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August 8, 2017
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Forecast for German Q2 GDP lifted to 0.8%. Strong private consumption boosts retail sales. Germany’s fiscal outlook: Goldilocks will not last forever. The view from Berlin: Asylum policy & refugee issues back on stage. [more]
Focus Germany Forecast for German Q2 GDP lifted to 0.8%. Following recent strong soft and hard data, we have lifted our forecast for Q2 GDP from 0.6% qoq to 0.8% (Q1 0.6%). Private consumption should remain the major driver behind above potential growth. In H2 the recent strong appreciation of the EUR should leave its mark. Still, in July ifo export expectations stood just 1 point below their all- time high. This could be related to the stronger-than-expected recovery within the Eurozone as well as stronger demand from China. Strong private consumption boosts retail sales. Private consumption rose by more than 2% in real terms in each of the years 2015 and 2016 and was thus the most important growth driver. Retail sales expanded at an above-average rate, and their share in overall consumption did not decline further. Strong employment growth, decent wage hikes and low inflation are propping up real disposable incomes, which means that private consumption should remain well supported in the coming quarters. Germany’s fiscal outlook: Goldilocks will not last forever. In an international comparison, Germany’s fiscal situation stands out – thanks to buoyant growth, low interest rates and a “demographic respite”. We estimate that the German government saved almost EUR 260 bn in interest payments between 2008 and 2016 (c. 8% of 2016 GDP). A normalization of monetary policies as well as the ageing society look set to put the public finances under immense pressure from the middle of the coming decade. However, the long-term fiscal risks are pretty much ignored in the current election campaign given the increasing dominance of older voter groups. Even worse when the reality check comes it will be even harder to find democratic majorities to push through the necessary adjustments, which will then need to be much harsher due to the current collective ignorance. The view from Berlin: Asylum policy & refugee issues back on stage. Referencing the situation in Italy, SPD frontrunner Schulz recently warned of a renewed surge in migration to Germany. According to commentators he wanted to show that he takes care of problems before they escalate, thus implicitly criticising Chancellor Merkel. This, however, backfired to a certain extent as the SPD did hardly oppose Merkel’s asylum policy and he himself backed it as President of the EP. About two months ahead of the election day Merkel’s popularity rating surpasses Mr. Schulz‘ rating by about 30pps. And according to the major surveys nearly 40% of the Germans would vote for the CDU/CSU if elections were held next Sunday (SPD 23.6%). This would provide the Chancellor with several options for forming a coalition: besides a renewed grand coalition, a so- called Jamaica coalition with the FDP and the Greens, even alliances with each of these smaller parties would be feasible if the CDU/CSU’s performance improved marginally only. Author s Sebastian Becker +49 69 910-21548 sebastian-b.becker@db.com Barbara Böttcher +49 69 910-31787 barbara.boettcher@db.com Dieter Bräuninger +49 69 910-31708 dieter.braeuninger@db.com Jochen Möbert +49 69 910-31727 jochen.moebert@db.com Marc Schattenberg +49 69 910-31875 marc.schattenberg@db.com Stefan Schneider +49 69 910-31790 stefan-b.schneider@db.com Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Stefan Schneider Content Page Forecast tables ............................................ 2 Forecast for German Q2 GDP lifted to 0.8%..............................................................3 Strong private consumption boosts retail sales............................................................ 5 Germany’s fiscal outlook: Goldilocks will not last forever……………………………………..7 The view from Berlin. Asylum policy & refugee issues back on stage .................... 11 DB German Macro Surprise Index ............. 13 Export Indicator ......................................... 14 Event calendar .......................................... 15 Data calendar ............................................ 15 Financial forecasts .................................... 16 Data monitor .............................................. 17 August 8, 20 17 Cyclical boom no reason for fiscal complacency Cyclical boom no reason for fiscal complacency 2 | August 8, 2017 Focus Germany Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2016 2017F 2018F 2016 2017F 2018F 2016 2017F 2018F 2016 2017F 2018F Euroland 1.7 2.2 2.0 0.2 1.6 1.5 3.5 3.1 2.9 - 1.5 - 1.4 - 1.3 Germany 1.9 1.6 1.7 0.5 1.6 1.6 8.4 8.0 7.8 0.8 0.5 0.2 France 1.1 1.4 1.6 0.3 1.3 1.3 - 0.9 - 0.6 - 0.5 - 3.4 - 3.1 - 2.8 Italy 0.9 1.0 1.0 - 0.1 1.4 1.3 2.6 2.7 2.3 - 2.4 - 2.3 - 2.3 Spain 3.2 2.7 2.1 - 0.3 2.0 1.8 1.9 1.9 1.8 - 4.5 - 3.3 - 2.8 Netherlands 2.2 2.1 1.5 0.1 1.1 1.4 8.5 10.2 10.2 0.4 0.6 0.0 Belgium 1.2 1.6 1.6 1.8 2.3 1.9 - 0.4 1.0 1.0 - 2.6 - 2.1 - 2.1 Austria 1.6 1.8 1.6 1.0 1.9 1.6 1.7 2.8 3.1 - 1.6 - 0.9 - 0.8 Finland 1.9 1.2 1.5 0.4 1.0 1.4 - 1.1 - 1.0 - 0.7 - 1.9 - 2.1 - 1.6 Greece 0.0 0.9 2.0 0.0 1.1 1.0 - 0.6 1.0 1.0 0.7 - 1.3 0.6 Portugal 1.4 2.5 1.4 0.6 1.2 1.5 1.0 0.7 0.7 - 2.0 - 1.8 - 1.7 Ireland 5.1 4.0 3.2 - 0.2 0.2 1.3 3.3 10.0 8.0 - 0.6 - 0.7 - 0.5 UK 1.8 1.6 1.2 0.6 2.7 2.8 - 4.4 - 4.0 - 4.0 - 2.9 - 2.9 - 2.5 Denmark 1.7 1.7 1.8 0.3 1.1 1.4 6.5 6.5 6.5 - 2.1 - 2.5 - 1.9 Norway 0.7 1.6 1.8 3.6 2.7 2.5 4.4 6.2 7.0 3.7 3.9 4.2 Sweden 3.0 3.0 2.4 1.0 1.5 1.5 4.7 4.9 5.1 2.0 0.0 0.3 Switzerland 1.3 1.5 1.7 - 0.3 0.5 0.7 9.5 9.3 9.0 - 0.1 - 0.1 - 0.1 Czech Republic 2.3 2.8 2.1 0.7 2.5 2.1 1.1 1.1 1.0 0.6 - 0.6 - 0.6 Hungary 2.0 3.8 3.5 0.4 2.3 2.5 5.5 3.0 2.3 - 1.9 - 2.3 - 2.4 Poland 2.7 3.4 3.2 - 0.6 1.8 2.0 - 0.3 - 1.1 - 1.2 - 2.5 - 2.9 - 3.0 United States 1.5 2.1 2.4 1.3 2.0 1.9 - 2.6 - 2.9 - 3.2 - 3.1 - 3.6 - 2.8 Japan 1.0 1.2 0.7 - 0.1 0.4 0.5 3.7 3.9 4.0 - 3.5 - 3.4 - 3.0 China 6.7 6.7 6.3 2.0 1.7 2.7 1.8 1.3 1.1 - 3.8 - 4.0 - 4.0 World 3.1 3.6 3.7 4.3 5.2 4.3 *Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepanc ies compared to other DB publications. Sources: National Authorities, Deutsche Bank Forecasts: German GDP growth by components, % qoq, annual data % yoy DX 2017 2018 2014 2015 2016 2017F 2018F Q1 Q2F Q3F Q4F Q1F Q2F Q3F Q4F Real GDP 1.6 1.7 1.9 1.6 1.7 0.6 0.8 0.5 0.5 0.4 0.3 0.3 0.3 Private consumption 0.9 2.0 2.1 1.2 1.5 0.3 0.6 0.4 0.4 0.3 0.3 0.3 0.3 Gov't expenditure 1.2 2.8 4.0 1.2 1.0 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Fixed investment 3.4 1.7 2.2 2.1 3.0 1.7 0.7 0.9 1.0 0.7 0.7 0.7 0.6 Investment in M&E 5.5 3.7 1.1 1.1 3.5 1.2 1.0 1.0 1.0 1.0 0.8 0.8 0.5 Construction 1.9 0.3 2.8 3.1 3.3 2.3 0.5 1.0 1.2 0.7 0.7 0.7 0.7 Inventories, pp - 0.3 - 0.5 - 0.2 0.2 0.0 - 0.4 0.2 0.0 