Global Economic Perspectives Higher German inflation: Mission impossible? Deutsche Bank

Transcription

Deutsche Bank
Research
Europe
Economics
Date
23 October 2014
Peter Hooper
Global Economic Perspectives
Higher German inflation: Mission
impossible?

In the current context of massive under-utilisation of productive capacity in
the Euro area aggregate price stability is at risk. Beyond the one-offs
affecting food or energy, growth in consumer prices is only “one shock
away” from turning into negative territory. The ECB is right to fight this
scenario with its unconventional measures.

Normally, this would add substantially to inflation risks in countries at full
employment such as Germany. However, in the absence of any reaction of
wages and prices even the least likely apologists of higher inflation,
German central bankers, have signalled to the industrial partners that they
would not mind higher wages in Germany (although the actual statements
were more nuanced than the public echo).

Why are German wages/inflation not responding? Much of the answer lies
in cultural factors and personal traits which manifest themselves in a high
aversion to inflation. This in turn has led to Germany’s unique economic
fundamentals and institutions. At the core it seems that Germans and
German society can handle distribution conflicts involving time
inconsistency problems better, on average, than many other nations.

Basically all factors influencing inflation attitudes as identified in crosscountry studies are supportive for high inflation aversion in Germany. In
two key areas of the economy determining its inflation propensity – private
credit demand and the relationship between unemployment and inflation –
we find quantitative evidence of rather limited inflation-accelerating
properties.

The German peculiarities are a mixed blessing for the ECB. On the one
hand, it makes inter-EMU rebalancing more arduous for the periphery and
the reinvigoration of the credit multiplier more complicated for the ECB. On
the other, it gives the ECB more time to run its supportive policy without
creating new imbalances in the largest EMU economy.

In the long run, the arguments about what are the proper tasks and limits
of fiscal and monetary policy, challenged several times in Germany’s
highest court, show that there are still differences between Germans’ and
other Europeans’ view of the world. Even more worrisome, the impact of
demographic ageing in combination with strong preference for (low-risk)
interest-bearing assets will probably make them even more inflation averse,
while high unemployment rates, soaring government debt and the need for
deleveraging in the private sector might have the opposite effect in many
other European countries. As a result, reaching a consensus on economic
policy within EMU is going to remain very challenging.

Although we still think that the inflation cycle in the Monetary Union is
about to turn, recent weakness and geo-political uncertainty do not hint
towards strong cyclical forces driving inflation – probably not for years.
Therefore the ECB has scope to extend its balance sheet via private and
most likely public QE.
Chief Economist
(+1) 212 250-7352
peter.hooper@db.com
Michael Spencer
Chief Economist
(+852) 2203 8303
michael.spencer@db.com
Torsten Slok
Chief Economist
(+1) 212 250-2155
torsten.slok@db.com
________________________________________________________________________________________________________________
Deutsche Bank Securities Inc.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
23 October 2014
Global Economic Perspectives: Higher German inflation: Mission impossible?
Key Economic Forecasts
CPI
% growthc
Real GDP
% growthb
Current a/c
% GDPd
Fiscal balance
% GDP
2014F
2015F
2016F
2014F
2015F
2016F
2014F
2015F
2016F
2014F
2015F
2016F
US
2.4
3.6
3.1
1.8
2.2
2.4
-2.5
-2.5
-2.6
-2.9
-2.5
-2.8
Japan
1.0
1.3
1.4
2.9
1.7
1.8
0.2
1.4
2.1
-7.0
-6.1
-4.6
Euroland
0.7
1.0
1.4
0.5
1.1
1.5
2.5
2.1
1.6
-2.6
-2.5
-2.1
-0.2
Germany
1.5
1.5
1.4
0.9
1.5
1.8
7.2
6.7
6.6
0.2
-0.1
France
0.4
0.9
1.5
0.6
0.9
1.5
-1.8
-1.8
-1.5
-4.4
-4.3
-3.8
-0.4
0.4
0.7
0.2
0.8
1.2
1.6
1.6
1.5
-3.0
-2.9
-2.7
Italy
1.2
1.9
1.8
-0.1
0.8
1.4
0.4
0.5
0.7
-5.6
-4.6
-3.3
UK
Spain
3.1
2.5
2.3
1.7
1.9
2.0
-4.0
-3.2
-3.0
-4.6
-3.5
-2.1
Sweden
2.2
2.6
2.5
0.2
1.5
2.0
6.0
5.5
5.0
-1.5
-1.0
-0.5
Denmark
1.0
2.0
1.8
1.0
1.5
2.0
6.7
6.4
6.0
0.0
-1.0
-2.0
Norway
2.4
2.5
2.5
1.8
2.2
2.0
11.0
10.5
10.0
7.0
6.7
6.5
-2.8
Poland
3.1
3.5
3.8
0.2
1.1
2.3
-1.8
-2.0
-2.2
4.3
-2.9
Hungary
3.4
2.7
3.0
0.2
2.6
3.3
1.6
1.5
1.5
-2.9
-2.7
-2.8
Czech Republic
2.4
2.6
2.8
0.4
1.8
2.0
-1.5
-1.4
-1.5
-2.6
-2.5
-2.4
Australia
3.1
2.7
3.9
2.4
2.0
2.5
-3.0
-3.2
-2.2
-2.5
-1.4
-0.7
Canada
2.5
3.2
2.8
2.0
2.2
1.9
-2.0
-1.4
-1.1
-0.8
0.0
0.3
Asia (ex Japan)
-2.6
6.1
6.3
6.2
3.5
3.7
3.9
2.4
2.3
2.2
-2.3
-2.5
India
5.5
6.5
6.5
7.7
7.1
7.0
-1.6
-2.5
-2.4
-4.5
-4.2
-4.0
China
7.3
7.0
6.8
2.2
2.6
3.0
3.1
3.4
3.3
-2.1
-2.5
-3.0
1.0
1.8
3.0
12.0
13.0
10.6
-2.6
-2.4
-2.8
-3.8
-3.6
-3.0
0.3
1.0
1.9
6.3
6.4
5.8
-3.9
-3.7
-4.1
-4.2
-3.7
-3.3
1.9
2.7
3.0
5.6
5.4
5.0
1.6
0.9
0.4
-0.4
-1.2
-1.4
0.5
1.0
1.4
7.3
6.2
5.8
2.7
1.7
1.4
0.2
0.3
-0.4
Latin America
Brazil
EMEA
Russia
G7
1.9
2.6
2.4
1.7
1.9
2.1
Worlde
3.2
3.7
3.8
3.5
3.7
3.7
Forecasts: G7 quarterly GDP growth
% qoq saar/annual: %yoy
US
Japan
Q1 14
Q2 14
Q3 14F
Q4 14F
Q1 15F
Q2 15F
Q3 15F
Q4 15F
2014F
2015F
2016F
-2.1
4.6
4.0
4.2
3.1
3.3
3.2
3.1
2.4
3.6
3.1
6.0
-7.1
2.4
4.4
1.3
1.5
2.1
-2.8
1.0
1.3
1.4
Euroland
1.2
0.3
0.8
0.5
0.9
1.6
1.6
1.6
0.7
1.0
1.4
Germany
2.7
-0.6
1.8
0.8
0.9
1.7
1.8
1.7
1.5
1.5
1.4
France
0.2
-0.1
0.8
0.4
0.8
1.2
1.8
1.6
0.4
0.9
1.5
Italy
0.0
-0.7
-0.7
-0.3
0.8
0.8
1.1
0.9
-0.4
0.4
0.7
UK
3.0
3.7
3.0
2.4
2.3
2.3
2.3
2.2
3.1
2.5
2.3
Canada
0.9
3.1
3.0
2.7
0.9
3.1
3.3
3.8
2.5
3.2
2.8
G7
0.3
1.7
2.9
3.2
2.2
2.5
2.6
1.9
1.9
2.6
2.4
a) Euroland forecasts as at the last forecast round on 26/09/14. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)GDP figures refer to working day adjusted data, except
Germany. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions. e) As of the week starting 14 July 2014, our global and regional
forecast aggregation methodology has changed to dynamic rather than static annual IMF PPP weights. The change added 0.2pp to global growth in 2014 and 2015 due to the rising weight of EM economies.
Sources: National authorities, Deutsche Bank Research
Page 2
23 October 2014
Higher German inflation: Mission
impossible?
