Economic outlook 2009/10: German economy

Transcription

October 6, 2009
International topics
Current Issues
Economic outlook 2009/10
German economy – recession ended
The storm that has had a firm grip on the global economy since last
year has abated. Confidence indicators throughout the world have recovered
and returned to levels signalling growth starting to come back. Financial market
sentiment has improved and the extreme risk aversion that set in after the collapse
of Lehman Brothers is a thing of the past.
In Germany, the ifo business climate index has risen steadily from its
historic low in March. Somewhat surprisingly, consumer confidence has also
improved. But hard data such as order intake, industrial output and exports have
also recovered substantially from the dramatic slumps seen in the winter half-year.
To be sure, it is still too early to sound the all-clear. But the German
economy registered growth (+0.3%) in Q2 2009 for the first time in five quarters.
Even if the growth forces intensify in the second half of the year – as we expect –
German GDP for the full year 2009 will still be 5% lower than one year earlier and
register the strongest decline by far in post-war history.
We expect the economic recovery to be relatively moderate in 2010.
Persistent difficulties in the property market and still hesitant US consumers
suggest the US economy will provide little impetus for the world economy.
Authors
Bernhard Gräf
+49 69 910-31738
bernhard.graef@db.com
Tobias Just
+49 69 910-31876
tobias.just@db.com
Jochen Möbert
+49 69 910-31727
jochen.moebert@db.com
Stefan Schneider
+49 69 910-31790
stefan-b.schneider@db.com
Editor
Stefan Schneider
Technical Assistant
Pia Johnson
Deutsche Bank Research
Frankfurt am Main
Germany
Internet:www.dbresearch.com
E-mail marketing.dbr@db.com
Fax: +49 69 910-31877
Managing Director
Norbert Walter
German exports therefore look set to grow very slowly in 2010 after
plummeting in 2009. As a major exporter of capital goods, Germany will likely
be hit particularly hard by the modest global propensity to invest.
Flexible working time arrangements and especially the massive
increase in short-time working have postponed the adjustment in the
German labour market. The dramatic increase in industrial unit labour costs in
the winter half is expected to lead to large-scale redundancies over the next few
months even if demand picks up. New car registrations will decline now that the
scrapping bonus has expired. Consumption thus looks set to shrink somewhat in
2010. GDP could grow slightly by 1%.
In July, consumer prices were down the first time since 1987 in a year-over-year
comparison. This was the result of the oil price dropping by half within only one
year. This effect will expire around year-end so the level of prices looks set to rise
slightly on average in 2010.
We do not share concerns that the current extremely expansionary
monetary and fiscal policies could lead to a longer-term acceleration
of inflation. The ECB has both the means and the intention to siphon off excess
liquidity once the economy gets back on track.
First signs of recovery1
ifo business climate
2000 = 100
115
Business climate
Current situation
Expectations
105
95
85
75
00
02
04
06
08
Source: ifo
1
Over the last few months, numerous experts had still revised
downward their growth forecasts – with some expecting pronounced
slumps – and said a potential recovery would probably not occur
until late next year. However, signs are mounting that the German
economy has passed the trough. The so-called hard data are now
also showing the improvement already evident for several months in
the confidence indicators, such as the ifo business climate index or
the purchasing managers index. Due mainly to foreign orders, order
intake has risen by almost 13 ½% since March. This was reflected in
strong increases in production following massive slumps in both
order intake and industrial output by one-third and one-quarter,
respectively, since the autumn of last year. Overall, real GDP was up
(+0.3% in Q2) for the first time in five quarters.
Exports have bottomed out
Exports
Nominal exports, % yoy
08
30
20
10
0
-10
-20
-30
-40
-50
09
Germany
USA
Japan
China
Sources: National statistical offices
2
The marked increase in order intake suggests that exports will
continue to grow. So we have come full circle as it was exports that
had suffered dramatically after the shock waves triggered by the
collapse of Lehman Brothers. This was reflected in an almost
synchronous slump in exports of all major export nations. While the
first quarter of 2009 saw exports drop by roughly one-quarter (yoy)
in China, the US and Germany, they dropped by as much as nearly
47% in Japan. Given its high degree of openness, the German
economy was hit particularly hard, especially in a European
comparison. Taking into consideration imported intermediates,
exports generate just over one-quarter of GDP in Germany, and
roughly one in four workers depends directly or indirectly on the
export sector. As a result, with the global economy beginning to look
somewhat better again – as suggested for some time now by
purchasing managers' indices in China and the US – German
exports can also look for some positive impetus. German exports
thus seem to have broken their downward trend in May. However, as
with all economic indicators one should not assume that the only
way is up. Especially the phases before and after a turning point in
business activity are characterised by high volatility of monthly
indicators. Despite the expected improvement, exports will likely fall
by over 17% in real terms on average in 2009, and thus shrink faster
than world trade, which looks set to drop by around 15% this year.