0.0 0.0 0.0 0.0 0.0 Exports 4.1 5.2 2.7 3.7 3.9 1.3 1.1 1.2 1.0 1.0 1.0 1.0 1.0 Imports 4.0 5.5 3.8 4.0 4.5 0.4 1.1 1.2 1.1 1.0 1.2 1.2 1.2 Net exports, pp 0.4 0.3 - 0.4 0.1 0.0 0.5 0.1 0.1 0.0 0.1 0.0 0.0 0.0 Consumer prices* 0.9 0.2 0.5 1.6 1.6 1.9 1.7 1.6 1.3 1.3 1.6 1.9 1.8 Unemployment rate, % 6.7 6.4 6.1 5.7 5.5 5.9 5.8 5.7 5.6 5.6 5.5 5.4 5.4 Industrial production** 1.5 1.1 1.4 1.5 1.0 Budget balance, % GDP 0.3 0.7 0.8 0.5 0.2 Public debt, % GDP 74.9 71.2 68.3 65.9 63.4 Balance on current account, % GDP 7.3 8.3 8.4 8.0 7.8 Balance on current account, EUR bn 213 253 263 259 260 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. **Manufacturing (NACE C) Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 3 | August 8, 2017 Focus Germany Forecast for German Q2 GDP lifted to 0.8% — Following recent strong soft and hard data we have lifted our forecast for Q2 GDP from 0.6% qoq to 0.8% (Q1 0.6%). — Private consumption should remain the major driver behind above potential growth. — In H2 the recent strong appreciation of the EUR should leave its mark. Still, in July ifo export expectations stood just 1 point below their all-time high. This could be related to the stronger than expected recovery within the eurozone as well as stronger demand from China. While we were expecting a normalization following Q1’s strong growth of 0.6% (qoq), hard and soft data suggest that the economy has even gained further momentum in Q2 (the Statistical Office will publish its first estimate on August 15 th ). Even after correcting our sentiment-based bridge models for their over- prediction of around ¼pp in recent quarters, they yield on average a whopping 0.8% qoq GDP increase. Models based on hard monthly data (IP, retail sales) – which were almost spot on in the last two quarters – are currently giving even slightly higher rates, as real retail sales jumped by 1.3% in Q2 (see article “Strong private consumption feeds into retail sales”). Despite the unexpected 1.1% mom drop in June, industrial production is still up 1.8% on the quarter. Moreover, both the ifo index and consumer confidence (GfK) improved in June and further in July, enjoying post-unification (ifo) or cyclical (GfK) highs. Consumption remains major growth driver Private consumption should have been the biggest contributor to Q2-GDP. The contribution from capital spending should probably weaken slightly compared to Q1’s 0.3pp, which was in part driven by weather effects in the construction sector, although the positive impact of the changeover to a new reporting sample in the construction sector might still be felt. Hard to predict is the volatile investment in machinery & equipment, which showed a marginally positive contribution in Q1. The usual drivers for investment spending such as capacity utilization and export outlook have improved further during Q2. On the other hand domestic capital goods orders, a good concurrent proxy for investment spending, disappointed in recent months; but posted a 7.5% jump in June. Net exports, another volatile component, are expected to slow, partly a pay-off for the 0.4pp contribution in Q1. However, it is probably too early to expect any impact from the recent strong appreciation of the EUR. Very optimistic export outlook despite recent EUR strength, which might be felt more strongly during H2 In H2 growth might still slow somewhat from H1’s rapid pace, but should still remain above the trend growth rate, which we currently see at close to 0.4% qoq. One reason might be the exchange rate. Although based on the usual export elasticity (which is in a range of 0.2 to 0.5) with respect to broader measures of price competitiveness over a one year horizon, still suggest a rather modest impact on export growth. Against the USD the EUR has appreciated by around 12% so far this year. In H1 EUR/USD increased around 6%, while Germany’s price competitiveness index versus 56 countries (CPI basis) rose by only slightly more than 1%. While the link is quite volatile EUR/USD changes tend to be three times larger than the move in the broader price competiveness index. So we assume that it will have risen by 4% YTD in recent weeks (the latest available reading of the index is from June). Applying 0 0.2 0.4 0.6 0.8 1 1.2 Q1 2015Q3 2015Q1 2016Q3 2016Q1 2017 Bridge models (avg.) GDP actual % qoq Bridge models: Overstating growth, but by how much? 1 Sources: Deutsche Bundesbank, Markit, ifo, Deutsche Bank Research -5 0 5 10 15 20 30 35 40 45 50 55 60 65 12 13 14 15 16 17 Global trade, yoy, right Export demand (PMI). left Export expectations (ifo), left Index % yoy Sources: IFO, Markit, CPB Export outlook has improved - despite stronger EUR 2 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 2000 2003 2006 2009 2012 2015 USD/EUR (left) German price competitiveness v56 CPI Price competitiveness & USD/EUR 3 % yoy % yoy Source: Bundesbank Cyclical boom no reason for fiscal complacency 4 | August 8, 2017 Focus Germany an elasticity of 0.3 shaves about 1¼ percentage point off German exports during the next 12 months. On the other hand the more buoyant economy in the rest of the eurozone – which still accounts for 37% of German exports – should provide a counter- weight for exports. Although the overall GDP impact is rather small, probably due to the role of intra-EMU supply chains. An analysis of the Council of German Economic Experts from 2012 found that a 1% rise in EMU (ex GER) private consumption adds 0.14 % to German GDP. In the next few months stronger demand from China – where the economy is performing better than expected – should also help. In the first five months nominal exports to China were up 16.1%, twice as much as the overall increase (7.4%). More dynamic growth in these important export markets is clearly reflected in the export expectations of the manufacturing sector (ifo), which have been rising rapidly in recent months and stood just 1 point below their all-time high in July. Overall the better real demand situation should result in higher foreign order intake in the coming months. This was up 5.5% yoy in May/June although monthly data has not shown any clear uptrend since the start of the year. However, towards year end we would expect an at least modest dampener from the exchange rate. Stefan Schneider (+49 69 910-31790, stefan-b.schneider@db.com) -8 -6 -4 -2 0 2 4 6 8 10 42 44 46 48 50 52 54 56 58 1213141516 EMU PMI Manufacturing ex GER (left) Ger exports to EMU % yoy, mvg.avg. lag3 Buoyant EMU growth bolsters German exports 4 Index % yoy Sources: Federal Statistical Office, Markit, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 5 | August 8, 2017 Focus Germany Strong private consumption boosts retail sales — Private consumption rose by more than 2% in real terms in each of the years 2015 and 2016 and was thus the most important growth driver. — Retail sales expanded at an above-average rate, and their share in overall consumption did not decline further. — Strong employment