ECB policy and EMU inflation surprises
Right from the start of the European government bond crisis it was clear that
its cyclical impact in addition to supply side reforms triggered by it would
induce strong downward pressure on Eurozone inflation, notwithstanding
doomsayers’ predictions that the unprecedented easing of monetary policy in
all major economies would result in surging inflation1. In 2011 and 2012,
however, inflation turned out much higher than previously expected by the
ECB or the EU-Commission. In 2013 it matched the forecasts produced end2011 and end-2012, but initial GDP forecasts (Dec-2011 1.3%) turned out way
too optimistic (actual -0.4%). Starting in 2014 the ECB has been facing the
opposite problem. It has been repeatedly forced to lower its HCPI predictions
for 2014 and 2015. Of course, this might not only be the result of the
GDP/inflation trade-off in the EMU economy as factors such as energy prices
and the exchange rate matter too. Still, the fact that the ECB now expects
inflation at only 1.5% in Q4 2016 suggests that there is more to it than only
cyclical or temporary factors. The ECB’s explanation for its recent decisions,
citing the risk of a too prolonged period of low inflation and Mr. Draghi’s
explicit reference to the 5y/5y-swap in his Jackson Hole speech, can certainly
be interpreted as pointing into this direction.
Figure 1: EMU: Output gap & core
inflation
% yoy (left) trend-GDP-cur.GDP, % trendGDP(right)
3.0
5
4
3
2
1
0
-1
-2
-3
-4
2.5
2.0
1.5
1.0
0.5
0.0
99
01
03
05
07
09
11
13
Inflation, ex food & energy (left)
Output gap (right)
Sources: Eurostat, OECD, Deutsche Bank Research
Moreover, comments by central bankers such as the ECB’s chief economist
Peter Praet or Bundesbank president Jens Weidmann, who made the highly
unusual move of endorsing higher German wages, suggest that even the
central banks are getting somewhat impatient in light of Germany’s inflation
resilience, although the actual statements were far less “heretic” than their
public perception. Mr. Praet said that in countries where labour market
developments are positive, such as Germany, higher pay increases (compared
with those in the EU crisis countries) would be appropriate. The Bundesbank
was more concrete, calculating a “higher pay increase” of around 3%, as this
exploits the medium-term distribution-neutral scope provided by productivity
and the inflation trend, which is allegedly adequate in view of the labour
market situation.
Figure 2: ECB : Macroeconomic projections for the euro area
2010
2011
2012
2013
HCPI
GDP
HCPI
GDP
GDP
Dec 10
1.6
1.7
1.8
1.4
1.5
1.7
Dec 11
1.6
1.8
2.7
1.6
2.0
0.3
1.5
1.3
2.7
1.5
2.5
-0.5
1.6
-0.3
1.4
1.2
2.5
-0.6
1.4
-0.4
1.1
1.1
1.4
-0.4
1.3
1.5
1.0
1.2
1.3
1.5
1.5
1.8
Jun 14
0.7
1.0
1.1
1.7
1.4
1.8
Sep 14
0.6
0.9
1.1
1.6
1.4
1.9
Mar 14
HCPI
GDP
2016
HCPI
Dec 13
GDP
2015
GDP
Dec 12
HCPI
2014
HCPI
HCPI
GDP
Blue cells contain the actual outcome
Sources: ECB staff forecasts, Deutsche Bank Research
The analysis of individual country forecasts provided by the European
Commission shows that actual inflation has recently been overestimated in
those countries where large and uncertain output gaps and supply side
reforms have certainly increased the potential for forecasting errors. But
1
Gräf, Schneider, „Medium term inflation risks – how much of a threat are they?, Deutsche Bank
Research, 2009
Page 3
23 October 2014
inflation for Germany has been overestimated too. This cannot be attributed to
the same kind of uncertainties as the German economy is in a more favourable
and very stable cyclical position, while the inflation-dampening effect of supply
side reforms implemented a decade ago should by now have run their course.
Does the German inflation trend contradict the economic
textbooks?
Figure 3: Unemployment rate &
NAWRU
2013, %
From an Anglo-American point of view it has been taken for granted since
2010 at the latest that the inflation rate in Germany would rise significantly.
Since Germany was one of the few advanced economies in which the current
unemployment rate in 2010 fell below the non-accelerating wage rate of
unemployment (NAWRU), the threshold below which a further decline in the
unemployment rate leads to an increase in the inflation rate, wage pressure
had to rise . This argument was all the more persuasive as the ECB's monetary
policy was on course for an interest rate level that was geared towards the
eurozone as a whole, but was much too loose for Germany. Since 2010 the
current interest rate in Germany has been around 2 percentage points below
the equilibrium rate derived using a Taylor rule.
AT
NL
DE
GB
FI
US
BE
FR
IT
IE
PT
GR
ES
0
10
20
Unemployment rate
Inflation has indeed failed to accelerate in Germany over the last four years.
Even in 2010 and 2011, when the energy components registered year-on-year
increases of 10% and 6% respectively, consumer prices (as defined nationally)
barely breached the 2% mark. In 2013 – with energy prices nearly stable – the
inflation rate softened to 1.5%. For the current year we expect a rate of just
0.8%. The restrained price climate is also reflected in the core inflation rate
(that excludes energy and food), which has remained at roughly 1 ¼% for
more than three years.
30
NAWRU
Sources: European Commission, Deutsche Bank Research
Figure 4: Germany: Key rate & Taylor
rule CPI
%
6
Of course such a low inflation rate is not a problem per se, unless it is
considerably lower than expected by economic agents – especially borrowers.
On the contrary, it has enhanced consumers' real purchasing power. For the
eurozone's peripheral countries, however, low German inflation rates are a
major problem, since the loss in bilateral price competitiveness caused by
higher inflation (which has peaked at above 20% in the four programme
countries since 1999) thus has to be corrected in the countries themselves via
a stronger and/or longer disinflationary process.
5
4
3
2
1
0
99
01
03
05
Refi rate
07
09
11
13
Taylor Core CPI*
*) Q4 averages
Sources: Federal Statistical Office, Global Insight, Deutsche Bank
Research
Is Germany different?
The theoretical considerations (Phillips curve and Taylor rule) based on the
above-mentioned expectations of rising inflation rates suggest that the way the
labour market functions and the drivers of credit growth are probably the key
determinants of an economy's inflation propensity. In the literature, however,
the discussion extends to a plethora of factors from the institutional, political,
and cultural fields as well as individual features . All the same, the findings
concerning the relevance of individual factors are not always clear cut in the
studies that compare different countries. This may be due to the methodology
and time period, but it is probably mainly to do with the complex
interdependencies between the factors. Individual preferences are heavily
influenced by the cultural environment, and these in turn both influence which
institutions emerge in a society. This is impressively illustrated by the example
of central bank independence. Studies show a close relationship between the
degree of independence and the averting of inflation. Theoretically this
relationship derives from the time inconsistency problems inherent in
2
Figure 5: Germany: HICP & core
inflation
% yoy
4
3
2
1
0
-1
99
01
03 05 07 09 11 13
HICP
Excl. food, alcohol and tobacco
Sources: Eurostat, Deutsche Bank Research
2
Institutionelle Strukturen und makroökonomische Stabilität, Paul-Günther Schmidt
Page 4
23 October 2014
monetary policy for a political agent who would like to get re-elected. If the
analysis is expanded to include other political aspects where time
inconsistencies are also a factor, such as economic openness, political stability
and efficiency of taxation, the influence of central bank independence is
rendered far less significant, and it becomes clear that the inflationary
tendencies of a society ultimately depend on the efficiency of the mechanisms
for solving societal conflicts over distribution, which in turn depend on the
trust (interpersonal and in institutions) that exists in society, risk aversion and
time preferences.
Figure 6: HICP
Jan 1999 = 100
160
150
140
130
120
110
100
Below, we start by presenting the most important economic/institutional
individual factors to be found in the literature, such as inflation experience,
exchange rate regime, openness etc., that influence a country's susceptibility
to inflation and discuss their specific expressions in Germany. Then we shall
focus on the labour market and the credit process – both factors are in our
opinion of pivotal importance for inflation and probably also the most
important reasons for the pick-up in inflation originally expected by many
observers. In the third section we then address the questions of whether
Germans are different. We find that Germans are more inflation averse than
other nationalities not only in light of their historical experiences, but also due
to cultural differences. Germany's institutions have of course taken shape on
the basis on these attributes and Germany's “stability culture” has developed
accordingly. The study's conclusion comprises the resulting implications for
Europe and the ECB.