Exports weighing on investment
Germany:
Exports & investment
% yoy
15
10 Exports
(right)
5
0
-5
-10
Investment in M&E
-15
(left)
-20
-25
92
95
98
01
04
20
15
10
5
0
-5
-10
-15
-20
07
10
Sources: Federal Statistical Office, DB Research
3
Many companies have reconsidered their investment plans owing to
poor foreign demand, and in autumn last year they began to
massively reduce their investments. Real investment in plant and
equipment was down by nearly one-fifth from the pre-year level in
Q1 2009. Contributing factors were shrinking profits and, in
particular, extremely low capacity utilisation. Capacity utilisation has
fallen by 18 1/2% from its last high in Q2 2007 to its lowest level
since data collection began in 1955. Moreover, financing conditions
have worsened in the course of the financial crisis. Financial
institutions have markedly tightened lending conditions, for instance,
and the spread between corporate and government bonds in the
euro area is still two and a half times as wide as the 2005-2007
average despite a recent spread narrowing. So the downtrend in
investment can hardly be expected to peter out soon. However,
measured as a percentage of GDP, German investment in plant and
equipment is considerably below the euro area average and also
1
October 6, 2009
This report was first published in German on August 13, 2009.
3
Current Issues
EUR corporate bonds
Bp vs government bonds
800
700
Financial
institutions
600
500
400
300
200
Non-financial
corporates
07
08
100
0
09
Source: iBoxx
4
EMU: Lending conditions
Percentage of banks that have tightened
lending conditions
80
70
60
50
40
30
20
10
0
-10
-20
-30
03
05
Loans to
07
09
Small and medium-sized companies
Large companies
Source: ECB
5
clearly below the level registered in 2000/01. As a result, there is
less need for correction so we assume the speed of the decline to
be noticeably lower in the further course of the year. All in all,
investment in plant and equipment will probably fall by more than
20% on average in 2009 and stagnate next year.
Credit crunch – what crunch?
As in former recessions, credit growth has slowed considerably and
both companies and private individuals are increasingly complaining
about difficulties in obtaining credit. Politicians, who until recently
had still criticised the banks for financing high-risk deals, are now
calling upon banks to lend more generously so as not to worsen the
downswing by a so-called credit crunch. Tighter lending standards
are typical of an economic downswing, which is exacerbated by
banks' higher risk aversion. The reason for this is higher default
risks for credit in a recession. Risk reassessment at companies has
led to a slowdown in hiring and a shelving of investment plans.
Consumers are postponing unnecessary purchases and saving
more. This reveals two things: not only does credit supply decrease
in a recession but credit demand, e.g. for investment or
consumption, decreases as well. Hence, slowly growing or even
falling lending volumes do not necessarily represent a credit crunch.
The facts are as follows: German bank lending to corporates or
households still rose by 4% yoy in June. Even though credit to
companies outside the financial sector has shrunk by 2.3% since the
beginning of the year, it is still 2.8% higher than in June 2008. In
light of the economic slump credit volumes are likely to remain
below their pre-year level over the next few months – as was the
case after the New Economy crisis. However, this cannot
automatically be called a credit crunch but is attributable to the
expected decline in GDP by roughly 5%, and especially to the slump
in investment in plant and equipment, which requires a large degree
of external financing. It cannot be ruled out, though, that the slump
in investment is in part a result of more difficult financing conditions.
But the dramatic slump in capacity utilisation, which is 12
percentage points below its long-term average and thus at an alltime low, shows that lack of demand is by far the more important
argument. In its May forecast of economic development in 2009/10,
the Bundesbank gives a similar assessment and assumes that
Germany will not see a general credit crunch.
Inventory changes and the economic cyle
Germany: Changes in
inventories & GDP growth
3.0
Real GDP
(% yoy)
2.0
1.0
0.0
-1.0
-2.0
Growth contribution,
of inventory changes
(%-points)
07
08
-3.0
-4.0
09
Source: Federal Statistical Office
4
6
We expect inventory depletion to make a positive contribution to
growth in the further course of the year, so the marked reduction in
inventories which set in after the Lehman shock should gradually
peter out. Fluctuation in the stock of pre-products and finished
products (inventories) play an important role in economic analysis.
Demand shocks will initially lead to an unplanned increase in
inventories. Companies then react by markedly cutting production.
Inventories will subsequently shrink to below their original levels in
order to adjust to fallen demand. This will reinforce the economic
downswing. By contrast, when demand rises companies do not only
increase production by the additional volume of demand but also
tend to replenish their inventories.