growth, decent wage hikes and low inflation are propping up real disposable incomes, which means that private consumption should remain well supported in the coming quarters. Strong private consumption boosts retail sales In real terms, German retail sales (excluding car sales) continued to rise in H1 2017. In price-adjusted terms, they were up by 1.7% year-on-year. The favourable trend of the last few years is obviously continuing. In 2014, 2015 and 2016, retail sales (excluding cars) were up 1.2% yoy, 3.8% yoy and 2.6% yoy, respectively (all figures in real terms and annual averages). This means that, in each of these years, retail sales grew even more strongly than private consumption as a whole – a remarkable fact which shows that robust economic activity has led to higher demand for retail sales goods. The growth rates for retail sales and for private consumption as a whole are currently converging, perhaps due to saturation effects. At the same time, both the GfK consumer sentiment index and the EC consumer sentiment index suggest that consumers are still optimistic. The trend in retail sales reflects the fact that the German economy is in excellent shape. A closer look at the growth contributions of the individual components shows that private consumption currently contributes strongly to overall GDP. Private consumption benefits from the favourable effects of low inflation on real disposable incomes. In addition, employment growth is robust and wage agreements are favourable for workers. It is therefore not surprising that private consumption was up by more than 2% in real terms in each of the years 2015 and 2016. It made an annual contribution of 1.1 pp to real GDP growth, with real GDP expanding by 1.7% and 1.9%, respectively. Retail sales are propped up by robust construction activity in particular. New construction and renovations – which are often made by homeowners themselves, leading to higher sales of DIY stores – often lead to subsequent purchases of furniture, household appliances or up-to-date IT equipment. -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 -1.0 0.0 1.0 2.0 111213141516 EC consumer climate GfK consumer climate Retail sales Sales and sentiment converge 1 Sources: Federal Statistical Office , European Commission, GfK, Deutsche Bank Research Consumer climate, normalized (left); % yoy, 3mma, sa (right) -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 95 99 03 07 11 15 Private consumption: Over 2% growth in 2015 and 2016 4 Private consumption, % yoy, real Sources: Federal Statistical Office, Deutsche Bank Research -4 -3 -2 -1 0 1 2 3 4 5 02 04 06 08 10 12 14 16 Retail sales Private consumption Consumption usually outpaces retail 2 Sources: Federal Statistical Office, Deutsche Bank Research Real, % yoy -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 07 08 09 10 11 12 13 14 15 16 Private consumption Invest. in machinery & equip. Construction Net-trade Rest Private consumption contributing more than half of GDP growth in 2016 3 Growth contribution to yoy real GDP growth, pp Sources: Federal Statistical O ffi ce, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 6 | August 8, 2017 Focus Germany During H1 2017, furniture, household appliance and building materials sales were up 4.6% in price-adjusted terms. Alongside “traditional” retailing, i.e. department store and supermarket sales, internet and mail-order sales rose in H1 2017, too. In price-adjusted terms, internet and mail-order sales were up by 6.6%. Expenditure related to the past influx of migrants also has a favourable effect on some retail segments, for example food, clothes and furniture. Strong labour market supports income and consumption The consumer climate indices (chart 1) show that consumers are optimistic about both their current situation and the future outlook. In fact, the GfK consumer sentiment index has remained at a high level for four years now. In contrast, the EC consumer sentiment index has risen strongly, particularly in the last three years. Still, we should be cautious when drawing conclusions concerning the longer-term trend in private consumption from these two indices. We currently expect private consumption to grow 1.2% and 1.5% in real terms in 2017 and 2018, respectively. However, it might expand even more strongly for several reasons. Employment growth remains dynamic. The labour market situation is favourable for workers, and the upcoming wage negotiations in 2018 will probably ensure that households’ income situation remains comfortable. The firm euro and persistently low oil prices will limit inflation-related losses of purchasing power. As a result, there is a good chance that the favourable signals from the sentiment indices translate into robust retail sales growth. At the same time, events which need not necessarily be of an economic nature may have an impact on consumer behaviour in the short term. Marc Schattenberg (+49 69 910-31875, marc.schattenberg@db.com) 80 85 90 95 100 105 110 115 0204060810121416 furnishings, household equip. etc. Electrical household appliances Selected turnovers retail trade, house and home, Germany 5 Sources: Federal Statistical Office, Deutsche Bank Retail Sales, real, 2010=100 Cyclical boom no reason for fiscal complacency 7 | August 8, 2017 Focus Germany Germany’s fiscal outlook: Goldilocks will not last forever — In an international comparison, Germany’s fiscal situation stands out – thanks to robust GDP growth and zero interest rates. Other important industrial countries, such as the US or Japan, are still struggling with high fiscal deficits and rising public-sector debt. Germany, however, is the only G7 country which has generated fiscal surpluses since 2014 that helped to considerably reduce its debt ratio. — In the short to medium term, dynamic revenue growth should help to ensure that Germany’s fiscal situation remains comfortable, despite robust expenditure growth. The 2017 update of the Stability Programme foresees fiscal surpluses on the general government level for the years from 2017 to 2021, which means that – provided growth remains strong and interest rates low, the key assumption in this scenario – the debt ratio might drop below the Maastricht limit of 60% of GDP by end-2020. — Public finances are currently benefiting from buoyant growth, low interest rates and a “demographic respite”. According to our calculations, the German government saved almost EUR 260 bn in interest payments between 2008 and 2016 (c. 8% of 2016 GDP). Excluding these beneficial effects from low interest rates, Germany would still have continued to run a deficit in 2016 and as a result the debt ratio would be much higher. Therefore, the current fiscal surpluses, which are to a large extent due to these special factors, should not be used to justify permanent expense increases or cuts in taxes and/or social security contributions. — A normalization of monetary policies (and hence gradually rising interest rates) as well as