99
01
DE
PT
03
05
FR
GR
07
09
IT
IL
11
13
ES
Figure 7: Prices of bread and butter
Month
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jan
May
Aug
Sep
Oct
Nov
Dec
Year
1914
1916
1918
1919
1920
1921
1922
1923
1923
1923
1923
1923
1923
1923
Price of a pound of bread
(Reichsmark)
Price of a pound of butter
(Reichsmark)
0.13
0.19
0.22
0.26
1.20
1.35
3.50
700.00
1,200.00
100,000.00
2,000,000.00
670,000,000.00
0.50
0.35
1.20
2.00
2.40
4.00
15.00
18.00
70.00
5,400.00
10,000.00
1,400,000.00
50,000,000.00
5,800,000,000.00
3.00
2.30
Sources: Statistical Yearbook of the German Reich, Deutsche Bank Research
Experience of inflation: Hyperinflation and currency reform
Germany's dramatic experience of hyperinflation in the 1920s and the currency
reform following World War II are often cited as the reasons for Germans'
aversion to inflation. Later on we shall take a closer look at how such collective
experiences can influence individual preferences. However, analyses based on
a larger number of countries do not show that past high inflation rates – which
however did not constitute hyperinflation – lead to lessons being learned so
that high inflation is averted in future. On the contrary, according to estimates
a 1 percentage point higher inflation rate in the past boosts the current
inflation rate by about 0.6 of a percentage point . The reason cited for this is
that especially in highly developed countries instruments are found to protect
against inflation, for example financial products (index-linked) or an indexation
of, for example, rents or even pay. Before the start of EMU such index clauses
were banned conditionally in Germany (Section 3 (2) of the Currency Act, with
3
3
Why does inflation differ across countries?. Marta Camillo, Jeffrey A. Miron
Page 5
23 October 2014
the Bundesbank having an approval veto. A highly persistent inflation rate
could, however, also be due to other factors that were only insufficiently
recorded in the studies.
Exchange rate regime: Fixed exchange rates = price
stability?
Figure 8: Exchange rates vs. DEM
1979-1998
1979 = 100
1000
800
600
With a stable anchor currency, membership in a system of fixed exchange
rates should reduce an economy's susceptibility to inflation, since a high
inflation rate gives rise to additional political costs. This type of self-imposed
restriction undoubtedly played a significant role in the EMS. Nevertheless the
frequent devaluations showed that their political costs were not prohibitive
after all. Moreover, the causality can also operate in the other direction: a
country such as Austria for example, was able to pursue a fixed exchange rate
to the D-Mark without having too much worries, since it was sure it had
attained the necessary level of price stability. In Germany the decision to
abandon the peg to the USD in May 1971, by contrast, was a clear expression
of the preference for low inflation. The introduction of the EUR can also be
understood as a system of fixed exchange rates with a total renunciation of
nominal external adjustment flexibility inside the monetary union. However,
this restriction was not heeded by actors especially in the peripheral countries
(or by investors) and thereby helped to bring about the European sovereign
debt crisis. The functioning of the system would have required structural
reforms in the peripheral countries to reverse the appreciation of their real
exchange rates in order to recalibrate.
Openness tends to dampen inflation
The more open an economy, the less pronounced the anyhow only short-lived
benefit of surprise inflation, as it results in a devaluation of the currency and a
corresponding loss of purchasing power. This correlation is, however, less
pronounced in the most developed economies. This could be because these
economies have found better solutions to the time inconsistency problems
inherent in distribution conflicts and thus the "escape valve" of devaluation is
no longer required. With an export share of 50% of GDP and an import share
of some 45% this correlation is probably of major importance in Germany –
although it is a highly developed country. This is due in no small measure to
globalised value chains, which mean that pay and pricing developments in
many sectors have a direct impact on employment (more about this below).
High levels of public spending and debt stoke inflation
High levels of public debt are certainly the product of the failure to get to grips
with distribution conflicts by shifting burdens to third parties in the future.
Countries with chronically empty coffers and inefficient tax systems have an
incentive to boost their tax revenues via higher inflation. Studies reveal a
negative correlation between the size of public expenditure/debt and the
public's aversion to inflation, i.e. the larger the public debt, the greater will be
the preference for higher inflation.
Ageing generates inflation aversion
From the life cycle hypothesis it can be deduced that – all things being equal –
older people are more inflation averse than younger people. Younger
households have larger debts (home, car etc.) than older ones and are
therefore – especially when the nominal interest rate is fixed for a long period –
the potential winners if there is a surprise surge in inflation. They can, on
Page 6
400
200
0
79 81 83 85 87 89 91 93 95 97
FR
IT
PT
ES
GR
Sources: Global Insight, Deutsche Bank Research
Figure 9: Export shares in 2013
% of GDP
EMU
ES
FR
DE
GR
IT
JP
PT
US
0
20
40
60
Figure 10: Sovereign debt ratios
% of GDP
EMU
ES
FR
DE
GR
IT
JP
PT
US
0
100
200
300
Figure 11: Median age (2013)
Years
50
45
40
35
30
DE IT
PT GR EU ES FR UK PL IR
23 October 2014
account of their still long employment phase, react better to changes in
relative prices and the price level than the elderly, who are less flexible in the
labour market or are even already retired. Older households, by contrast, have
largely completed their asset accumulation. In Germany this occurs to a far
greater degree than in other countries due to savings schemes, bonds and life
insurance policies whose real value is reduced by inflation.
Figure 12: Households: Financial
assets
Q3 2013, %
6.2 0.7
Financial sector: Little appetite for inflation
40.5
30.2
The income from maturity transformation is a major source of revenue for
savings banks and credit cooperatives that command a 55% share of the
market in Germany (in terms of claims on non-banks): Given their close ties
with local and regional politicians savings banks in particular wield
considerable social and political influence. This business model is very
vulnerable to unexpected surges in inflation. This sector is therefore likely to
have a strong interest in stable prices.
8.7
The German free collective bargaining model – together with an economy
where SMEs are prominent – has traditionally helped to foster a comparatively
cooperative relationship between unions and employers. The informal leading
roles in collective bargaining performed by the metal and chemicals unions –
IG-Metall and IG-Chemie – which both represent traditional exporting sectors,
mean that considerations relating to international competitiveness have always
played a big part in setting pay levels. In this respect the response of union
representatives to recent suggestions of higher wage increases in Germany
was particularly telling. They basically rejected such encouragements be
pointing out that they had fully exploited the distribution-neutral leeway for
wage increases (provided by productivity gains and inflation) in recent years.
This focus on international competitiveness was further intensified by the fall
of the Iron Curtain and the resulting access to well-trained, inexpensive labour,
especially as companies were thereby enabled to issue the credible threat of
relocating their operations . This has been one of the reasons why the last 25
years have seen collectively bargained opening clauses lead to decentralisation
of the pay-setting process and a decline in the coverage of collective
agreements. In 2012, 66% of west German and 79% of east German firms
were not tied to a collective agreement, although some 40% of them aligned
their remuneration towards the collective agreement for their industry. In 2011,
25% of manufacturing firms had the possibility to make use of opening clauses.
64% of them used them with regard to remuneration and 74% of them with
regard to working time.5
5.5
4.3
Currency and deposits
Fixed income securities
Equities
Other types of investment
Fund units
Insurance policies
Occupational pensions
Other claims
Labour market – wage restraint is institutionally driven
Pay and social security contributions in Germany – as in other industrialised
countries – make up about half of GDP. Pay developments are thus the key
determinant of the inflation trend in the economy as a whole. On account of
the at least short-term trade-off between unemployment and inflation, the
preference for stable prices declines as unemployment rises and the more
personally affected one becomes. However, the level of NAWRU itself, i.e. the
unemployment rate threshold below which inflation rises, influences inflation
preferences. A high NAWRU, on account of a too heavily regulated and
inefficient labour market, leads to a larger number of people being directly
affected by the costs of unemployment and concerns about inflation take a
back seat.
3.9
Sources: Deutsche Bundesbank, Deutsche Bank Research
Figure 13: Strikes and lockouts:
Working days lost
Average per 1,000 employees (2001-2010)
CA
ES
DK
FR
IT
BE
FI
AT
IE
AU
GB
NO
SE
NZ
US
NL
CH
DE
PL
JP
0
50
100
150
200
250
Sources: ILO, IW Köln, Deutsche Bank Research
4
4
5
Christian Dustmann, Bernd Fitzemberger, Uta Schönberg, Alexandra Spitz-Oener, “From the sick man
of Europe to the Economic Superstar: Germany’s resurgent economy, 2014
IAB Betriebspanel, quoted from Peter Ellguth, “Entwicklung der Tarifbindung”
Page 7
23 October 2014
It cannot currently be estimated to what degree this development will be
reversed by the introduction of a minimum wage, the restriction of temporary
work and the possibility to declare collective agreements as generally binding.
The effects, however are ultimately likely to be limited on account of the scope
for relocation that will still be available to many companies (including SMEs).