In the quarterly statistics of the national accounts, inventories are
initially estimated on the basis of the difference between output and
turnover in industry and on the basis of stock assessments made in
the ifo business climate index. In a second step, this estimate is
October 6, 2009
ifo inventory estimates
%
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
1991 1995 1999 2003 2007
Source: ifo
7
The last recessions by
comparison
Real output index, manufacturing,
smoothed
105
100
95
90
85
80
1993
2003
2009
75
70
-6 -4 -2 0 2 4 6 8 10 12 14 16 18
X-axis: month 0 marks the point at which the recessions
start to have a strong impact on industrial production.
Sources. Federal Statistical Office, DB Research
8
compared with the difference between GDP by origin (output) and
GDP by use (private and public consumption, investment and
exports). Hence, inventory statistics are in part residual measures
reflecting potential mistakes in the calculation of GDP by origin and
use. Unlike in the US and several European countries, there is no
statistical reporting on inventories at less than twelve-month
intervals in Germany. Structural statistics for the distributive trades
and industry registering initial and final stocks for the year are only
available to the Federal Statistical Office with a considerable time
lag. This as well as the fact that only limited information on individual
components of use is available at the time of the first estimates may
explain why inventory data are frequently subject to major revisions.
These revisions are almost always downwards for inventories and
upwards for other components.
In the current business cycle, inventories are moving nearly in line
with the typical pattern. In the second half of 2008, inventories rose
by a total of 1.7 percentage points of GDP although the economy
was already shrinking by 2.7 percentage points in this period. In Q1
inventories were reduced by 0.5 pp of GDP, which contributed to the
massive slump in growth of 3.5% qoq. In the euro area, an increase
in inventories by 0.8 pp in H2 was followed by a decline of the same
order in Q1, with GDP shrinking by 2.5%.
The ifo survey still shows a majority of companies believing they
hold excessive stock. Thus the inventory run-down should have
continued at least in Q2, even though this correlation was not
particularly reliable especially in the last few years. In light of the
doubtful data base, economic forecasts driven primarily by expected
changes in inventories should be questioned: this also applies to the
much discussed "double dip” theory, according to which the
expected economic stabilisation in the second half of the year will
only be triggered by temporary replenishment of inventories, so the
lack of demand in early 2010 will push the economy back into
recession.
Heavy slump in manufacturing output
Germany:
Business expectations
Balance of positive and negative
company reports
Manufacturing industry
30
20
10
0
-10
-20
-30
-40
-50
-60
00 01 02 03 04 05 06 07 08 09
Source: ifo
October 6, 2009
9
After five boom years the upswing in German manufacturing came
to an abrupt halt in 2008. Thanks to the relatively good first half and
full order books which kept production going well into Q3, though,
the statistics still show a 1% increase in output for the full year 2008.
However, this figure masks the fierce correction in the second half of
the year. While seasonally adjusted production figures still rose
slightly in the first two quarters, orders slumped in H2 which led to
production being cut markedly. In the third quarter, seasonally
adjusted output already fell by 3% qoq, 6.5% in Q4 and as much as
13.5% in Q1 2009. By February 2009 production had shrunk by
roughly 25% compared with the highest level reached one year
earlier.
So the crisis has thus far been much more pronounced than the last
recessions. In the first eight months after the beginning of the 2003
crisis, production fell by merely 5%. Even in the recession of 1993,
real output shrank by "only" 15% over the following 16 months. So
the current slump is considerably stronger but seems to be ending
sooner than in earlier recessions. There are important early
indicators currently suggesting that the decline in production is
bottoming out. Business expectations in industry have been looking
up since early 2009. Even though pessimistic voices still dominated
in July, sentiment indicators have risen steadily. Moreover, foreign
5
Current Issues
Hard landing
Order intake, seasonally adj., 2005=100
140
120
100
80
60
40
95
97
99
01
03
05
07
09
Mechanical engineering
Automobile
Chemicals
Electrical engineering
Source: Destatis
10
Germany:
Industrial production
% yoy
Food
Textiles
Clothing
Chemicals
Plastics
Metal processing
Mechanical eng.
Electrical eng.
Automobile
2008 2009 2010
0.2
2
1
-4.5
-23
-5
-14.6
-23
-14
-3.8
-18
4
-1.9
-12
3
-1.1
-30
10
5
-22
6
5.2
-19
6
-3.8
-25
5
Manufacturing
1
-19
5
11
Germany: New car
registrations
% yoy
50
40
30
20
10
0
-10
-20
-30
05
06
07
08
09
Source: Federal Motor Transport Authority
6
12
orders were up approx. 17% and domestic orders up more than 7%
in June from the low point reached in February 2009.
