so-called “normal” employment conditions, ie mainly full-time working hours, increased by more than 450 000 jobs. In the same period, the number of low-wage jobs came down. A clear indication that despite constant headline numbers, the German labour market is still evolving positively. Looking ahead, and despite the uncertainty stemming from the Volkswagen crisis, the prospects for the German labour market remain bright. The number of vacancies is still increasing and employers, particularly in the service sector, have again stepped up their recruitment plans. According to a recent study, the often-discussed lack of qualified workers mainly occurs in the engineering, the metal and electronic industry. Obviously, these numbers will add comfort to the currently widely heard equation that an economy with a strong labour market, combined with high vacancies, the lack of qualified workers and the demographic change, can digest a high inflow of migrants. However, whether this equation is simple or only simplistic remains to be seen. Language skills, recognition of diploma, financial support and integration in society are just some issues that will determine whether Germany can really make it. In our view, one thing is for sure, a successful integration of the current migration inflows requires an unprecedented and long-lasting flexibility of the German economy and society. All in all, the German labour market will remain an important growth driver this year and beyond. The challenges ahead, however, are much bigger than the relatively dull and constant data from today’s report suggest.
Wednesday, September 23, 2015
Tomorrow’s Ifo index should get less attention than normal. The latest events in the automotive industry overshadow ordinary confidence indicators and could eventually leave their marks on the German economy. Normally, the release of the Ifo index is always a special day for markets and observers of both the German and the Eurozone economy. It remains the first and most prominent leading indicator. Tomorrow’s release, no matter what the outcome will be, is already outdated before the numbers have actually been released. As so often in recent months with German confidence indicators, the Ifo comes between at least two drastic events and therefore is unable to capture the impact of any of the events. In normal circumstances, tomorrow’s Ifo index should give a better understanding of the possible impact of the late-summer market turmoil and the Chinese slowing on the German economy. The ongoing refugee crisis and now Volkswagen shocker, however, pose new risks to the German economy, which tomorrow’s Ifo will not yet capture. As regards to the refugee crisis, it is clearly too early to assess the possible impact. Besides the evident direct costs of building refugee shelters and housing and offering financial support, all other effects on, for example, the labour market, are still too unclear to be put in numbers. Obviously, the simple equation that an ageing economy with a shrinking labour force needs more immigration is appealing. However, only time will tell as to whether the German society can show enough and, even more important, sustainable flexibility to support long-term integration. As regards to Volkswagen, a short-term reaction of the German economy is more likely, even if at the current juncture it still is unclear what the impact from recent allegations will really be. Needless to say, owning 12 brands in seven European countries and having a global market share of around 13% of all passenger cars, there will be an impact. Volkswagen is one of Germany’s most important global champions. It is an important growth driver for the German economy. In Germany, Volkswagen employs more than 270,000 people and according to media reports is the third largest employer in the EU. Returning to Germany and adding a proxy of the possible suppliers to the equation, Volkswagen accounts for roughly 1.5% of German employment and even more when it comes to the growth impact. At this point, it is unclear what the impact of the probe into VW’s diesel manipulations will be. Volkswagen set aside more than €6bn as risk provisions. Estimates of a possible fine from US regulators for Volkswagen currently range from €1bn to €16bn. Moreover, the company will clearly have costs in changing the cars, with latest reports referring to 11 million cars affected by the diesel manipulations. As a reminder, Volkswagen produces around 10 million new cars each year. The reputational damage is currently impossible to assess. While the German economy defied Greece, the euro crisis and the Chinese slowdown, it could now be facing the biggest downside risk in a long while. The irony of all of this is that the threat could now come from the inside, rather than from the outside.