the ageing society look set to put the public finances under considerable pressure from the middle of the coming decade. The ageing society will result in significant burdens for the public budgets in the near future. Given the increasing dominance of older voter groups this development is currently broadly ignored. Even worse when the reality check comes it will be even harder to find democratic majorities to push through the necessary adjustments, which will then need to be much harsher due to the current collective ignorance. — The long-term fiscal risks are pretty much ignored in the current election campaign. Rather, calls for tax cuts and expense increases mushroom in the parties’ election programmes. For the sake of the sustainability of German public finances the newly elected federal government in September should refrain from further boosting public spending beyond what is already planned by the incumbent government so that revenue growth will not be exceeded by the strong expansion rate of expenditures. Strong economy and zero interest rates result in large budget surpluses Other important industrial countries, such as the US or Japan, and large European economies, such as France or Spain, are still struggling with high fiscal deficits and rising public-sector debt. Germany, however, is the only G7 country which has generated fiscal surpluses since 2014 (not least thanks to robust economic growth) that helped to considerably reduce its debt ratio. In fact, Germany’s fiscal situation is better than it has been for a long time, mainly thanks to strong growth and zero interest rates. According to the Maastricht definition, the general government balance, which includes the budgets of the federal government, the federal states, the local authorities and the social 0 1 2 3 4 5 6 7 9698000204060810121416 Implied interest rate on government debt (nominal), % p.a. Market interest rate (long term; yield on 10-year Bunds) (nominal), % p.a. German fiscal policy currently benefits from low interest rates 1 Sources: Eurostat, AMECO, Bloomberg, Deutsche Bank Research The implied interest rate on government debt is calculated on the basis of the relationship between government interest expenditure during a given year and gross government debt at the end of the preceeding year. -5 -4 -3 -2 -1 0 1 2 96 98 00 02 04 06 08 10 12 14 16 Fiscal balance: actual value Fiscal balance: hypothetical value* Fiscal balance (average: 1996-16) Sources: Eurostat, AMECO, Deutsche Bank Research General government fiscal balance, % of GDP German budget surpluses aided by low interest rates 2 * Calculated on the basis of a constant implied interest rate (at the 2007 level) for the period 2008 - 16. 40 50 60 70 80 90 00 02 04 06 08 10 12 14 16 Hypothetical value* Actual value Sources: Eurostat, Deutsche Bank Research General government debt (consolidated), % of GDP German debt ratio already retreated noticeably, in part thanks to zero interest rates 3 * Calculated on the basis of a constant implied interest rate (at the 2007 level) for the period 2008 - 16. Cyclical boom no reason for fiscal complacency 8 | August 8, 2017 Focus Germany security system as well as special budgets, was in the black for the third year in a row in 2016 (c. EUR 23,7 bn or 0.8% of GDP; see chart 4). The spending side of the (general government) budget benefited from the further decline in interest payments, the revenue side from strong tax and social security revenues. Despite the significant increase in the general government’s primary expenses (i.e. government expenses before interest payments), particularly for social security purposes (“retirement at 63”, “pensions paid to mothers” etc), the fiscal situation looks set to remain comfortable, at least in the short to medium term, as public-sector revenues continue to grow at a strong clip. The 2017 update of the Stability Programme foresees sustained positive fiscal balances on the general government level for the years from 2017 to 2021 (chart 4), which means that – provided growth remains strong and interest rates low – the debt ratio might be reduced considerably until the end of 2021. According to the federal government, the general government debt ratio might drop below the Maastricht limit of 60% of GDP by the end of 2020 for the first time since 2002 (chart 5). Even though such a decline in the debt ratio does not appear unrealistic, this scenario depends to a large extent on a continuation of strong growth and dynamic increases in public-sector revenues (taxes, social security contributions). In addition, the strong increase in social spending (pensions, employment, health care) may result in immense fiscal pressure in the long run, at the latest at the time when the economy slows, interest rates rise and population ageing will hinder revenue growth to keep pace with (high) spending growth. Goodbye to QE means goodbye to budget surpluses (and higher debt levels) A look at the implied interest rate shows to what extent the German public sector budgets have benefited over the past years and are still benefiting from negative or zero interest rates. This “average interest rate”, which is calculated from the overall interest payments (general government level) during a fiscal year and the debt level at the end of the preceding fiscal year (general government level), has steadily declined since the global financial and economic crisis and, indeed, more than halved from c. 4.2% p.a. in 2008 to only 2% p.a. in 2016 (chart 1). As a result, the interest service payments of the German government have slid rapidly, despite the rise in total debt after the beginning of the global financial crisis (chart 5). While, during the five years before the financial market crisis in 2007, the government had to pay c. EUR 64 bn per year in interest (c. 2.8% of GDP), this figure dropped to c. EUR 43 bn in 2016 (c. 1.4% of GDP). Without the steep fall in interest rates between 2008 and 2016, the government’s interest burden would have accounted for c. 3.2% of GDP in 2016 and hence more than double of the actual figure of 1.4% of GDP (chart 6). As a result, Germany’s general government budget would have still recorded a deficit (of around 1% of GDP) instead of running a budget surplus (of 0.8% of GDP) for the third consecutive year (charts 4 and 7). Germany’s cumulative interest savings between 2008 and 2016 are indeed much larger and amount to almost EUR 260 bn (c. 8.2% of 2016 GDP). In other words: Without the continued fall in the (implicit) interest rate (on government debt), Germany’s government debt ratio would have stood at more than 75% of GDP instead of the recorded 68.3% of GDP 1 . The budgetary relief and debt dampening effect from the low interest rate environment are not only a German phenomenon. In fact, many more euro area governments have also benefited to a very large degree from the fall in interest rates. For example, at an estimated EUR 250 bn France’s cumulative interest