Capital goods sector hit particularly hard
The nature of the current crisis has meant that export-reliant
sectors, in particular, slid into a deep recession at an early stage. In
spring 2009 the chemicals industry registered a 27% drop in orders
compared with one year earlier, while automobiles lost roughly onethird and mechanical engineering as much as half of their pre-year
order intake. Hardly any industrial sector was able to escape the
downswing; only the food industry registered a slight increase in
production. The success of the car scrapping programme is
reflected in the fact that order intake in the German car industry was
up 30% already in June compared with January 2009. Typically a
supplier of intermediate inputs, the chemicals industry has been
registering (slightly) higher order intake since March. So is the worst
behind us?
Moderate increase in output expected for 2010
On the one hand, early indicators point to an increase in production
in all major sectors of industry over the coming months. Therefore,
2010 may see manufacturing output rise by a substantial 5% thanks
not least to the very low starting level. On the other hand, one
should not underestimate the risks. As we expect industry as a
whole to see output shrink by approx. 20% in 2009, the upswing
foreseen for 2010 does not provide a comfortable degree of capacity
utilisation, not to speak of large-scale demand for investment. In
addition, there will be negative second-round effects for the car
industry as a result of the scrapping bonus. Demand looks set to
drop noticeably after the scrapping schemes. Moreover, structurally
weak industries such as textiles and clothing will continue to shrink.
It will probably take about four years until manufacturing will have
recovered entirely from the drop in output.
Mixed signals will likely come from construction in both 2009 and
2010: no more than 170,000 residential buildings are set to be
completed this year. This is the lowest number of new dwellings
since the end of WWII and nearly 50% lower than the average
completion figures of the last fifty years. In addition, rising
unemployment will also lead to higher vacancy rates in office
markets. This will reduce the volume not only of speculative new
construction. Economic stimulus programmes alone are providing
impetus in the order of approx. EUR 15 bn in civil engineering and
public-sector construction, e.g. through measures to improve energy
efficiency. At the same time, though, more and more municipalities
are seeing their revenues shrink. For 2009 we therefore expect total
construction activity to drop by roughly 4% in real terms. In 2010 a
slight increase is possible.
Private consumption: Even stagnation would be a success
While exports and investment plummeted in the first quarter of 2009,
private consumption surprisingly rose by 0.5% qoq. However, the
increase in real terms is mostly attributable to car purchases in
connection with the government scrapping bonus for old cars and
the low inflation rate. At least from a business activity point of view,
the scrapping scheme turned out to be an extremely effective
instrument. Meanwhile, the funds earmarked for the scheme
(EUR 5 bn) have been spent and the programme has ended.
Despite the deep recession new car registrations were up almost
30% in July from the pre-year level.
October 6, 2009
Savings ratio
As % of disposable household income
14
13
12
11
10
9
8
91 93 95 97 99 01 03 05 07 09
Source: Deutsche Bundesbank
13
Germany: Real private
consumption
1991 = 100
125
120
115
110
105
100
95
91 93 95 97 99 01 03 05 07 09
14
However, the uptick in private consumption can hardly be expected
to continue, although the GfK consumption climate index has been
steadily rising from the low reached at the end of last year. At the
same time, retail sales stagnated in real terms in Q2 and automobile
sales even edged down from the strong Q1 figure. To be sure,
wages will likely rise almost as strongly as in 2008 this year, as
many collective agreements last from 2008 into 2009. In addition,
households will feel considerable relief in 2009 from lower energy
and food prices. However, this effect is offset by a negative wage
drift, substantial job cuts in the course of the recession and an
expected further increase in the savings ratio as a result of rising
uncertainty. Despite the fiscal relief, private consumption thus looks
set to grow by ½ % in real terms at the most this year, and fall by
roughly the same number next year as unemployment continues to
rise noticeably and government subsidies for the purchase of new
cars expire. This would mean a continuation of the disappointing
development of consumption witnessed since 2001, after real
increases of nearly 2% between 1991 and 2001. Against the
backdrop of a dramatic slump in business activity, though, even
stagnation would be quite a success in 2009/10.
Labour market: Short-time work cushions rise in
unemployment
So far, the labour market has been holding up relatively well. Since
its last low point in October 2008, the jobless total has risen by
“only” 300,000 to just under 3 ½ million, and the rate of
unemployment was up by a mere 0.7 percentage point to 8.3% in
July, even though the economy has been shrinking since Q2 2008
and the pace of the upswing picked up dramatically in the winter half
of the year. This has been due in part to legal and statistical
changes reducing the jobless total by roughly 150,000 persons.