Labour market and credit process: Decisive for inflationary
trend
In this section we shall examine to what degree the above-mentioned German
peculiarities can also be documented quantitatively. Because of their pivotal
importance we shall focus on price formation in the labour market and the
credit process. We are well aware that such empirical analyses presuppose a
certain degree of stability of the structures in the countries surveyed. This
assumption applies only to a limited degree to the countries on Europe's
periphery on account of the euro-driven structural break. That is why the
findings presented here are at best indications that can support qualitative
considerations.
Labour market – flat Phillips curve in Germany
Figure 14: Union members as % of
employees
2011*
18.1
27.8
50.4
26.8
68.5
8.1
69
7.8
18
25.4
35.6
18.1
9.9
18.2
19.3
15.6
67.5
17.1
25.6
11.3
AU
AT
DE
CA
DK
EE
FI
FR
DE
GR
IT
JP
KR
NL
PT
ES
SE
CH
GB
US
*Or last available year
Sources: OECD, Deutsche Bank Research
On account of the rather indirect correlation between unemployment rate and
inflation, which moreover is influenced by other factors, such as import prices
or administered prices, we have also investigated the correlation between
unemployment and wages. Here, too, we see that the coefficient in Germany is
somewhat low. Furthermore, we estimate that the recent surge in immigration
– adding about 300,000 persons p.a. to German labour supply will temporarily
ease wage pressure by shaving off at least 0.2 pp of wage growth.
6
Figure 15: Phillips curve
Averages for 1961-2013
12
Consumer prices, % yoy
The inverse correlation – at least in the short and medium term – between
unemployment and inflation (Phillips curve) is a core equation in
macroeconomic models. If we look at the chart, the distance between each
point and the x-axis provides an indication of the overall efficiency of the
respective economy, while the slope depicts the correlation between the
unemployment rate and inflation. In this simple formulation a robust
explanatory value cannot be found for all countries (R2 significantly > 20%).
For the peripheral countries there is also a structural break in the decade
from1997 to 2007 when, despite the unemployment rate declining heavily,
inflation remained very moderate – at least on a historical comparison.
Nevertheless, both the chart and the coefficients for our Phillips curve
estimates show that in Germany the correlation between unemployment and
inflation is comparatively weak. For instance, a 1 pp decline in the
unemployment rate in Germany is followed by a 0.3 pp rise in the inflation rate.
The corresponding rise in the inflation rate is ½ pp in Spain, ¾ pp in France
and Italy and 1 ½ pp in Greece. Given the structural changes in peripheral
Europe over the last fifty years, a shorter time horizon would probably show
smaller gaps vis-à-vis Germany, but curtailing the observation period results in
a massive loss of statistical significance.
10
PT
GR
8
IT
6
ES
FI
NL GB
US
4
AT
2
FR
BE
IE
DE
0
0
5
10
Unemployment rate, %
15
Sources: European Commission, Deutsche Bank Research
Figure 16: Coefficient Phillips curve
estimate
Inflation = f (unemployment), for countries
with mit R2 > 0,30*
0.0
-0.5
-1.0
-1.5
Credit development – little dynamism in Germany
According to Milton Friedman, inflation has been and always will be a
monetary problem. It should thus be clear that the credit mechanism exerts a
key influence on an economy's susceptibility to inflation. The role of the central
6
-2.0
IT
GR AT FR NL
FI
BE ES DE
*) Estimates with optimal lags based on yearly figures from 19612013
Sources: EU Commission, Deutsche Bank Research
Temporary immigration boom: A wake-up call for politicians?, Deutsche Bank Research, July 28, 2014
Page 8
23 October 2014
banks is definitely controversial as – at least in the short and medium term –
the credit volume is partially determined endogenously as a function of cyclical
developments and thus the behaviour of commercial banks and borrowers is
of key importance.
Figure 17: Cointegrating equation
log(real total credit)
Germany
France
Italy
Spain
United Kingdom
log(real GDP)
1.13
***
1.10
***
2.31
***
5.85
***
4.09
***
10Y govt bond yield
-0.07
***
-0.05
***
-0.17
***
0.12
***
0.33
***
Error correction term (-1) in
short-term equation
-0.03
**
-0.03
**
-0.11
***
-0.02
***
0.00
Observation period
70Q1 - 07Q3
70Q1 - 07Q3
98Q1 - 07Q3
85Q1 - 07Q3
70Q1 - 07Q3
*** 1%, ** 5% and * 10% significance level
Sources: Deutsche Bank Research
Using a simple error correction model we have estimated the real credit
volume as a function of real GDP and the 10-year government bond yields of
selected countries. We have chosen the longest possible periods (since the
early 1970s), which we had to partly shorten, however, due to data availability
issues or the lack of stability of the parameters. The results should thus be
viewed with caution. Moreover, the positive signs for bond yields in the UK
and Spain are puzzling at first glance, but are probably the result of the
protracted housing bubbles in these countries. Nevertheless, it is striking that
in Germany both the influence of GDP and interest rates is lower than in Italy
and much weaker than in Spain or the UK. (It is also noteworthy that the
coefficient of the equations for Germany and France are almost identical!).
Overall, the estimates support the assumption that the credit volume in
Germany responds comparatively weakly to the economy and interest rates
and thus the risk of credit-driven overheating of the economy or asset markets
is rather limited.
Are the Germans different?
In the previous section economic, political and institutional factors and their
implications for the inflation aversion of a society have been analysed.
However, these factors are almost exclusively the result of the historical and
cultural development of a society. This is impressively reflected in the analyses
of Scheve : his country comparison showed that even taking into account the
economic and institutional context, there were still considerable national
differences, with the Germans showing the highest inflation aversion of all 20
countries analysed, with in part substantial differentials to the other eurozone
countries.
7
7
Kenneth Scheve, "Public demand for low inflation", 2002
Page 9
23 October 2014
Figure 18: Determination index for inflation aversion
Regressor
Regressor
Inflation
Unemployment gap¹
NAWRU
Income quartile²
Number of unemployed
Age
Gender³
Education
1980s*
1990s*
Belgium
Denmark
Germany
Greece
Italy
Number of observations
0.065
-0.056
-0.065
0.079
-0.251
0.004
-0.237
-0.001
0.208
0.426
-0.292
-0.150
0.276
-0.283
-0.510
55,194
Spain
France
Ireland
Netherlands
Portugal
Norway
Finland
Sweden
Austria
Australia
US
Canada
Japan
New Zealand
Constant
-0.109
-0.429
-0.110
-0.457
-0.798
-0.113
-0.539
-0.816
-0.354
0.316
0.153
0.080
0.221
0.255
-0.706
¹ GAP between actual unemployment rate and NAWRU
² 1 to 4, for lowest to highest quartile
³ females = 1, males = 0
* Survey date
Sources: Bank of England (Kenneth Scheve "Public demand for low inflation"), Deutsche Bank Research
Figure 19: Thrift as a value in a
child’s upbringing (share of
“Important“ responses)
60%
50%
40%
30%
20%
10%
Average
SE
8
US
PT
ES
IT
NL
GR
FR
DE
BE
0%
AT
True, other industrial countries have also suffered from periods of extremely
high inflation rates. The German hyperinflation of 1923 and the high inflation
period ended by the currency reform of 1948 stand out, however. For instance,
the price of bread rose from 3.50 Marks in 1922 to 700 Marks in January 1923
and to as much as 670 m (!) in October. The currency reform was called by
historians "the largest expropriation for cash holders in German history" (cash,
bank and savings deposits were converted in a ratio of 100:6.5). Given that
hyperinflation was a result of WWI and the conflict about reparations which
was one factor contributing to the political developments in Germany that led
to WWII, might have contributed to hyperinflation becoming the mother and
son of all evil in Germans’ collective perception. Such caesuras are reflected in
the collective memory and cultural heritage of a society. On the one hand, via
socialisation as parents put emphasis on certain character traits for their
children . For example, German parents consider an upbringing in accordance
with the principle of thrift to be particularly important. On the other hand, this
also applies to institutional arrangements. In Germany, this certainly included
the Bundesbank. In 1992, the then president of the European Commission
made the remark that not all Germans believe in God but that all Germans
believe in the Bundesbank. Several ministers of finance who picked a fight
with the Bundesbank came to realise that public opinion in general supported
the Bundesbank whenever exchange-rate adjustments or assaults on the gold
reserves of the Bundesbank were the matter9. The historian Herfried Münkler
regards the D-Mark and the German economic miracle as a founding myth of
the young federal republic: "Everybody carried the currency as a material
substrate of the founding myth with him and was able to check everyday
whether the promises given with it still applied." This is in keeping with
surveys, in which price stability is seen – not only by the Germans – as a
matter of national prestige. As in the German media as well the topic of
inflation remained an important issue for decades – not least during the heated
discussions on the creation of a single European currency, German
reunification and especially since the ECB has pursued an extremely loose
monetary policy to fight the financial and economic crisis – it is fair to say that
inflation concerns have become an element of German culture. In any event
our point of reference is a common definition of culture, then individual
Sources: World Value Survey, Deutsche Bank Research
10
11
8
9
10
11
Etienne Farvaque, Alexander Mihailov, "Intergenerational Transmission of Inflation Aversion: Theory and
Evidence", (2011)
Die Welt, Notenbank zeigt Waigel die Zähne, May 30,1997
Herfried Münkler, "Die Deutschen und ihre Mythen" 2011
Robert J. Shiller, "Why people dislike inflation", 1996
Page 10
23 October 2014
thoughts and actions influence cultural norms and practices, and these cultural
norms and practices influence the thoughts and actions of individuals. 12
Already in Goethe’s Faust, the most powerful German poetry, the authors
warned 200 years ago and under the impression of the French assignat
economy of the inflationary consequences of a money-based system. Such
characteristics are enhanced by the attention and confirmation bias known
from behavioural economics , as well as the isolation effect, which lead to a
distorted perception of price development. For instance, 58% of respondents in
a survey stated that they had the feeling that prices in 2013 had risen more
strongly than the 1.5% published by the Federal Statistical Office. A
phenomenon which as "perceived inflation" has even found its way into the
official statistics.