savings are not far below Germany’s. As a 1 The Deutsche Bundesbank reaches a similar conclusion. However, their estimate for Germany’s cumulative interest savings at EUR 240 bn or 7.7% of 2016 GDP is somewhat below our number. -5 -4 -3 -2 -1 0 1 2 3 Fiscal balance Primary balance (fiscal balance before interest payments) Structural fiscal balance* Budget surpluses since 2014 4 % GDP (general government level) * Cyclically - adjusted and excluding special effects. Forecasts: German Stability Programme (2017). Sources: Eurostat, AMECO, Federal Ministry of Finance, Deutsche Bank Research 0 10 20 30 40 50 60 70 80 90 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Interest payments (LHS) Government debt (RHS) According to the federal government, Germany's debt ratio could fall below 60% by the end of 2020 5 % GDP (general government level) Sources: Eurostat, AMECO, Federal Ministry of Finance, Deutsche Bank Research 0 2 4 6 8 10 IE ES PT FI DE EA19 NL BE AT FR IT GR Interest savings per year (here: in 2016)* Sources: Eurostat, AMECO, Deutsche Bank Research % of GDP (2016) (general government level) * Difference between the actual and hypothetical interest payments of the general government. Hypothetical interest payments are calculated on the basis of a constant implied interest rate (at the 2007 level) for the period 2008 - 16. Low interest rates suppress public interest payments in the euro area 6 Cyclical boom no reason for fiscal complacency 9 | August 8, 2017 Focus Germany percentage of national GDP (roughly 11% of GDP), cumulative interest savings in France were even larger than in Germany. Indeed, Germany’s cumulative interest savings of just above 8% of 2016 GDP are lower than the euro area average (of c. 9% of GDP) and significantly lower than those of large debtor governments like France, Belgium or Italy (chart 8). Rising interest rates and the ageing society look set to put public finances under considerable pressure from the middle of the coming decade Realistically, the general fiscal situation is unlikely to remain forever as good as it is now. First, interest service will again put pressure on the budget in the medium to long term once the ECB starts to normalize monetary policies. Second, the ageing society will progress noticeably and hence result in significant burdens for the public budgets in the near future, as government revenues (taxes, social security contributions) will probably advance at a slower pace on the back of a shrinking workforce and lower potential growth while government expenses will boom at the same time (in particular for statutory pensions, healthcare and old-age care). By the middle or end of the next decade at the latest, age-related government expenses (i.e. pension, healthcare and old-age care expenses) will rise considerably in comparison to GDP and thus put significant pressure on the budget 2 . The Federal Ministry of Finance believes that Germany is currently experiencing a “demographic respite”, which means that the full impact of ageing on the economy and the public finances is not yet being felt more noticeably and to the full extent. However, this respite will be over by the middle or end of the next decade at the latest, as more and more pensioners will claim money under the statutory pension system (i.e. put pressure on the public-sector budgets and/or contributors) and the declining workforce will reduce potential growth rates. The old-age dependency ratio, which measures the ratio between those aged above 65 and those aged 15 – 64, shows that Germany is in for a dramatic ageing of society. Based on the latest population forecasts by Eurostat, the old-age dependency ratio will rise considerably from the beginning of the next decade and the “demographic respite” will be over (chart 9). The Ministry of Finance’s simulations of the long- term sustainability of public finances have shown that the German debt ratio may rise to c. 220% of GDP by the end of 2060 in an unfavourable scenario (regarding population and GDP growth, increase in age-related public spending, etc.) – unless policymakers take measures to counteract this trend 3 . Despite this alarming result the long-term fiscal risks do not appear to play a major role in the current election campaign. In fact, politicians have included calls for tax cuts and expense increases in their parties’ election programmes on the grounds of the current, favourable fiscal situation (for a deeper analysis see our current publications on Germany’s fiscal situation 4 and welfare proposals ahead of the legislative elections 5 ). 2 For a deeper analysis on the long-term budgetary pressures from ageing see Becker, Sebastian. Germany’s fiscal situation: Full employment and zero interest rates result in budget surpluses – but demographic development might become a problem. Germany Monitor. Bundestag elections 2017. July 19, 2017. 3 See the Fourth Report on the Sustainability of Public Finances and the 2017 Update of the Stability Programme) by the Federal Ministry of Finance. 4 See Becker, Sebastian. Germany’s fiscal situation. Full employment and zero interest rates result in budget surpluses – but demographic development might become a problem. Germany Monitor. Bundestag elections 2017. July 19, 2017. 5 See Bräuninger, Dieter. Parties not focusing enough on sustainability. Welfare proposals against a backdrop of positive economic development. Germany Monitor. Bundestag elections 2017. July 17, 2017. 0 5 10 15 20 25 GR AT FR IT NL BE EA19 DE FI PT IE ES Sources: Eurostat, AMECO, Deutsche Bank Research % of GDP (2016) (general government level) Cumulative interest savings* of selected euro area sovereigns 8 * Cumulative difference between the actual and hypothetical interest payments of the general government. Hypothetical interest payments are calculated on the basis of a constant implied interest rate (at the 2007 level) for the period 2008-16. -8 -6 -4 -2 0 2 ES FR BE IT PT FI AT EA19 IE NL GR DE Fiscal balance (actual) Budgetary relief* Fiscal balance (hypothetical**) Sources: Eurostat, AMECO, Deutsche Bank Research % GDP (2016) (general government level) * Difference between the actual and hypothetical interest payments of the general government. **Hypothetical interest payments are calculated on the basis of a constant implied interest rate (at the 2007 level) for the period 2008-16. Low interest rates have provided a big relief to EA government budgets 7 Cyclical boom no reason for fiscal complacency 10 | August 8, 2017 Focus Germany In order to prepare the economy and the public-sector finances for the ageing of the population and avoid abrupt major fiscal adjustments in the future, the parties should not make more and more electoral promises (tax cuts, expense increases) ahead of the elections in September which they will be hard pressed to pay for in the longer term. General government spending looks set to increase significantly stronger in 2017/18 than public revenues, according