Thursday, September 17, 2015
Angela Merkel is alom bekend als politieke overlevingskunstenaar. Haar doormodderen en strategisch overnemen van standpunten van de tegenstander is haar op verwijten van visieloosheid en draaikonten komen te staan. Niet de wens het klimaat te redden, maar wel de (bijna) kernsmelting in Fukushima en het aangewakkerde anti-nucleaire sentiment deden de bondskanselier plots van standpunt veranderen. Met deze geniale draai veegde zij in een keer het partijprogramma van de Groenen van tafel en maakte zij van Duitsland een voortrekkersland in energie. Duitsland sinds jaar en dag vrijwel het laatste land zonder wettelijk minimumloon? Merkel maakt er haar speerpunt van en haalt de socialisten links in. Over Merkels draaikonterij in de eurocrisis, van géén hulp tot een derde pakket voor Griekenland, is inmiddels ook al alles gezegd. Merkel is de Houdini van de Europese regeringsleiders, een boeienkoningin, die zich uit elke val weet te bevrijden. Zij is een meester in het aanvoelen van de publieke opinie, terwijl zij zelf nooit op emotie is betrapt. De vluchtelingencrisis heeft dit veranderd. De Duitsers laten nu een groot hart zien. Vluchtelingen worden ruimschoots opgenomen, juichend met dekens en knuffels ontvangen op treinstations en de bereidheid hen te helpen is groot. Tienduizenden vluchtelingen lopen op de snelweg in Hongarije, ‘Germany, Germany’ en ‘Merkel’ roepend. Kan Duitsland die toeloop aan? ‘Wir schaffen das’ (dat krijgen we voor elkaar), beweerde de bondskanselier stellig. Dat was een week geleden. Nu zijn de grenzen dicht, zijn de opvangkampen, sporthallen, stations en lege scholen overvol en luidt elke deelstaat de noodklok. En de opvangbereidheid in de andere EU-lidstaten laat te wensen over. De vluchteling-stroom en de hoop op een betere toekomst in ‘Germany’ zijn alleen maar groter geworden. Heeft de best geïnformeerde vrouw van het westelijk halfrond werkelijk niet voorzien dat de genereuze opname van de vluchtelingenstroom de poorten alleen maar verder zou openzetten en dat de voorzieningen in een week uitgeput zouden zijn? Dat er zicht is op een bevolkingsaanwas van 12,5 procent in één jaar? Licht hierop werpt nu - na sluiting van de grenzen en de vraag of Duitsland zich niet moet verontschuldigen vanwege de gastvrije ontvangst van de vluchtelingen - haar uitspraak ‘Dann ist das nicht mein Land’. Merkel toont emoties. De ironie van de geschiedenis is dat net nu Merkel eindelijk emoties laat zien, dit haar einde kan inluiden. Want Duitsers zijn vriendelijk en zullen helpen bij humanitaire nood, maar ook Duitsers willen niet naast een vluchtelingenopvanghuis wonen en sturen hun kinderen naar een witte school. De grenzen kraken en de publieke opinie en de eenheid binnen de christendemocraten vertonen al de eerste barsten. Elke leider vindt vroeg of laat zijn Waterloo. En wat is er mooier voor een christendemocrate dan ten onder te gaan aan barmhartigheid? Deae column verscheen vandaag in het Belgische dagblad "De Tijd"
Monday, September 7, 2015
The reliable friend. July trade data just showed that the export sector remains an important growth driver of the German economy and has added to evidence of a solid start to the third quarter. Exports increased by 2.4% MoM, from -1.1% in June. As imports increased by 2.2% MoM, the seasonally-adjusted trade balance improved to 22.8 bn euro, from 22.1 in June. While many German commentators still complain about the ECB’s QE programme, German exporters should send a thank-you letter to Mario Draghi. Notwithstanding the excellent quality and product specialization of German exporters, the weak euro has clearly been a very special stimulus package; actually for the entire German economy. While industrial production is still struggling to gain momentum, exports have increased by more than 17% since the start of the year. In the same period, the effective nominal exchange rate of the euro has depreciated by around 4%. A closer look at German exports shows that exports to some countries are more sensitive to exchange rate movements than others. Interestingly, German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, German exports to the US seem to be most sensitive exchange rate changes. An important driver behind the fact that in the first half of the year, the US has become the single most important German trading partner; taking over this number one position from France. As regards the other currently often discussed German trading partners, a comparison of export and exchange rate developments shows that exports to both China and other emerging markets are less correlated. Looking ahead, this link between exports to different destinations and exchange rate movements is both good and bad news for the German economy. It shows that a weak exchange rate might compensate for domestically-driven problems in emerging economies, while at the same time it should further boost exports to the US. All in all, the weaker euro seems to have off-set domestically-driven weaker demand in several emerging economies. If and when the Fed finally starts hiking interest rates and the anticipated further weakening of the euro actually materializes, German exporters should not only send a thank-you letter to Mario Draghi but also to Janet Yellen.