Figure 20: Price index for cost of
living
Change, % yoy
15
13
Even within Germany, different experiences have led to significantly different
inflation preferences. A study by the ifo Institute comes to the conclusion that
east Germans under otherwise equal conditions (rate of unemployment,
occupation, political orientation etc.) are 25 percentage points more likely to
mention inflation as a major problem. The authors attribute this to the specific
experience of east Germans with almost stable prices for decades in the
former GDR, the experience of the conversion of the East-Mark to the D-Mark
in a ratio of 2:1 and the strong increase in consumer prices following
unification given the reduction of state subsidies (rents, water, electricity).
10
5
0
1992
1994
1996
1998
Former West Germany
Former East Germany and East Berlin
Sources: Federal Statistical Office, Deutsche Bank Research
14
Surveys on the basis of the five cultural dimensions developed by Hofstede15
also show strong differences especially with regard to the "Long-term
orientation" dimension, which describes a (work) ethic where people are
willing to make efforts which pay off only in the future. In an international
comparison, 89% of the German students surveyed preferred a payment of
USD 3,800 in one-month's time to a payment of USD 3,400 in the current
month; similarly high values were shown in the answers of Austrian and Swiss
students . In Italy, Spain and Greece, the respective values were slightly below
50%. The authors even find a positive correlation between punctuality, working
pace and the propensity to wait.
16
As culture, individual thinking and individual action influence one another,
there is reason to presume that not only is Germany different but that the
Germans are different as well. This is also reflected in international
comparisons of the so-called BIG 5 character traits. Here, the German
respondents show a relatively high "conscientiousness" but a low "openness
to experience" und thus show that they prefer conventional behaviour and
stability. This is shown by their conservative attitude towards credit and debt,
the cooperative interaction between the social partners and ultimately by
inflation aversion.
The studies we cite are relatively old. Furthermore, the individual factors raise
questions regarding their endogenity and multicollinearity. Nevertheless, the
relevance of the variables discussed can in many cases be deduced from
economic theory and is supported by experience. Cultural and individual
characteristics should be relatively stable also over longer periods. Thus there
is much to suggest that there is a specifically German inflation aversion which
is unlikely to change for some time to come and should characterise the actual
inflation development in the next few years.
12
13
14
15
16
Figure 21: Willingness to wait
%
Germany
Austria
Switzerland
Norway
Denmark
Estonia
Sweden
Canada
Czech…
Hong Kong
Japan
South Korea
Slovenia
GB
Ireland
Taiwan
US
Argentina
Turkey
China
Lithuania
Portugal
Croatia
Mexico
Rumania
Thailand
Vietnam
Australia
Greece
Spain
New Zealand
Italy
Russia
Georgia
Nigeria
0
20
40
60
80
100
Sources: Norwegian School of Economics "How Time Preferences
Differ: Evidence from 45 Countries", Deutsche Bank Research
Lehman, Chiu & Schaller, "Psychology and Culture" (2002), quoted from Micheal A. Hogg, Graham M.
Vaughan, "Social Psychology" (2011)
The attention bias describes the tendency of our perception to be influenced by recurring thought. The
confirmation bias describes people’s preference for information supporting their own hypothesis.
Michael Berlemann, Sören Enkelmann, Die German Angst…
http://geert-hofstede.com/dimensions.html
Mei Wang, Marc Oliver Rieger, Thorsten Hens, "How time preferences differ: Evidence from 45
countries" (2011).
Page 11
23 October 2014
Figure 23: Openness to new things
Figure 22: Conscientiousness
60
60
55
55
50
50
45
45
40
40
35
35
DE
18-21 years
IT
22-29 years
PT
HR
30-49 years
KR
50+ years
Sources: "Age differences in personality across the adult Lifespan" R.R. McCrae et al., Deutsche Bank
Research
DE
IT
18-21 years
22-29 years
PT
HR
30-49 years
KR
50+ years
Sources: "Age differences in personality across the adult Lifespan" R.R. McCrae et al., Deutsche Bank
Research
Implications for Europe and the ECB
True, the still comparatively good economic situation combined with a too low
interest environment should lead to an inflation rate above the EMU average
but not necessarily to a marked acceleration in inflation; this is also reflected in
the most recent inflation forecasts of the ECB experts, according to which
inflation in the eurozone following 1.0% in the current year is expected to
remain markedly below the 2% mark, i.e. 1.3% in 2015 and 1.5% in 2016. The
Bundesbank expects inflation in Germany to come to 1.5% (excl. energy 1.9%)
in 2015. In our view, this means that the adjustment burdens of the peripheral
countries to restore their price competitiveness will lead to a stronger
disinflationary process there.
The German peculiarities are a mixed blessing for the ECB. On the one hand, it
makes intra-EMU rebalancing more arduous for the periphery and the
reinvigoration of the credit multiplier more complicated for the ECB. On the
other, it gives the ECB more time to run its supportive policy without creating
new imbalances in the largest EMU economy.
Figure 24: ECB inflation forecasts
Change in HICP, % yoy
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0.5
2013
2014
2015
2016
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
Sources: ECB, Deutsche Bank Research
Our analysis of the potential effects of the ECB-decisions taken on June 5th and
September 4th suggests that they will be close to zero in the case of Germany .
This is in part explained by the relatively small reduction in banks’ refinancing
costs of around 75bp compared to 125bp in Spain or 195bp in the case of Italy.
In addition, a panel regression finds that the response of corporate loan growth
to looser lending conditions (as reported in the bank lending survey) is
negligible, which fits well to very low coefficients of our error correction model
for German credit demand shown on page 8.
17
Still, the bigger picture presented by the above analysis of the factors behind
the quite different inflation propensities among EMU countries hints, that they
cannot be bridged easily by a common institutional framework, since the
reasons for these differences run much deeper and their implications go much
further.
17
Deutsche Bank, ECB: quantifying the package, Focus Europe 6 June 2014.
Page 12
23 October 2014
Figure 25: Trust in the ECB: Share of
“Tend to trust“ responses
20%
36%
30%
47%
53%
30%
18%
30%
15%
40%
28%
50%
40%
60%
48%
70%
54%
%
10%
2002
Average
PT
SE
AT
NL
IT
FR
ES
GR
BE
0%
DE
The quarrels about the ECB's monetary policy as well as the Stability and
Growth Pact and national fiscal policy reveal that there is no proper consensus
on the tasks and limits of fiscal and monetary policies in Europe as yet. Since
the financial and economic crisis, German concerns that the other countries
are not quite as serious about (price) stability are likely to have increased. The
demographic development and the Germans' preference for bonds and savings
schemes for their private pensions should tend to strengthen the German
inflation aversion. It remains to be seen whether the repercussions of the crisis
and the experience with – likely temporary – disinflationary processes in the
countries on the periphery of Europe will promote a convergence of cultural
and individual inflation aversion. The high rates of unemployment and
government debt levels as well as the need for private sector deleveraging as
well seem to argue against it. But the fact of the matter is that the euro area
needs some glue (political will) to hold it together. Reforms in the vulnerable
countries could be a win-win strategy. Even if the Germans are unlikely to
honour them with an expansionary fiscal policy (which again would run
contrary to their cultural biases), it should at least generate some goodwill for
more controversial monetary policies of the ECB. It would certainly be wise for
the rest of Europe and the financial markets not to underestimate the German
inflation aversion so deeply engrained in their culture and institutions.