to the current Stability Programme (chart 10). This is also the result of the aging population and hence ageing voters. Parties are increasingly catering to this voter segment, given its numerical dominance. This means that while currently people might be under the false impression that the very comfortable status quo might be maintained – in part courtesy of the “demographic respite” -, it will be very hard to find majorities to implement the necessary adjustments once the demographic bill becomes due. Not least because by then the “pain” will be much harder, due the current collective ignorance. Sebastian Becker (+49 69 910-21548, sebastian-b.becker@db.com) Explanatory note on the calculation of cumulative interest savings: We calculated the hypothetical development of interest payments (i.e. of the budget balance) and public debt, as it would have taken effect if the implicit interest rate on government debt had remained constant (at its 2007 level of 4.2%) during the period 2008 and 2016. All remaining indicators – that have an effect on budgetary developments and debt dynamics (such as GDP growth, government revenue and government spending before interest payments) were considered in the above calculation at their actual figures. 0 10 20 30 40 50 60 90 95 00 05 10 15 20 25 30 35 40 45 50 55 60 Old dependency ratio 1st variant (population 65 and over to population 15 to 64 years) Old - age dependency ratio to rise strongly from the next decade 9 Sources: Eurostat, Deutsche Bank Research -1 0 1 2 3 4 5 12 13 14 15 16 17 18 19 20 21 Other expenditure* Social transfers Gross fixed capital formation Interest Subsidies Intermediate consumption Compensation of employees Total revenue Total expenditure According to the Stability Programme, public spending looks set to rise 2017 and 2018 stronger than revenues 10 Percentage change year - over - year and growth contributions in percentage points *Other current expenditure and other investment. Forecasts of spending and revenue are taken from the German Stability Programme (2017). Sources: Eurostat, AMECO, Federal Ministry of Finance, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 11 | August 8, 2017 Focus Germany The view from Berlin Asylum policy & refugee issues back on stage In the past few weeks the refugee and asylum policy has climbed up the political agenda in Germany again with SPD frontrunner Martin Schulz warning of a re- emergence of the refugee crisis. Furthermore, on 26 July, the European Court of Justice (ECJ) issued a judgment on the national responsibilities for refugee registration during the peak of the refugee crisis in autumn 2015. The ruling attracted much attention as it indirectly addressed Chancellor Merkel’s then liberal asylum policy, too. Referencing the situation in Italy, Martin Schulz recently warned of a renewed surge in migration to Germany similar to the influx in autumn 2015 when more than 600,000 people immigrated within a few months (H1 2017: 83,000). Schulz argued for more solidarity with Italy and stressed that all member states should participate in the refugee relocation system. In addition, the SPD frontrunner criticized Chancellor Merkel for her single-handed asylum policy at that time when she agreed to open the German boarders for Syrian refugees without consulting with the (neighboring) partner countries. Mr. Schulz‘ criticism, however seems to have backfired to a certain extent as (i) the SPD did not oppose the policy course back then and the more restrictive period following and he himself backed it as President of the EP and (ii) not only the Federal Government interpreted the ECJ’s judgment as an approval for Merkel’s policy. In a nutshell the court stated that even in that exceptional situation the member state responsible was the one where a person first entered the EU, i.e. that the Dublin Regulation could not be regarded as suspended. But the court added that in case of ‘an unusually large number of third-country nationals seeking international protection … in a spirit of solidarity’ other member states may ‘decide to examine applications for international protection lodged with them.’ Furthermore, according to the ECJ ‘an applicant for international protection must not be transferred to the member state responsible where that transfer entails a genuine risk that the person concerned may suffer inhuman or degrading treatment.’ With this sophisticated ruling the ECJ also did not back Merkel’s numerous critics – some even from her own camp – who deemed her liberal approach incompatible with EU law. On July 27, Martin Schulz visited Italy to learn more about the situation on site. Following a meeting with the Italian MP Paolo Gentiloni Schulz repeated his call for other member states’ solidarity with Italy. He stated that a situation like the one in Greece in autumn 2015 when tens of thousands of refugees arrived there must not evolve again (FAZ July 28). According to commentators Schulz wanted to demonstrate resoluteness and competence and to show that he takes care of problems before they escalate. At the same time his initiative might point to the CDU/CSU’s protracted internal difficulties to agree on a joint position to cope with the refugee question. However, meanwhile the Conservatives have largely settled the dispute. For quite a long time now the CDU has also advocated a more restrictive asylum policy, too, albeit Merkel’s party did not buy the CSU’s demand for an immigration upper limit of 200,000 people per year. The sister parties’ joint election platform states that they want to keep the number of new refugees low enough so that Germany could stick to its humanitarian duties with regards to resettlement and relocation. Also, with respect to their comments on the present situation both opponents did not differ substantially. Similar to Martin Schulz representatives from the CDU and the CSU have recently addressed Italy’s burden resulting from the relatively 0 50000 100000 150000 200000 Asylum applications Refugees** * First time applications; **until Dec. 2016 preliminary registrations in the EASY system which might include double count Asylum applications & registered refugees in Germany 1 Sources: BAMF, BMI 0 50000 100000 150000 200000 GR IT Source: UNHCR Sea arrivals in Italy and Greece 2 Refugees and migrants Cyclical boom no reason for fiscal complacency 12 | August 8, 2017 Focus Germany large number of sea arrivals (H1 83,840; H1 2016: 70,222; but July 2017 only 11,460 vs 23,254 in June 2017) and called for the European partners’ solidarity with Italy. Both camps also agree that solutions should be found on a European level, e.g. financial support for member countries which participate in the relocation and resettlement or sanctions for those which refuse to take responsibility. Nevertheless, asylum and refugee policy will remain a sensitive issue. In the past two years a clear majority of the Germans has frequently named it as the country’s most important