Moreover, the labour market reacts to changes in economic growth
with a time lag. This is partly attributable to provisions against
dismissal, but also to the fact that redundancies will only occur to a
larger extent once companies no longer see deteriorating demand
as the result of short-term volatility but as a longer-term
phenomenon, and when short-term buffers such as annual working
time accounts have been used up. By far the most important reason
why large waves of redundancies have so far failed to materialise,
however, lies in political measures such as the prolongation of the
funding for short-time work to initially 18 months in January and then
24 months in June 2009. Funding for short-time work, which is
usually paid out for six months, serves to bridge temporary
unemployment and is designed to prevent dismissals and the cost of
re-hiring once jobs are available again. Companies applying for
funding for short-time working will have their social security
contributions reimbursed in part or in total. Full reimbursement is
possible particularly if the funds for short-time working are used for
further training measures. Staff on short-time work receive 60% or
67% (if a child lives in the household) of their net wage differential
(normal working hours minus actual working hours) from the Federal
Employment Service (BA).
When the economic crisis began in autumn 2008, the number of
applications for and the number of employees in short-time work
rose rapidly. Most recent short-time working figures reached the
second highest level after that seen in the early 1990s. Back then,
the number of short-time workers had risen at times to more than 2
million in the course of German unification. In March 2009 in excess
of 1.2 m employees worked short hours, and according to the
October 6, 2009
7
Current Issues
Germany: Number of
short-time workers
In 1 000
2500
2000
1500
1000
500
0
85
90
95
00
05
Source: Federal Labour Office
15
Germany: Short-time
working
In 1 000
1400
1200
1000
800
600
400
200
0
2007
2008
2009
Number
Registrations
Source: Federal Labour Office
16
Germany: Labour market
Seasonally adjusted, m (left), % (right)
5.5
Unemployment rate
(right)
5.0
13
12
11
4.5
10
4.0
9
8
Jobless total
(left)
3.5
7
3.0
6
05
06
07
08
09
10
Sources: Federal Labour Office, DB Research
17
Germany: Growth
Real GDP
Short-time working takes place predominantly in manufacturing.
During the crisis generally more than 50% of the Germany-wide new
registrations were made in that industry in any given month, with
some months even seeing registrations rise to 90%. Within
manufacturing, short-time working is concentrated mainly in the car
industry, with nearly one-quarter of these approximately 820,000
employees subject to social security contributions being registered
for short-time working in February alone. Over the last 12 months
nearly every second employee was or still is taking part in short-time
work.
Although short-time working has thus far proved to be highly
efficient, much simplified requirements and more generous funding
will likely lead to large-scale free-rider effects. Moreover, short-time
working may hamper adjustment processes and preserve excess
capacities, as for instance in the automobile sector and supplier
industries. It may also contribute to conserving outdated structures
within companies. What's more, short-time working comes at a high
cost. This is currently estimated at over EUR 5 bn for the current
year and thus EUR 3 bn higher than still assumed in February.
Whether, at the end of the day, this instrument will actually prevent
unemployment from rising remains doubtful, but thanks to increased
availability of funding it is definitely possible. The number of shorttime workers has risen strongly particularly since the beginning of
2009, so by the time funding expires, the German economy will
hopefully be growing again.
However, short-time working can hardly be kept up in any case for
companies that are seeing demand erode over a longer period of
time. The way companies handle redundancies may also be
influenced by the elections. So the coming months will likely see
unemployment rise appreciably. Up until the end of the year we
expect the jobless total to grow by a good 500,000 to just under 4
million, which would push up the rate of unemployment to 9 ¾%.
2010 will probably see another increase in the jobless total by
400,000 to just under 4 ½ million, resulting in an unemployment rate
of 10 ¾% by the end of next year.
4.0
2.0
Back on a growth path …
2.0
1.0
0.0
0.0
A look at the latest economic indicators suggests that the turning
point was reached in the second quarter. However, both the
development of the financial crisis, especially after the collapse of
Lehman Brothers, and the speed and depth of the recession have
shown that we are in uncharted waters. Models to analyse and
forecast business activity on the basis of the average behaviour of
economic subjects in the past decades can only be applied to a very
limited extent and are little help in explaining the current situation.
Growth looks set to pick up speed in the second half of the year.
Besides inventory changes, the extent of this acceleration depends
-2.0
-1.0
% qoq
(right)
-4.0
-6.0
-2.0
-3.0
% yoy
(left)
-8.0
06
07
-4.0
08
09
10
8
Federal Employment Sevice, the figure probably rose to 1.4 m in
June. In February, the number of newly registered short-time
workers also rose to over 700,000 but fell gradually in the following
months, to 200,000 in June. This recent development suggests that
a stabilisation (of those already in short-time work) is on the cards
for the next few months. On average, employees participating in
such schemes worked roughly two-thirds of their normal working
hours. This means that without short-time working – in purely
arithmetical terms – roughly one-third of all employees registered in
the schemes would have become unemployed, and the jobless total
would already have risen by over 400,000 to just under 4 million.