2013
Sources: Eurobarometer, Deutsche Bank Research
Stefan Schneider, (+49) 69 910-31790
Page 13
23 October 2014
Central Bank Watch
G3
Figure 1: G3 policy rates
US
Prospects for Fed policy will be driven by the data. On our current projections
(and the Fed’s) we expect rate hikes to commence next June. The risks are
skewed toward a later lift-off in light of the recent deterioration in financial
conditions and the softness of inflation data. We expect the Fed to end QE on
schedule at its October meeting.
8%
6
4
2
Japan
Recent data has disappointed, suggesting the economy is not rebounding as
quickly from the Q2 tax-hike induced decline in activity as had been hoped. The
BoJ appears still to be confident that a proper wage/price spiral is emerging as
inflation expectations rise and tightening labor market conditions push wages
higher. Inflation has leveled off, as had been expected. An explicit statement
that asset purchases are open-ended is likely this month. Data will determine
whether the BoJ feels a need to add to its asset purchases and the next two
months could be key in this respect.
Euroland
Draghi’s rhetoric took a step back in October, not repeating that the ECB is
ready to adjust the “size and composition” of purchases and de-emphasizing
balance sheet targets. We view this as reflecting patience within the Council
and don’t see it as a challenge to our new view of public QE within 6 months.
Other European countries
0
2001
2007
Fed
%
2010
2013
BoJ
ECB
Current Dec-14 Mar-15 Jun-15 Sep-15
Fed
0-0.25
0-0.25
0-0.25
0-0.25 0-0.25
BoJ
0-0.10
0-0.10
0-0.10
0-0.10 0-0.10
ECB
0.05
0.05
0.05
0.05
0.05
Source: Deutsche Bank Research
Figure 2: Key European policy rates
UK
Expectations of the first rate rise have been gradually put back since Governor
Carney’s remarks suggesting a hike could be delivered by year-end. Weak
wage/price pressures have been the cause, despite strong growth, and as a
result we have put back our call for the first move to February 2015.
8%
6
4
Sweden
We broadly agree with the Riksbank’s latest forecasts showing official rates
remaining at current levels until the end of next year before rising gradually.
Switzerland
The SNB left policy and its statement unchanged in September. Despite small
revisions to its inflation view, we see no change in policy within the next year.
2004
2
0
2001
2004
UK
%
2007
2010
Sweden
2013
Switzerland
BoE
0.50
0.50
0.75
0.75
1.00
SRB
0.25
0.25
0.25
0.25
0.25
SNB
0.00
0.00
0.00
0.00
0.00
Page 14
23 October 2014
Dollar bloc
Figure 3: Dollar bloc policy rates
Canada
In its October policy Rate Announcement of 2014, the Bank of Canada, to no
one’s surprise, left its target for the overnight rate unchanged at 1%. It has also
raised 2014 GDP and 2015 core CPI.
10%
8
6
Australia
The RBA left the cash rate unchanged at its September Board meeting, and
although there were some tweaks in the body of the text, the RBA’s ultimate
policy conclusion remained unchanged. We continue to see the cash rate
remaining on hold this year and next at 2.5%.
4
2
0
2001
2004
2007
Canada
New Zealand
The RBNZ met widespread analyst and market expectations by leaving the
OCR at 3.5%. This outcome had been clearly signaled by the RBNZ in the
statement accompanying the last 25bp rate hike on 30 July. As we had
expected, whilst the RBNZ still anticipates the need for tighter monetary
conditions over time, the Bank’s revised central projection envisages less
tightening than had been projected in June, achieved through a lower path of
projected increases in the OCR and a downwardly-revised assumption for the
trade-weighted exchange rate (TWI).
BRICs
%
Brazil
The BCB has been on hold since May. Since economic activity has weakened
significantly, we believe the next move to be a rate cut. However, as inflation
remains significantly above the target and would be even higher without
artificial constraints on regulated prices, we do not expect any action in the
next 12 months.
2013
NZ
BoC
1.00
1.00
1.00
1.25
1.75
RBA
2.50
2.50
2.50
2.50
2.50
RBNZ
3.50
3.50
3.50
4.00
4.00
Figure 4: BRICs policy rates
China
After successfully restoring growth momentum in Q2, the government is faced
with an easing of momentum so far in Q3. M2 growth of 12.8% in August, and
a worsening of PPI deflation (and CPI inflation still well below the PBOC’s 3.5%
forecast) suggest there is room for another round of targeted easing. We
expect GDP growth could be marginally lower in Q3 but a supportive base
effect from Q4 last year should see GDP growth near 8% in the final quarter of
this year and above 8% in Q1 next year.
India
Rates were left unchanged in the late-September RBI meeting, with the central
bank making it clear that policy decisions will be guided by not present
developments but the likelihood of meeting the January 2016 inflation target of
6%. This strategy all but rules out the chance of a rate cut in the near term.
2010
Australia
30%
20
10
0
2001
2004
China
%
2007
India
2010
2013
Brazil
Russia
PBoC
3.00
3.00
3.00
3.00
3.00
RBI
8.00
8.00
8.00
8.00
7.75
BCB
11.00
11.00
11.00
11.00
CBRF
8.00
8.50
8.50
8.50
11.00
8.50
Russia
In September 2014, the CBR decided to keep the key policy rate on hold at
8.00%. According to the CBR, despite the acceleration in inflation, the current
monetary stance enables the economy to accommodate food price shocks and
reduce inflation dynamics in the medium term to 4.0% yoy. The CBR states
that it will further tighten the monetary policy if high inflation risks persist and
inflation expectations remain elevated. Our sense is that given these risks as
well as the dynamics not just in headline inflation, but also in the core inflation
indicator, the CBR is likely to resort to additional interest rate increases later
this year, which may reach another 50 bps by end-2014.
Page 15
23 October 2014
Global data monitor :Recent developments and near term forecasts
B’bergcode
Q4-13
Q1-14
Q2-14
Q3-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
OECD leading indicators
(6M change, %, ann.)
OECD
2.4
2.2
1.9
1.9
1.8
US
OLE3US
2.4
2.1
2.0
2.0
1.9
Euro area
OLE3EURA
1.9
1.9
1.5
1.6
1.3
Japan
OLE3JAPA
2.9
2.3
0.9
0.9
0.4
China
OLE3CHIN
9.8
9.2
9.0
9.1
9.0
India
OLE3INDI
4.8
5.3
6.0
6.0
6.3
Russia
OLE3RUSS
1.8
2.5
Brazil
OLE3BRAZ
0.7
0.9
1.5
1.5
1.8
8.9
8.9
9.0
Purchasing manager indices
Global (manufacturing)
53.3
53.5
54.1
55.2
54.2
55.4
55.5
55.1
54.9
US (manufacturing ISM)
NAPMPMI
56.7
52.7
55.2
57.6
55.4
55.3
57.1
59.0
56.6
55.0
Euro area (composite)
ECPMICOU
51.9
53.1
53.4
52.8
53.5
52.8
53.8
52.5
52.0
52.2f
Japan (manufacturing)
SEASPMI
54.8
55.3
50.3
51.5
49.9
51.5
50.5
52.2
51.7
China (manufacturing)
EC11CHPM
50.7
48.7
49.4
50.7
49.4
50.7
51.7
50.2
50.2
India (manufacturing)
EC16INPM
50.5
51.7
51.4
52.1
51.4
51.5
53.0
52.4
51.0
50.0
48.3
48.8
50.8
48.9
49.1
51.0
51.0
50.4
-0.9
2.7
22.5
-18.4
1.5
102.6
102.1
102.2
100.6
99.9
1.0
Russia (manufacturing)
Other business surveys
US dur. goods orders (%pop1)
DGNOCHNG
-0.5
1.3
0.9
2.0
Japanese Tankan (LI)
JNTSMFG
16.0
17.0
12.0
13.0
Euro area EC sentiment
EUESEMU
99.1
101.6
102.2
100.9
Industrial production (%pop1)
US
IP CHNG
4.9
3.9
5.5
3.2
0.5
0.3
0.2
-0.2
Euro area
EUITEMUM
2.5
0.8
0.2
-2.0
-1.1
-0.3
0.9
-1.8
Japan
JNIPMOM
7.6
12.5
-14.4
-9.9
0.7
-3.4
0.4
-1.9
Retail sales (%pop1)
US
RSTAMOM
Euro area
RSSAEMUM
Japan (household spending)
3.6
0.9
9.7
3.9
0.4
0.4
0.3
0.6
-0.5
2.4
1.3
2.1
0.2
0.3
-0.4
1.2
2.7
15.4
-37.1
-1.8
-3.1
1.5
-0.2
-0.3
-0.3
Labour market
US non-farm payrolls2
NFP TCH
198
190
267
224
229
267
243
180
Euro area unemployment (%)
UMRTEMU
11.9
11.7
11.6
11.5
11.6
11.5
11.5
11.5
Japanese unemployment (%)
JNUE
3.9
3.6
3.6
3.7
3.5
3.7
3.8
3.5
US
CPICHNG
1.2
1.4
2.1
1.8
2.1
2.1
2.0
1.7
1.7
Euro area
ECCPEMUY
0.8
0.7
0.6
0.4
0.5
0.5
0.4
0.4
0.3
Japan
JNCPIYOY
1.4
1.5
3.6
3.2
3.7
3.6
3.4
3.3
China
CNCPIYOY
248
225
CP inflation (%yoy)
India
Russia
RUCPIYOY
Brazil
2.9
2.3
2.3
2.1
2.5
2.4
2.4
2.1
10.4
8.4
8.1
7.4
8.3
7.5
8.0
7.7
6.5
6.4
6.4
7.6
7.7
7.6
7.8
7.4
7.6
8.0
5.8
5.8
6.4
6.6
6.4
6.5
6.5
6.5
6.7
-37.5
-41.5
-43.4
-40.2
-43.5
-40.8
-40.3
-40.1
-40.0
14.4
14.2
14.6
14.2
15.3
13.8
12.7
15.8
3.7
1.5
1.0
1.3
18.0
14.0
17.1
15.8
109.5
111.8
106.8
101.8
0.5
1.8
Current account (USD bn)3
US (trade balance, g+s)
USTBTOT
Euro area (EUR bn)
XTSBEZ
Japan
0.0
-4.5
2.2
1.1
China (trade in goods)
90.5
16.6
85.9
128.1
Russia (trade in goods)
15.6
16.9
17.3
Other indicators
Oil prices (Brent, USD/b)
EUCRBRDT
109.3
108.2
109.7
FX reserves China (USD bn)
CNGFOREX
3821.3
3948.1
3993.2
102.0
97.4
Quarterly data in shaded areas are quarter-to-date. Monthly data in the shaded areas are forecasts.