problem. In the latest survey from July 23 (Forschungsgruppe Wahlen: ZDF Politbarometer) 49% of those asked did so (June 41%). Recently, serious crimes involving foreigners from conflict areas have attracted much public attention accompanied by populist reflexes. In particular, the AfD seems to be always prepared to try to leverage such reflexes. Chancellor Merkel is on vacation and did not participate in these debates so far. About two months ahead of the election day her popularity rating surpasses Martin Schulz‘ rating by about 30pps (69 vs 37 in the latest Infratest dimap ARD- DeutschlandTrend from early July) and 59% prefer Merkel as chancellor compared to only 30% for Schulz (ZDF Politbarometer from July 23). And according to the major surveys nearly 40% of the Germans would vote for the CDU/CSU if elections were held next Sunday. Thus, the Chancellor and her conservative camp enjoy the prospect of (nearly) repeating their strong result of the 2013 election (41.5% vs 33.8% in 2009). From the present point of view this would provide Angela Merkel with several options for forming a coalition after September 24: besides a renewed grand coalition which would be less likely in the event of such a strong CDU/CSU performance, a so-called Jamaica coalition with the FDP and the Greens, even alliances with each of these smaller parties might be possible. Barbara Böttcher (+49 69 910-31787, barbara.boettcher@db.com) Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) 0 10 20 30 40 50 60 70 80 90 Unemployment Economic situation Pensions Foreigners/Integration/Refugees Terror/War/Peace Euro/Financial crisis Disenchantment with politics Social inequalites Environment Most important problems in Germany 3 Max. 2 answers, percentage of those asked, % * From the federal election (September 22) onwards Source: Forschungsgruppe Wahlen: ZDF Politbarometer (July 23, 2017) 0 5 10 15 20 25 30 35 40 CDU/CSU SPD Greens FDP Left AfD Others * Average of major surveys (Allensbach, Infratest Dimap, Forsa, Forschungsgruppe Wahlen, TNS Emnid) Source: Wahlrecht.de Major political parties' popularity on the federal level* 4 Surveys published from mid - July to early - August 2017, % Cyclical boom no reason for fiscal complacency 13 | August 8, 2017 Focus Germany DB German Macro Surprise Index The DB German Macro Surprise Index compares published economic data with market forecasts and thus provides clues as to the direction of future forecast revisions. Updated by Sebastian Becker and Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) Source: Heiko Peters (2014). DB German Macro Surprise Index. Focus Germany, 4 August 2014. Last 20 published economic data for Germany DX Bloomberg Tickers Indicator Reporting month Publication date Current value Bloomberg consensus Surprise Standardised surprise Quantile rank GRIFPBUS IndexIFO Business Climate6 201726/06/2017115.2114.50.70.40.6 GRIMP95Y IndexImport Price Index (% yoy)5 201728/06/20174.14.6-0.5-0.10.4 GRFRIAMM IndexRetail Sales (% mom)5 201730/06/20170.50.30.20.40.7 GRUECHNG IndexUnemployment Change (000's mom)6 201730/06/20176.0-10.0-16.0-0.80.1 MPMIDEMA IndexMarkit Manufacturing PMI6 201703/07/201759.659.30.30.30.7 MPMIDESA IndexMarkit Services PMI6 201705/07/201754.053.70.30.40.7 GRIORTMM IndexFactory Orders (% mom)5 201706/07/20171.11.9-0.8-0.40.3 GRIPIMOM IndexIndustrial production (% mom)5 201707/07/20171.20.21.00.90.8 GRCAEU IndexCurrent Account Balance (EUR bn)5 201710/07/201717.315.41.90.20.6 GRCP20YY IndexCPI (% yoy)6 201713/07/20171.61.60.00.20.3 GRZEWI IndexZEW Survey Expectations7 201718/07/201717.518.0-0.50.00.5 GRZECURR IndexZEW Survey Current Situation7 201718/07/201786.488.0-1.6-0.40.3 GRIFPBUS IndexIFO Business Climate7 201725/07/2017116.0114.91.10.70.7 GRIMP95Y IndexImport Price Index (% yoy)6 201725/07/20172.52.9-0.40.00.4 GRCP20YY IndexCPI (% yoy)7 201728/07/20171.71.70.00.20.3 GRFRIAMM IndexRetail Sales (% mom)6 201731/07/20171.10.20.91.00.9 GRUECHNG IndexUnemployment Change (000's mom)7 201701/08/2017-8.0-5.03.0-0.10.5 MPMIDEMA IndexMarkit Manufacturing PMI7 201701/08/201758.158.3-0.2-0.20.3 MPMIDESA IndexMarkit Services PMI7 201703/08/201753.153.5-0.4-0.40.3 GRIORTMM IndexFactory Orders (% mom)6 201704/08/20171.00.50.50.20.6 Sources: Bloomberg Finance LP, Deutsche Bank Research -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 14151617 DB German Macro Surprise Index +/- 1 standard deviation DB German Macro Surprise Index Average of last 20 z-scores of data surprises Values above (below) 0 indicate the data came in better (worse) than expected Sources: Bloomberg Finance LP, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 14 | August 8, 2017 Focus Germany German Export Indicator The E xport Indicator identif ies the effects on German exports of changes in global demand on the one hand, and currency movements on the other (price impact) . 6 6 See for details Focus Germany, March 3, 2016. Cyclical boom no reason for fiscal complacency 15 | August 8, 2017 Focus Germany Germany: Events of economic, fiscal and euro politics Date Event Remarks Until 4 Sep Bundestag (German lower house), Berlin Summer recess. 7 Sep ECB Governing Council meeting, press conference We continue to expect a slow ECB exit. Specifically, we expect a decision to “slow and extend” QE – probably on October 26, with 7 September only a risk – with QE extended to mid - 2018 at a slower pace of EUR 40bn per month. 15 - 16 Sep Eurogroup and ECOFIN, Tallinn Thematic discussion on growth and jobs: economic resilience in EMU; (poss.) Greece – state of play. 24 Sep Federal election According to recent polls the CDU/CSU will come in as the strongest party by far. However, it is still open which parties will build the next coalition government. 9 - 10 Oct Eurogroup and ECOFIN, Luxembourg Debates on exchange rate developments, thematic discussion on growth and jobs – financing of labour tax cuts, (poss.) Portugal - Post Programme Surveillance – 6th review, Greece – state of play. 19 - 20 Oct European Council, Brussels (Poss.) Debates on the future of the EU and (poss.) on the Brexit negotiations. 