18
October 6, 2009
Germany: Growth
Real GDP, % yoy
6
4
2
0
-2
-4
-6
70 74 78 82 86 90 94 98 02 06 10
19
Germany: Economic growth
% yoy
2007 2008 2009 2010
Real GDP
2.5 1.3 -5.0 1.2
Private consumption -0.3 0.4 0.6 -0.4
Gov't expenditure
1.7 2.0 2.7 1.8
Fixed investment
4.8 3.0 -8.6 1.7
M&E
11.0 3.3 -21.0 4.1
Construction
0.0 2.6 -0.7 1.2
Exports
7.5 2.9 -16.4 4.1
Imports
4.8 4.3 -11.0 0.9
Consumer prices
Budget bal., % GDP
Unemploym. rate, %
2.3
-0.2
9.0
2.7 0.3 0.3
0.1 -4.2 -6.1
7.8 8.4 10.0
20
Global
economic growth
Real GDP, % yoy
0.4
-0.7
0.7
-2.6
-5.8
-3.9
1.9
1.5
0.7
6.5
4.1
4.4
5.2
1.5
4.3
-2.5
-5.5
1.2
-2.6
6.1
2.6
2.0
3.2
2.0
Asia
Latin America
Eastern Europe
Middle East
World
Sources: IM F, DB Research
21
Brent Blend, USD/bbl.
160
140
120
100
80
60
40
20
0
02
04
06
08
Source: Global Insight
October 6, 2009
What is more important, however, than the extent of the downturn in
the German economy this year – something that will largely have
been determined by the slump in the winter half of 2008/09 anyhow
– is the dimension of the upswing expected for next year. As the
synchronous downswing passed on through international trade was
one of the reasons for the deep recession, a country like Germany –
with its strong dependence on the world economy – will see a
recovery of the global economy as the precondition for a sustainable
upturn. In our view this requires a recovery of the US economy
providing positive momentum for the world economy. Among the
major industrial nations, the US will probably be the first to emerge
from the recession. Given the ongoing adjustment in the US housing
market and further efforts to save on the part of US households,
growth will likely remain below potential for some time, especially as
former forms of financing used for consumption, such as mortgage
cash-outs, are no longer available. For 2010 we therefore expect
only slight GDP growth of approx. 1 ½% for the US and just under
2% for the world economy. In this environment, Germany may be
able to achieve growth in the order of around 1% next year.
In the course of the global recession and the dramatic drop in oil
and commodities prices, inflation has slowed markedly throughout
the world. While US inflation still stood at 5.6% in July 2008, the
consumer price index was recently down more than 1% from one
year earlier. In Germany the price level, which had still risen by 3
½% yoy in the middle of last year, was down half a percentage point
in June 2009. In view of the basis effects stemming from the
development of the oil price, price levels in Germany and many
other euro area countries look set to hit bottom. So-called core
inflation, i.e. excluding energy and food prices, will probably decline
but remain above zero.
Deflation unlikely …
Oil price
00
… but how strong will be the upswing in 2010?
Inflation or deflation? Not one or the other!
2008 2009 2009
USA
Japan
Euro area
not least on self-reinforcing processes which are hard to gauge at
present. The questions as to whether the recovery will take the
shape of a V, W or L can hardly be answered with any degree of
consistency today. The German economy this year looks set to
shrink by around 5% on an annual average, falling back to the level
reached in 2005. This would be the deepest slump in the post-war
period, as even in the wake of the two oil crises in the 1970s and
80s the German economy contracted by merely 0.9% and 0.4%,
respectively. The recession periods that followed in 1993 (-0.8%)
and 2003 (-0.2%) were also relatively mild.
22
To be sure, underutilisation of production capacities in the overall
economy will tend to push core inflation down. Nonetheless, we do
not expect the onset of deflation, i.e. a sustained and broad-based
decline in prices inducing economic subjects to postpone planned
purchases.
… and limited medium-term inflation risk
While some experts warn against Japanese-style deflation, others
predict a pronounced acceleration in inflation over the medium or
longer term, pointing to the dramatic lengthening of central bank
balance sheets and massively rising public debt. We consider the
risk of inflation to be limited as well. As a result of the deep
recession and dramatic capacity underutilisation, the rate of price
9
Current Issues
increase looks set to remain extremely moderate this year and next
and come to between 2% and 3% p.a. on a medium-term horizon in
the major industrial countries, with inflation rates in Germany
expected to be below average.
Germany: Inflation
Consumer price index, % yoy
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Headline
Core inflation (ex
energy and food)
03
04
05
06
07
08
ECB policy extremely loose and "unorthodox”
09
23
Source: Eurostat
Central bank balance
2500
2000
ECB
1500
1000
Fed
07
500
08
09
24
Sources: Fed, ECB
EMU: M3 money supply
% yoy
14
12
10
8
6
4
2
0
00
02
04
06
08
Source: ECB
25
Equity markets
January 2, 2008 = 100
S&P 500
110.0
100.0
90.0
80.0
Dax
50.0
40.0
09
Source: Global Insight
10
The ECB’s exit strategy
A huge lengthening of central bank balance sheets does not
automatically increase the money supply by the corresponding
amount, which is shown by the development of M3 in the eurozone.