%pop=%change in this period over previous period. Quarter on quarter growth rates is annualized.
Pop change in ‘000, quarterly data averages of monthly changes.
Quarterly data are averages of monthly balances.
‘f’ stands for flash estimate.
Source: Bloomberg Finance LP, Reuters, Eurostat, European Commission, OECD, Bank of Japan, National statistical offices, Markit/JP Morgan, Deutsche Bank Research
Page 16
23 October 2014
Charts of the Week
Chart 1. In the US, inflation remained muted in
September…
4.0
US prices
% yoy
Chart
2….
while
housing
activity
rebounded
in
September beating the expectations
25
% mom
US housing starts and building permits
% mom
25
3.5
20
20
3.0
15
15
10
2.5
10
5
2.0
0
1.5
-5
5
0
-5
-10
1.0
-10
-15
CPI
0.5
Core CPI
-15
-20
Building permits
Housing starts
-25
0.0
2010
2011
2012
2013
2014
Source : BLS, Haver Analytics , Deutsche Bank Research
-20
2010
2013
2014
Chart 4… while UK retail sales dropped by 0.3% mom in
September
4.0
Euro area composite PMI surveys
Index
2012
Source: Census, Haver Analytics, Deutsche Bank Research
Chart 3. In Euro area, composite PMI flash estimate rose
marginally in October…
65
2011
UK retail sales excluding auto fuel
% mom
3.0
2.0
60
1.0
55
0.0
-1.0
50
-2.0
Euroarea
France
45
-3.0
Germany
-4.0
40
2010
2011
2012
2013
2009
2014
Source: Markit, Haver Analytics, Deutsche Bank Research
Chart 5. In Japan, the September trade balance faltered
on higher communication device imports…
1500
Japan trade balance
JPY bn
2010
2011
2012
2013
2014
Source: ONS, Haver Analytics, Deutsche Bank Research
% mom
10
8
1000
Chart 6. …also in China, GDP grew by 7.3% yoy, the
slowest rate in 5 years
13
Chinese GDP growth
% yoy
12
6
500
4
2
0
11
10
0
-500
-2
-4
-1000
-8
Exports (rs)
Imports (rs)
-2000
2010
2011
2012
Source : MFJ, Deutsche Bank Research
8
-6
Trade balance (ls)
-1500
9
-10
2013
2014
7
6
2006
2007
2008
2009
2010
2011
2012
2013
Source: NBS, Haver Analytics, Deutsche Bank Research
Page 17
23 October 2014
Global Week Ahead: Friday, 24 October – Friday, 31 October
Dollar Bloc: In the US, the FOMC rate decision will be the highlight of the week. In addition, market will also
await the advance Q3 GDP estimate; we are projecting GDP to grow by 4.0% qoq saar. In other data releases,
durable goods, new home sales and pending home sales data will be important. Among the survey data,
consumer confidence and UoM consumer sentiment data is likely to improve. In New Zealand, RBNZ will
announce its official cash rate on Wednesday. In addition, building consents data is due.

Europe: In the Eurozone, focus will be on the EC sentiments. The German IFO and Italian ISAE are also
releasing next week. In hard data, focus will primarily be on the euro-area preliminary HICP estimates along with
Germany, Italy and Spain. In addition, Euro-area money supply, labour market report from Euro-area and
Germany, retail sales from Italy will be important. In the UK, Q3 flash GDP estimate will be the most important
release of the week. In CEE, MPC meeting of National Bank of Hungary is due.
Asia incl. Japan: In Japan, industrial production, unemployment rate, CPI, real household spending and retail
trade data is due for next week’s release.

Country
GMT
Release
DB Expected Consensus
Previous
Friday, 24 Oct
DENMARK
07:00
Consumer confidence (Oct)
ITALY
08:00
Retail sales (Aug)
UK
08:30
GDP flash estimate (Q3)
ITALY
10:00
US
14:00
New home sales (Sep)
5.0
7.1
-0.1% (-1.5%)
0.8% (3.2%)
510.0k
0.7% (3.0%)
0.9% (3.2%)
101.0
102.0
470.0k (-6.8)
504.0k (18.0%)
Events and meetings: EUROLAND: ECB’s Constancio to hold speech in Frankfurt – 07:45 GMT. EUROLAND: ECB’s Nowotny to hold speech in
Vienna – 08:00 GMT. US: Fed’s Yellen to hold speech in Boston – 12:30 GMT.
Monday, 27 Oct
GERMANY
09:00
IFO - business climate (Oct)
104.7
GERMANY
09:00
IFO - current assessment (Oct)
110.5
GERMANY
09:00
IFO - expectations (Oct)
EUROLAND
09:00
M3 (Sep)
UK
10:00
CBI distributive trades survey (Oct)
US
14:00
Pending home sales (Sep)
JAPAN
23:50
Retail trade (Sep)
99.3
(2.0%)
31.0
1.0%
1.0%
-1.0%
(1.2%)
Events and meetings: EUROLAND: ECB’s Restoy to hold speech in Madrid – 08:30 GMT.
Tuesday, 28 Oct
SWEDEN
08:30
PPI (Oct)
1.0% (2.7%)
SWEDEN
08:30
Retail sales (Sep)
1.9% (4.6%)
SWEDEN
08:30
Riksbank interest rate (Oct)
SWEDEN
08:30
Trade balance (Sep)
ITALY
09:00
ISAE business confidence (Oct)
US
12:30
Durable goods (Sep)
1.5%
US
12:30
Durable goods ex transport (Sep)
1.0%
HUNGARY
13:00
MPC meeting (Nov)
US
14:00
US
15:00
Richmond fed (Oct)
JAPAN
23:50
Industrial production (Sep)
0.25%
-SEK2.8bn
95.1
88.0
0.3%
-18.4% (8.9%)
0.7% (7.3%)
2.1%
2.10%
87.3
86.0
10.0
14.0
-1.5%
Events and meetings: SWEDEN: Swiss National Bank to announce interest rate decision – 08:30 GMT. HUNGARY: National Bank of Hungary to
announce interest rate decision – 13:00 GMT.
Wednesday, 29 Oct
BRAZIL
-
SELIC target - central bank (Oct)
SWEDEN
08:00
102.4
SWEDEN
08:00
NIER business survey (Oct)
102.8
SWEDEN
08:00
Economic tendency indicator (Oct)
101.1
Page 18
11.00%
11.00%
23 October 2014
Country
GMT
Release
DB Expected Consensus
Previous
Wednesday, 29 Oct contd.
