Dieter Braeuninger

We see Germany in a technical recession, as we expect another ¼% GDP drop in Q3. Our forecast for 2019 is now 0.3%. Given no indication for a rebound we lowered our 2020 forecast to 0.7%. We acknowledge these revisions do not properly account for the recent accumulation of risks. Given the increasingly fragile state of the global economy, the realization of one or more risks could easily push the economy into a completely different scenario, where growth revisions of a few tenths of a percentage point will not be sufficient. (Also in this issue: German automotive industry, chemical industry, house prices, corporate lending, the view from Berlin, digital politics.) [more]

In case of a snap election in Germany, a CDU/CSU-Greens coalition could be an option. Given both camps' radically different political positions in many areas, such a coalition would require both to make significant compromises. A black-green government would need to direct its focus and its available financial resources to climate protection and the energy transition. Corporates and consumers would have to bear considerable costs. This also spells a dilemma for fiscal policy. A larger share of government spending would necessarily have to be allocated to providing subsidies and mitigating the social impact of a quicker energy transition. Citizens and corporates cannot hope for major tax relief. (Also included in this issue: German goods exports, German industry, labour market, automotive business cycle.) [more]

In Germany, a decline in the labour force is inevitable. This can be seen from the recently published official 14th population projection. In this projection, the Federal Statistical Office took into account the past years‘ massive immigration. The impact is impressive. In the next few years, the number of inhabitants will increase by about 1 million to approx. 84 million – a new record high. Under plausible assumptions regarding future immigration (i.e. in the volume close to the past 20-year average – 268.000 p.a.) this number will decrease only slightly in the next two decades. [more]

Digital taxation is currently a subject of intense debate and since large digital companies are widely thought to pay inappropriately low taxes, policymakers remain under pressure to act. However, all approaches which are based on the taxation of revenues instead of profits have major flaws. As digital services expand into ever new areas of the economy (‘smart everything’), the risk of a far-reaching, arbitrary taxation of entrepreneurial activities is increasing. Disruption, the buzzword of the digitalisation discussions, may become an issue in international tax policy, too. In addition to an (international) digital tax, minimum taxes are one of the concepts under discussion. [more]

This edition of Focus Germany has quite a lot but rather short articles. We are taking stock of the German economy after Q1’s surprisingly strong growth. We expect the economy to flatline in Q2 and foresee an only subdued recovery in H2 given the recent flare-up of several geopolitical hotspots, rather than their hoped for de-escalation. We cross-check this analysis with deep dives into the auto and the mechanical engineering sector. We look at the impossible trinity of Germany’s fiscal policy (tax cuts, higher social expenditures and the black zero) and peek into the difficulties finance ministers are facing in the digital economy. We discuss to what extent the upcoming EP and Länder elections might spell more trouble for the Groko and introduce our new German financial conditions index. [more]

The recession in German industry can be traced to the massive slowdown of global trade in 2018. Will the German service sector withstand the recession in industry, as some recent survey data seems to suggest? We doubt it. In previous downswings in the manufacturing sector services were pulled lower, too. Indeed, the two sectors' output trends during 2018 did already follow this pattern. (Also in this issue: Economic Minister Altmaier's National Industrial Strategy 2030, the German Federal Budget, lower total and rental inflation thanks to new basket, corporate lending in Germany, the view from Berlin) [more]

Given much weaker than expected January business surveys and in particular the slump in their more forward-looking components we are now expecting the German economy to contract again in Q1 2019. Due to the yet unknown Q4 GDP outcome and its contradictory signals we currently refrain from formally revising our 1% GDP forecast lower again, but are expecting to shave off several tenths of a percentage point come February 22nd, unless the Statistical Offices Q4 GDP breakdown – and the new monthly data available by then – provide us with substantial positive surprises. While a technical recession might be avoided by a hair’s breadth with a positive Q4 number, the development of several key cyclical indicators is telling us that the German economy is drifting towards recession right now. [more]

The 0.2% qoq drop in Q3 GDP was, of course, largely due to the WLTP effect, but underlying growth has also clearly slowed in 2018. After mustering 1.6% in 2018, we expect German GDP to expand by 1.3% in 2019. Growth should be only marginally higher in 2020, despite a strong positive working day effect, as a further slowing of the global economy and EUR appreciation will provide considerable external headwinds. [more]

GDP stagnation in Q3 – 2019 forecast lowered to 1.3%. Despite signs that the WLTP effect is subsiding the recovery looks set to be slow. Export expectations and business sentiment in general have become more clouded on the back of the US/China trade conflict, the problems in the EMs and overall heightened economic uncertainty. Whilst we expect the economy to get back on track in the winter half-year, expansion rates well above potential have become unlikely in 2019. We have therefore trimmed our 2019 growth forecast to 1.3% (1.7%). (Also included in this issue: Auto industry, labour migration, the race for Chancellor Merkel’s succession) [more]

Weak currencies and economic difficulties in emerging markets dampen German exports. Over the past few months, the euro has appreciated against the currencies of many emerging markets which will likely curtail German exports to these countries in 2018 and 2019. In 2017, the ten largest German export markets among the emerging markets accounted for some 16% of total exports. According to our estimation model, German exports to this country group are set to increase by a nominal 3.5% to 4% in 2018 and 2019. This would be a noticeable loss of momentum compared with 2017 when exports increased by just over 7%. The country group’s share of total exports for the industrial sector is highest for traditional capital goods manufacturers, with mechanical engineering taking the lead. The ten emerging economies examined accounted for just over 22% of all exports in this sector in 2017. [more]

Since the last corporate tax overhaul in 2008, the need for reform has been continuously building in Germany. Given the ongoing criticism of Germany's current account surpluses, a reduction in corporate taxes would be a strong signal to provide new impulses to the sluggish domestic investment activity, thereby addressing a key issue of the current account discussion. The international trend towards lower tax rates also needs to be addressed, if Germany is to retain its competitiveness as a site for investment, innovation and jobs. [more]

German economy in H2 still goldilocks despite external headwinds. We maintain our forecast of around 0.5% quarterly GDP growth in both Q3 and Q4, following average growth of 0.4% in H1. The H1 growth composition, however, marginally lowers the annual average to 1.9% (2.0%) and risks remain more skewed to the downside. In Berlin, the Groko agreed on an expensive social policy package. Albeit medium- and long-term financing of the package is not secured, FM Scholz came up with an additional, even more costly idea for extended pension benefits. A silver lining could be if the Groko managed to launch a law on labour migration. (Also included in this issue: German manufacturing industry, shortage of qualified workers in the construction sector, corporate taxes) [more]