Over the past year, the yoy increase in the money supply slowed
from 9.7% to 3.5%. This is partly due to the fact that, as a
precautionary move, financial institutions are now actually holding
large parts of their ECB credit at the ECB. More cautious lending
and deleveraging on the part of the banks, i.e. shortening the lever
between equity and the business activities to be financed by this
capital, is also having a dampening effect on liquidity. And finally, the
ECB can be relatively relaxed about exiting its extremely loose
monetary policy, as its monetary easing – unlike that of the Bank of
England and the Fed – mostly focused on rate cuts and extensions
of repo maturities, i.e. on limited measures to boost liquidity, which
will automatically be reversed once the deals expire. Also, only a
limited number of unorthodox measures have been taken. The
planned Pfandbrief purchases by the ECB totalling EUR 60 bn are
relatively minor in view of the size of the European Pfandbrief
market. Even the full amount would only cover about 3% of the
market. We expect the ECB – just like the Fed – to start raising
interest rates again in 2010. The current low level of merely 1%
suggests that it will raise interest rates in various 50 bp steps to
bring up the main refinancing rate to 2.50% by the end of 2010. In
2011, it will then probably be hiked twice more to reach 3.50%.
Monetary tightening could turn out less pronounced should the EUR
strengthen considerably versus the USD.
Capital markets: Risk appetite returns
70.0
60.0
08
Tausende
EUR bn and USD bn, resp.
The arguments brought forward by inflation apologists centre on the
quantity equation of money. It stipulates that the sum of goods and
services in an economy multiplied by their prices must equal the
product of the money supply available and its velocity of circulation.
With production and the velocity of circulation unchanged, an
increase in the money supply will thus lead to a corresponding
increase in prices. In light of extremely loose monetary policy, prices
must soar sooner or later. Or must they? Yes, the ECB‟s monetary
policy is extremely accommodating at present. Since last October,
the European Central Bank has lowered its main refinancing rate by
325 basis points to 1%; in June it concluded a repurchase
agreement to the tune of EUR 442 bn with a 12-month maturity and
started to buy Pfandbriefe worth up to EUR 60 bn. Since the
collapse of Lehman Brothers the ECB has lengthened its balance
sheet by more than one-third to EUR 2,000 bn, or over one-fifth of
the euro area's GDP. But does this mean rising inflation is a
foregone conclusion? We think not.
26
The good performance of the stock market, rising government bond
yields and lower EM and corporate bond spreads show that the
flight to safety triggered by the international financial crisis has
eased. International investors„ risk appetite has returned, at least to
some extent. 10Y Treasury yields in the US, for instance, have
recently risen to 3 ¾% from a low of just under 2% at the end of
October 6, 2009
10Y govt. bond yield
%
5.0
Germany
4.5
4.0
3.5
3.0
Collapse
of Lehman
Brothers
Jan Apr
2008
Jul
2.5
USA
2.0
Okt Jan Apr Jul
2009
Source: DB Research
27
EUR corporate bonds
Bp vs government bonds
800
700
Financial
institutions
600
500
400
300
200
Non-financial
corporates
07
08
100
0
09
Source: iBoxx
28
EMU: Yield spreads
Spread vs 10Y Bunds, bp
300
France
Spain
Italy
Ireland
250
200
150
100
50
0
06
07
08
09
Source: DB Research
29
EMU: Budget balances
% GDP
0
-2
-4
-6
-8
-10
-12
2008
GER
2009
FRA
ESP
2010
ITA
Fiscal policy: 2010 debt ratio at 80% of GDP
As a result of the deep recession and the huge stimulus packages
passed by many countries, budget deficits are ballooning
everywhere. For Germany we expect the budget shortfall to rise to
over 6% of GDP in 2010. Both 2007 and 2008 still saw almost
balanced budgets in Germany‟s public sector overall. The economic
stimulus packages I and II were responsible for deterioration in
public finances equal to approximately 3 percentage points of GDP;
another 3 pp resulted from automatic stabilisers (such as recessioninduced low tax revenues and higher social spending to cushion
rising unemployment). This will push up total government debt, still
at just under 66% of GDP at end-2008, to 80% by the end of 2010.
In other European countries the deterioration of public finances has
been even more severe. In France, for instance, the budget deficit
looks set to reach 8% of GDP; in Spain the figures is just under 10%
and the UK and Ireland may even see deficits of approx. 14% of
GDP. This suggests politicians may seek a permanent monetisation
of the public-sector debt burden by the central banks or its reduction
via higher inflation.