NORWAY
09:00
Retail sales (Sep)
0.6% (1.9%)
UK
09:30
M4 growth (Sep)
0.3% (-1.5%)
UK
09:30
M4 lending (Sep)
(-4.6)
UK
09:30
Mortgage approvals (Sep)
64.2k
UK
09:30
Net consumer credit (Sep)
GBP0.9bn
UK
09:30
Net mortgage lending (Sep)
GBP2.3bn
US
18:15
FOMC rate (Oct)
0.25%
0.25%
NEW ZEALAND
20:00
RBNZ official cash rate (Oct)
3.50%
3.50%
Events and meetings: BRAZIL: Central Bank of Brazil to announce SELIC target rate – 12:00 GMT. US Federal Reserve to announce interest rate
decision – 18:15 GMT. NEW ZEALAND: Reserve Bank of New Zealand to announce official cash rate – 20:00 GMT.
Thursday, 30 Oct
SWITZERLAND
07:00
KOF leading indicator (Oct)
SPAIN
08:00
GDP flash estimate (Q3)
99.1
SPAIN
08:00
HICP flash estimate (Oct)
DENMARK
08:00
Industrial confidence (Oct)
-6.0
DENMARK
08:00
Unemployment rate (Sep)
3.9%
GERMANY
08:55
Unemployment rate (Oct)
6.7%
EUROLAND
10:00
-11.4
EUROLAND
10:00
Economic confidence (Oct)
99.9
EUROLAND
10:00
Industrial confidence (Oct)
-5.5
EUROLAND
10:00
Services confidence (Oct)
GERMANY
13:00
HICP preliminary (Oct)
US
13:30
GDP adv (Q3)
4.0%
3.0%
US
13:30
GDP deflator adv (Q3)
1.0%
1.4%
NEW ZEALAND
21:45
Building consents (Sep)
JAPAN
23:00
National CPI (Sep)
JAPAN
23:30
JAPAN
23:30
Real household spending (Sep)
0.6% (1.2%)
(-0.3%)
3.2
0.0% (0.8%)
4.6% (2.6%)
2.1% (1.7%)
0.0% (20.3%)
0.0% (3.3%)
3.5%
(-4.7%)
Events and meetings: EUROLAND: ECB’s Linde to hold speech in Madrid – 18:15 GMT.
Friday, 31 Oct
EUROLAND
10:00
11.5%
EUROLAND
10:00
HICP flash estimate (Oct)
(0.3%)
ITALY
10:00
HICP preliminary (Oct)
POLAND
13:00
Inflation expectations (Oct)
US
13:30
PCE (Sep)
US
13:30
PCE deflator (Sep)
US
13:30
Core PCE deflator (Sep)
0.1%
US
13:30
Personal income (Sep)
0.4%
0.3%
0.3% (4.3%)
US
13:30
Employment cost index (Q3)
0.5%
0.5%
0.7% (2.1%)
US
13:55
Consumer sentiment (Oct)
86.4
86.4
84.6
US
14:45
Chicago PMI (Oct)
61.0
61.0
60.5
-0.1% (-0.1%)
0.2%
0.2%
0.1%
0.5% (4.1%)
0.0%
0.0% (1.5%)
0.1% (1.5%)
Events and meetings: EUROLAND: ECB’s Linde to hold speech in Barcelona – 08:05 GMT. NORWAY: Norway’s Olsen to hold speech in Hamar –
08:30 GMT.
Source: Australian Bureau of Statistics; Bank of Canada; Bank of Japan; BEA; BLS; Bundesbank; Bureau of Labor Statistics, U.S Department of
Labor; Cabinet Office, Government of Japan; ECB; Eurostat; Indian Central Statistical Organization; INE; INSEE; ISTAT; ISTAT.IT; Ministry of
Finance Japan; National Association of Realtors; National Bureau of Statistics; National Statistics Office; OECD - Composite Leading Indicator;
People's Bank of China; Reserve Bank of Australia; Reserve Bank of New Zealand; Statistics Canada; Statistics Netherlands; Statistics of New
Zealand; U.S. Census Bureau; U.S. Department of Labor, Employment & Training Administration; U.S. Department of the Treasury; U.S. Federal
Reserve.
Note: Unless otherwise indicated, numbers without parenthesis are either % month-on-month or % quarter-on-quarter, depending on the
frequency of release, while numbers in parenthesis are % year-on-year. * on the release time means indicative release time. * on indicator name
means indicative/earliest release date
Page 19
23 October 2014
Financial Forecasts
US
Jpn
Euro
UK
Swe*
Swiss*
Can*
Aus*
NZ*
Actual
0.23
0.20
0.08
0.55
0.25
0.00
1.00
2.50
3.50
Rates1
Dec-14
0.35
0.20
0.10
0.55
0.25
0.00
1.00
2.50
3.50
DB forecasts
Mar-15
0.35
0.20
0.10
0.80
0.25
0.00
1.25
2.50
3.50
Sep-15
1.30
0.20
0.10
1.05
0.25
0.00
1.50
2.50
3.75
10Y Gov’t2
Actual
2.20
0.60
0.86
2.20
1.22
0.54
1.97
3.27
4.41
Bond/Yields
Dec-14
2.35
0.55
1.00
2.75
1.75
0.70
2.50
3.75
4.50
Spreads3
Mar-15
2.50
0.65
1.30
3.10
1.90
0.80
2.88
3.88
4.65
DB forecasts
Sep-15
2.70
0.70
1.50
3.30
2.20
1.00
3.50
4.25
4.95
Exchange
Actual
EUR/
USD
1.27
USD/
JPY
107.0
EUR/
GBP
0.79
GBP/
USD
1.61
EUR/
SEK
9.19
EUR/
CHF
1.21
USD/
CAD
1.12
AUD/
USD
0.88
NZD/
USD
0.79
Rates
Dec-14
1.25
112.0
0.75
1.67
8.95
1.22
1.14
0.90
0.80
Mar-15
1.22
114.0
0.75
1.62
8.90
1.23
1.15
0.87
0.76
Sep-15
1.18
118.0
0.76
1.56
8.80
1.25
1.19
0.83
0.68
3M Interest
(1) Forecasts are the same dates. * indicates policy rates.
(2) Forecasts in this table are produced by the regional fixed income strategists.
(3) US 10Y Govt. bond yield forecasts has been taken from US Fixed Income Weekly.
Sources: Bloomberg Finance LP, Deutsche Bank Research. Revised forecasts in bold type.
US 10Y rates
Euroland 10Y rates
6.0
US government bond yields, %
5.0
4.0
6.0
4.0
5.0
3.0
4.0
2.0
3.0
1.0
2.0
1.0
2002
5.0
0.0
10Y
2004
2Y/10Y spread (rhs)
2006
2008
2010
-1.0
2012
2014
Source: Deutsche Bank Research, Bloomberg Finance LP
Japan government bond yields, %
1.5
2.0
1.0
2002
2.0
6.0
1.5
5.0
1.0
1.0
10Y
2004
2Y/10Y spread (rhs)
2006
2008
2010
2012
2014
UK government bond yields, %
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
4.0
3.0
0.5
0.5
10Y
2Y/10Y spread (rhs)
0.0
2004
2006
2008
2010
Page 20
3.0
UK 10Y rates
2.0
0.0
2002
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Japan 10Y rates
2.5
Euro government bond yields, %
2012
2014
2.0
1.0
2002
10Y
2004
2Y/10Y spread (rhs)
2006
2008
2010
2012
2014
23 October 2014
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Peter Hooper/Michael Spencer/Torsten Slok
Page 21
23 October 2014
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the
meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and
its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is
indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where
at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the
preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for
its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483.
EU
countries:
Disclosures
relating
to
our
obligations
under
MiFiD
can
be
found
at
http://www.globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.
Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau
(Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures
Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific
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Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant
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Page 22
23 October 2014
Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise
to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash
flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a
loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the
loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse
macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation
(including changes in assets holding limits for different types of investors), changes in tax policies, currency
convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and
settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed
income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to
FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the
index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended
to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon
rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is
also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be
received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options
in addition to the risks related to rates movements.
Page 23
David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Guy Ashton
Global Chief Operating Officer
Research
Michael Spencer
Regional Head
Asia Pacific Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany
Richard Smith and Steve Pollard
Co-Global Heads
Equity Research
Andreas Neubauer
Regional Head
Equity Research, Germany
Steve Pollard
Regional Head
Americas Research
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