Thursday, September 3, 2015
What a difference only a couple of months can make. Remember that back in March and April, the ECB was very upbeat on the Eurozone economy, with ECB president Draghi obviously enjoying the positive impact from QE (and even its pure announcement effect)? Now, just a couple of months later, the ECB has become less upbeat. After today’s ECB meeting, president Draghi sounded rather dovish, keeping the door for stepping up QE open. The somewhat more downbeat economic assessment is mainly the result of weaker growth in emerging markets. The ECB still expects a gradual recovery, albeit at a somewhat weaker pace. This was also reflected in the latest ECB staff projection, which foresee GDP growth to come in at 1.4% this year (from 1.5% in the June projections), 1.7% in 2016 (from 1.9%) and 1.8% in 2017 (from 2.0%). As regards inflation, ECB staff projections were revised downwards significantly on the back of lower energy prices. In the latest projections, ECB staff expects inflation to come in at 0.1% this year (from 0.3%), 1.1% in 2016 (from 1.5%) and 1.7% (from 1.8%). All these projections, however, have to be taken with a large pinch of salt as the cut-off date was much earlier than usual and therefore before the peak of latest market turmoil. Normally, the cut-off date of ECB staff projections is around the 20th of the month, now it was the 12th. The early cut-off date is an additional explanation for the ECB’s caution and new emphasis on downside risks. As regards the ongoing QE programme, the ECB announced that it would increase the so-called “share issue limit” from initially 25% to 33%. This decision was taken after a first assessment of the first six months of QE and means that the ECB could now purchase up 33% of each government bond issuance (as long as this would not give the ECB a blocking minority). While some market participants saw this measure as a first step towards stepping up QE, it is in our view a more technical measure, reflecting the fact and fear that the ECB could run into troubles achieving its monthly target of 60bn euro. Needless to say that the drop in inflation projections has revived the deflation versus disinflation debate within the ECB. It is the same debate the ECB had at the end of last year when discussing the need for QE. It is the debate on whether low or negative headline inflation rates, mainly triggered by dropping energy prices, do lead to deflationary expectations or are simply a blessing for the economy, increasing consumers’ purchasing power. In today’s comments, Draghi suggested that currently the ECB was still tending to the “it’s a blessing” explanation. Still, Draghi made two important comments which in our view set the door for more QE a bit more open: the small addition of “or beyond” to the targeted duration of September 2016 for the QE programme and the phrase that the Governing Council emphasized its “willingness and ability to act, if warranted, by using all the instruments available within its mandate and, in particular, recalls that the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme.” The door to more QE is open, even if Draghi also stressed that the ECB today had not discussed this possibility, but will the ECB also walk through this door? To answer this question, one has to go back to the initial QE discussion in late 2014. In our view, back then the deflation threat was a welcome stalking-horse to convince even die-hard monetarists in the Governing Council to sign off QE. Of course, successful QE would eventually also increase inflation and inflationary expectations but only indirectly and as a second round effect. The main and most imminent impact from a successful QE would go through a weaker exchange rate and stronger economic growth. Keeping this in mind, lower inflation projections will not per se lead to an increase of QE. To really see the ECB stepping up QE, the Eurozone recovery would need to falter first. On his birthday, Mario Draghi did not receive but actually gave a present to financial markets, stressing the ECB’s determination to do everything to support the Eurozone economy.