We think the risk of higher inflation is limited, the main reason being
that the independent central banks above all are unlikely to tolerate
higher inflation as this would thwart their decades-long efforts to
anchor inflation expectations at low levels. Also, international capital
markets react extremely quickly to changes in the inflation outlook.
As roughly one-seventh of German government debt must be
refinanced every year, higher inflation and thus rising interest rates
are no attractive option for any government. Moreover, the low
money illusion of households does not allow politicians to levy a
quasi-unnoticed "inflation tax”. The coming decades will see the
German population age quickly. Ageing societies, however, are
characterised by rising inflation aversion, as they enjoy large-scale
financial wealth and are on average in no position to counter a
depreciation of their wealth by means of increased saving.
EMU
Sources: EU Commission, OECD, DB Research
October 6, 2009
2008, and Bund yields in Germany rose from 3 to 3 ½%, so US
yields are back above German yields. Also, the yield spread
between bonds issued by financial institutions and Bunds recently
halved to just over 300 bp, and the EM bonds to US Treasuries
spread is only half as wide today, at 400 bp, as it was shortly after
the collapse of Lehman Brothers. Nonetheless, weak business
activity and extremely low inflation expectations suggest that
considerably higher yields are not on the cards. We therefore do not
expect US yields to reach 4 ¾% until the end of 2010. 10Y Bund
yields will then likely have reached just under 4 ½%. Euro area
capital markets have also seen a noticeable stabilisation. After
having soared in the course of the financial crisis and mainly due to
dramatically deteriorating public-sector finances, the spreads vs.
Germany recently narrowed markedly. The spread widening had not
only hurt the usual “problematic” countries but also others such as
France, the Netherlands, Austria and Ireland. In 2006, Irish yields
had temporarily still been slightly below Bund yields but rose to
nearly 290 bp at the beginning of 2009. Most recently they were
back at approximately 175 bp. Spreads within the euro area are
likely to narrow further but are not expected to reach former lows
again.
30
11
Current Issues
Fiscal policy exit strategies: Things will get serious from 2011
EMU: Government debt
% GDP
120
110
100
90
80
70
60
50
40
30
20
2008
2010
GER
FRA
ESP
ITA
EMU
Sources: EU Commission, DB Research
31
Germany: Public finances
% GDP
0
85
80
-1
75
-2
70
-3
65
-4
60
-5
55
-6
50
03 04 05 06 07 08 09 10 11 12
Budget balance (left)
Govt. debt (right)
Sources: Deutsche Bundesbank, DB Research
32
As a result, only two ways of consolidating public-sector finances
remain: strict austerity or higher taxes. In the past, it was above all
the latter that was used to reduce debt. However, this will encounter
problems as from 2011 higher social security contributions,
especially in the health sector, seem inevitable as well.
Contributions to unemployment insurance are already planned to
rise from 2.8% to 3% in 2011, with higher rates also possible in light
of the expected increase in unemployment. We therefore expect the
next government to introduce a mix of higher taxes and levies and
spending cuts from the middle of their term in office in order to meet
the budget requirements of the Stability and Growth Pact again and
get on course for the balanced budget stipulated by the debt cap for
2016 (central government) and 2020 (federal states). From a current
vantage point this seems very ambitious, though. In our view, the
structural budget deficit could shrink by approximately ¾ of a
percentage point in 2011 and in excess of 1% of GDP in 2012.
Combined with the positive effects of slightly above-potential
economic growth, the overall budget deficit would shrink to just
under 4% of GDP in 2012, but still exceed the Maastricht ceiling of
3%. Despite this improvement, public debt would still rise to 85% of
GDP by 2012.
Long-term growth outlook not so rosy?
As a result of the crisis, international institutions as well as some
research institutes now take a more pessimistic view regarding the
German economy‟s long-term growth outlook and have revised their
growth estimates downward. The term "growth potential“ refers to
the pace at which the German economy can grow over a longer
term without inflation picking up. As reasons for the downward
revision, the institutes point to a pronounced decline in investment
leading to lower capital stock, recently much weaker productivity
increases and a potential increase in structural unemployment
stemming from the rise in the jobless total that occurs when
business activity slows. Structural employment could set in, for
instance, when unemployed persons lack the qualifications to return
to the job market after a longer period of unemployment. While the
growth potential was estimated at up to 1 ½% p.a. prior to the crisis,
it is now put at or even below 1%. However, especially the latter two
factors, structural unemployment and productivity, are not constants.
So it is quite possible that an economic recovery accompanied by
rising investment will also mean an improved outlook for productivity
and structural unemployment, and thus for longer-term growth.
© Copyright 2009. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank
Research”.
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Economic outlook 2009/10: German economy

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