26 Oct ECB Governing Council meeting, press conference We expect a pre - announcement of tapering. See above September 7 6 - 7 Nov Eurogroup and ECOFIN, Bruss e l s (Poss.) economic situation – Commission's 2017 autumn forecast and inflation developments. Thematic discussion on growth and jobs – QPF: Investment in human capital, among others. Source: Deutsche Bank Research Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Germany: Data calendar Date Time Data Reporting period DB forecast Last value 4 Aug 2017 8:00 New orders manufacturing (% mom, sa) June 0.8 1.0 7 Aug 2017 8:00 Industrial production (% mom, sa) June 1.5 1.2 8 Aug 2017 8:00 Trade balance (EUR bn, sa) June 20.5 20.3 8 Aug 2017 8:00 Merchandise exports (% mom, sa) June 1.2 1.5 8 Aug 2017 8:00 Merchandise imports (% mom, sa) June 1.3 1.3 15 Aug 2017 8:00 Real GDP (% qoq) Q2 2017 0.8 0.6 24 Aug 2017 9:30 Manufacturing PMI (Flash) August 58.0 58.1 24 Aug 2017 9:30 Services PMI (Flash) August 53.0 53.1 25 Aug 2017 8:00 Real GDP (% qoq) - Details Q2 2017 0.8 0.6 25 Aug 2017 10:30 ifo business climate (Index, sa) August 115.8 116.0 30 Aug 2017 14:00 Consumer prices preliminary (% yoy, nsa) August 1.8 1.7 31 Aug 2017 8:00 Retail sales (% mom, sa)* July 1.5 1.1 31 Aug 2017 09:55 Unemployment rate (%, sa) August 5.7 5.7 *An earlier data release may be possible due to the Federal Statistical Office. Sources: Deutsche Bank Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) Cyclical boom no reason for fiscal complacency 16 | August 8, 2017 Focus Germany Financial Forecasts DX US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 1.125 - 0.10 0.00 0.25 - 0.75 - 0.50 0.05 0.50 1.50 0.90 0.25 Dec 17 1.375 - 0.10 0.00 0.25 - 0.75 - 0.50 0.05 0.50 1.50 0.90 0.25 Mar 18 1.375 - 0.10 0.00 0.25 - 0.75 - 0.50 0.50 1.50 0.90 0.75 Jun 18 1.625 - 0.10 0.00 0.25 - 0.75 - 0.50 0.50 1.50 0.90 0.75 3M interest rates, % Current 1.31 0.08 - 0.34 0.29 Dec 17 1.58 0.05 - 0.30 0.40 Mar 18 1.58 0.05 - 0.30 0.40 Jun 18 1.83 0.05 - 0.30 0.40 10J government bonds yields, % Current 2.21 0.07 0.36 1.16 Dec 17 2.75 0.00 0.65 1.50 Mar 18 2.80 0.00 0.75 1.65 Jun 18 2.85 - 0.03 0.85 1.70 Exchange rates EUR/USD USD/JPY EUR/GBP GBP/USD EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK Current 1.19 110.10 0.90 1.32 1.15 9.61 7.44 9.38 4.26 303.74 25.96 Dec 17 1.17 116.00 0.91 1.29 1.05 9.50 7.46 9.75 4.10 310.00 26.00 Mar 18 1.18 117.00 0.92 1.28 1.06 9.38 7.46 9.69 4.20 312.50 25.93 Jun 18 1.19 118.00 0.93 1.28 1.08 9.25 7.46 9.63 4.28 315.00 25.85 Sources: Bloomberg Finance LP, Deutsche Bank Research Cyclical boom no reason for fiscal complacency 17 | August 8, 2017 Focus Germany German data monitor DX Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Business surveys and output Aggregate Ifo business climate 108.2 110.7 111.1 114.3 112.2 113.1 114.6 115.2 116.0 Ifo business expectations 102.4 105.5 104.2 106.2 105.4 105.2 106.5 106.8 107.3 Industry Ifo manufacturing 102.7 105.4 106.1 109.5 107.7 107.9 110.3 110.4 112.0 Headline IP (% pop) 0.2 0.0 1.2 0.2 0.7 1.2 Orders (% pop) 0.1 4.2 - 1.0 0.8 1.0 - 2.1 1.1 1.0 Capacity Utilisation 84.8 85.7 85.9 86.0 86.7 Construction Output (% pop) 1.7 - 1.4 4.7 2.7 - 0.7 - 0.5 Orders (% pop) - 4.6 8.2 0.4 - 0.4 0.4 - 6.6 Ifo construction 126.8 129.6 128.3 130.3 128.5 129.8 130.6 130.4 131.4 Consumer demand EC consumer survey - 2.5 - 1.5 - 0.6 3.6 0.2 2.8 3.1 5.0 5.2 Retail sales (% pop) 0.5 0.8 0.2 1.3 0.8 - 0.3 0.5 1.1 New car reg. (% yoy) 4.2 - 0.3 6.7 0.0 11.4 - 8.0 12.9 - 3.5 1.5 Foreign sector Foreign orders (% pop) 1.8 3.1 - 0.4 1.0 4.6 - 3.6 3.4 - 2.0 Exports (% pop) - 0.2 2.4 2.8 0.4 0.9 1.5 Imports (% pop) 1.7 3.5 3.6 2.0 1.2 1.3 Net trade (sa EUR bn) 61.2 60.1 59.9 19.8 19.8 20.3 Labour market Unemployment rate (%) 6.1 6.0 5.9 5.7 5.8 5.8 5.7 5.7 5.7 Change in unemployment (k) - 28.3 - 32.0 - 59.7 - 41.0 - 28.0 - 14.0 - 8.0 6.0 - 8.0 Employment (% yoy) 1.2 1.3 1.5 1.5 1.5 1.5 1.5 1.5 Ifo employment barometer 109.0 111.1 110.3 111.1 109.4 111.4 110.8 111.0 112.1 Prices, wages and costs Prices Harmonised CPI (% yoy) 0.4 1.0 1.9 1.6 1.5 2.0 1.4 1.5 1.5 Core HICP (% yoy) 1.1 1.2 1.0 1.4 0.9 1.6 1.1 1.5 Harmonised PPI (% yoy) - 1.7 0.2 2.8 2.8 3.1 3.4 2.8 2.4 Commodities, ex. Energy (% yoy) 2.9 19.2 32.7 8.9 26.3 16.5 8.3 2.0 2.7 Crude oil, Brent (USD/bbl) 46.6 51.1 54.5 50.8 52.6 53.8 51.4 47.6 49.1 52.1 Inflation expectations EC household survey 6.2 10.0 18.9 17.6 20.6 17.4 17.5 17.9 15.1 EC industrial survey 3.0 6.2 13.0 12.2 13.8 11.7 13.4 11.4 11.9 Unit labour cost (% yoy) Unit labour cost 1.8 2.3 1.1 Compensation 2.3 2.3 2.3 Hourly labour costs 2.4 3.4 0.8 Money (% yoy) M3 6.6 5.7 6.0 5.6 6.0 5.1 4.9 5.6 M3 trend (3m cma) 7.0 5.4 5.7 5.2 5.7 5.5 5.3 5.2 Credit - private 2.6 2.9 3.3 3.8 3.3 3.1 3.2 3.8 Credit - public - 0.1 8.9 21.0 4.1 21.0 11.5 9.9 4.1 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HW WI, ifo, Markit Focus G ermany Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E - mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Mai n Fax: +49 69 910 - 31877 E - m ail: marketing.dbr@db.com Available faster by E - mail: marketing.dbr@db.com  Cyclical boom no reason for fiscal complacency ........... August 7, 2017  Overheating risks are looming ................................ ............. July 7, 2017  Strong economy supports Merkel’s re - election chances ................................ .............. June 6, 2017  Positive signs ................................ ................................ ....... May 5, 2017  Investment: Public, residential – gradually picking up ................................ ............................ April 6, 2017  Growth and inflation leave ECB still unfazed .................. March 9, 2017  New SPD frontrunner unlikely to defeat Merkel .......... January 30 , 201 7  Outlook 2017: So lid, despite diminished tailwinds ................................ ................................ ... Dec ember 2 1 , 201 6  Subdued industry outlook dampens wage growth ................................ ................................ .......... October 28, 201 6  Difficult times for German savers ................................ .. October 2, 201 6  Low returns, political discontent – Germans explore riskier options ............................... September 2 , 201 6  ECB helps industry and boosts property prices ................................ ................................ ................. July 27 , 201 6  German consumer vs Brexit ................................ ................ July 4 , 201 6  Growth and fiscal outlook: Risks remain ............................ June 3, 2016  How to pay for retirement? ................................ ................ May 12 , 201 6  Solid growth but difficulties for exports and construction ................................ .................... April 4 , 201 6  German growth after oil, EUR and ECB ...................... February 2, 201 5  Outlook 2015: Recovery with risks attached ................. January 6 , 201 5  Case for higher investment in infrastructure – despite questionable “gap analysis” ( Standpunkt Deutschland ) ................................ ......... December 5 , 201 4  Focus Germany: Structural downshift in global trade burdens growth outlook (Current Issues – Business cycle) ............................. December 2, 201 4  Konzept Issue 01 ( Konzept ) ................................ ................................ . November 25 , 201 4  New growth opportunities for Germany's engineering sector: Technology leadership and outward investment (Current Issues – Sector research) ......................... November 13, 201 4  Focus Germany: Further disappointments ( Current Issues – Business cycle ) ............................. N ovember 5 , 201 4 © Copyright 2017. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. 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