Eric Heymann

The month of June was marked by various political irritations which of course also had a certain impact on economies and markets. The US-EU trade conflicts seems set to broaden beyond steel and aluminium. The threat of imposing tariffs on US car imports will be felt particularly in the export-driven German car industry which already has to deal with stricter regulations and a cyclical slowdown in important export markets. On the domestic front, the German retail sector is facing ongoing structural change due to digitalisation. The German government crisis between the CDU and the Bavarian CSU over the course of the asylum policy is still not settled despite the rather constructive outcome of the EU summit. The various party bodies will convene and later on Monday there will be another meeting between Chancellor Merkel and Interior Minister Seehofer. In view of the factors weighing on economic sentiment, we consider our recent adjustment of our annual GDP growth forecast from 2.3% to 2% to be justified. [more]

At 0.3% qoq, German GDP growth in the first quarter of 2018 slowed markedly compared with 2017, when GDP rose by an average of 0.7% per quarter. Whilst this was partially attributable to temporary factors, the large number of vacancies is gradually becoming a stumbling block for the German economy. Manufacturing, in particular, has been hard hit of late, with the number of job openings in the first quarter of 2018 up by 38% on the same period a year earlier. [more]

Developments in artificial intelligence and robotics have far-reaching economic and sociopolitical consequences, with some of them already materialising today. Still, the implications of further progress in these fields are not well understood. Economies around the world are likely to be impacted differently by the diffusion of AI technologies and robotics as wealthy industrial countries might increasingly “re-shore” production. To forge ahead and maximise the benefits for economies and societies, a balance needs to be found globally between successfully promoting key technologies and industries and avoiding the risk of rising protectionism and "knowledge wars". As the pace of technological change and the related launch of new business models are unlikely to slow, the ability of the state and regulators to keep pace is challenged. [more]

Weaker recent data – too early to throw in the towel, but 2018 GDP forecast cut to 2%. Although German Q1 GDP growth now looks like reaching around ¼% qoq, we still expect some positive payback in Q2, as some temporary factors depressing activity should disappear. Corporate investment spending will be key for growth in the remainder of the year. Unfortunately, signals from proxy indicators have become somewhat mixed recently too. Notwithstanding a likely, albeit limited, Q2 rebound in activity, the strong drop in the expectations' component of the ifo business climate suggests that we have probably passed the peak in qoq growth rates in the current cycle. Due to the weaker Q1 we have lowered our GDP forecast for 2018 from 2.3% to 2.0%. (Also included in this issue: industrial producer and import prices, labour migration, fiscal policy) [more]

In 2017, Germany ran a trade surplus of around EUR 50 bn with the US. Exports came to roughly EUR 111 bn, compared with imports of around EUR 61 bn. It was the second-largest surplus in German-US merchandise trade. Relative to 2011, Germany’s trade surplus with the US roughly doubled. [more]

In 2017, Germany’s goods exports rose 6.2% in nominal terms, and the trade surplus was the second highest ever. In particular, exports to China and the Netherlands increased considerably. US comments on free trade have caused irritation recently and dampened the outlook for German exports, even though the EU (and, consequently, Germany) have so far been exempted from higher US import tariffs. German capital goods producers and pharmaceuticals companies would be hit hardest by a trade dispute, as the export ratios of these sectors are particularly high. Moreover, the US are an important market for them. (Also included in this issue: rental inflation, fiscal outlook 2018/19, Merkel's fourth legislative period) [more]

Nitrogen oxides emissions (NOx) in Germany plunged by 44% between 1995 and 2016. Road traffic recorded the sharpest decline (-62%). After the decision of the Federal Administrative Court in Leipzig, however, certain diesel vehicles can be banned from inner cities. Apparently, there is a conflict of interests between the human right to clean ambient air and the protection of diesel car owners against an erosion of their vehicles‘ value. In our view, this conflict could be resolved over time. To this end, policymakers could, for instance, introduce a Blue Badge for low-emission diesel passenger cars, which is tied to a transitional period for older vehicles. [more]

From the start, the negotiations were ill-fated. To begin with, the SPD leadership rejected a revival of the grand coalition (Groko). Then, the partly diametrically opposed interests of the parties involved, seemingly abundant financial scope and a lack of interest in fundamental reforms on the part of the German population led to a – in many areas – mixed bag of measures which, on balance, aims to further increase governmental control of the business sector and society at the expense of individual freedom. However, at present, the predominant feeling is relief that Germany now has a “decent“ government. But not only the coalition partners may soon wonder whether the price is too high. [more]

German manufacturing industry ought to be at the peak in the current cycle. Domestic production in 2017 edged up by 3% in price-adjusted terms, which marks the strongest increase since 2011. At the same time, producer prices (+2.3%) also recorded the sharpest increase since 2011. Although industrial order intake continues to be very dynamic, several factors, including the strong euro and the recent slight dip in business expectations, suggest that growth momentum is likely to slow in the course of 2018. Against this backdrop, German industrial production looks set to rise by 2.5% in 2018. In the face of high wage settlements and plans to lower the limit on fixed-term contracts, German companies are likely to create fewer new jobs. [more]

With a growth rate of probably 2.3% in 2017, Germany delivered the main positive surprise in the industrial world. In 2018, German GDP looks set to expand by 2.3% again. If this forecast materialises, Germany will grow at an above-potential rate for the fifth year in a row. The upcoming wage round and resilient demand combined with the global decline in free capacities might, however, push up prices more strongly than currently expected. We already voiced concerns ahead of the Bundestag elections that the new government (just like its predecessor) might not pay sufficient attention to urgent challenges such as digitalisation, demographics and globalisation as the labour market situation is favourable. Now that forming a government has turned out to be unexpectedly difficult our concerns have increased. [more]

The EU Commission proposed new mandatory CO₂ targets for passenger cars. These targets cannot be achieved with combustion engines alone. Stricter regulation thus enforces the electrification of the power train. However, the average car buyer currently does not play to the tune of regulatory policy and turns a cold shoulder on most alternative fuels. There are other climate policy instruments that outperform the CO₂ targets for passenger cars in terms of meeting the environmental targets and economic efficiency. [more]

Between 1990 and 2016, Germany reduced its greenhouse gas emissions (GHG emissions) by 27.6%. Excluding the significant downtrend in the first few years after the German reunification, GHG emissions still declined by more than 19% between 1995 and 2016. This is a considerable success, particularly in an international comparison. After all, global energy-related carbon emissions increased by more than 50% during the same period. [more]