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February 6, 2018
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The economy continues to steam ahead, with quarterly GDP growth of 0.5% qoq in the winter half. A tight labour market and swelling order books are boosting the union's bargaining power so they are pushing hard for higher wages, although increases might fall short of expectations among workers and the ECB tower. Meanwhile in Berlin, Groko hopefuls are spending Germany's fiscal surpluses, seemingly unconcerned with demographic challenges and the fact that record low interest rates and above potential growth will not last. This party will likely go on for some time - maybe even a few years. However, the situation feels increasingly reminiscent of carnival revellers' popular song "Am Aschermittwoch ist alles vorbei" (It's all over on Ash Wednesday). [more]
Focus Germany The economy continues to steam ahead, with quarterly GDP growth of 0.5% qoq in the winter half . A tight labour market and swelling order books are boosting the unions’ bargaining power so they are pushing hard for higher wages, although increases might fall short of expectations among workers and the ECB tower. Meanwhile, in Berlin, Groko hopefuls are spending Germany’s fiscal surpluses, seemingly unconcerned with demographic challenges and the fact that record-low interest rates and above-potential growth will not last. This party will probably go on for some time – maybe even a few years. However, the situation feels increasingly reminiscent of carnival revellers’ popular song “Am Aschermittwoch ist alles vorbei” (It’s all over on Ash Wednesday). Germany enjoys a solid start to 2018. Recording growth of 2.2% in 2017 (2016: 1.9%), the German economy expanded for the eighth consecutive year. Private consumption was supported by strong income and employment growth. Moreover, the recovery of global trade provided a lift to export demand. This resulted in rising capacity utilisation and hence higher investment in machinery and equipment. For the fourth quarter of 2017, we expect GDP growth of 0.5%. Whilst retail sales were flat on the previous quarter, industrial production was up sharply despite a negative “bridge day” effect in October. Thanks to the solid underlying dynamics, Germany has enjoyed a good start to 2018. This is reflected in industrial order intake, the robust labour market and consumer and business sentiment indicators. German wage round – approaching its first peak. IGM has started “24h-token strikes” to increase pressure ahead of the 6 th round of talks. The crunch point remains IGM’s insistence on a partial subsidy in case employees want to temporarily reduce their weekly working hours to 28. Despite the intensification of the dispute, there still seems to be willingness on both sides to avoid a collapse; both have signalled their intention to return to the negotiating table after Friday, when the current wave of strikes ends. Improved offers by metal employers and VW support our long-held view that pay increases could be clearly north of 3%. Groko formation on the home stretch: Concerns over SPD members’ verdict. After surprisingly fast negotiations in the past few days, the CDU, the CSU and the SPD appear to be on the verge of agreeing on a draft coalition treaty. But SPD leader Schulz will have to go extra miles to enlist his party members’ support in the imminent membership ballot. Despite mixed public sentiment and the critical SPD youth organisation’s No campaign, the most likely scenario seems to be a positive result, as in the negotiations the CDU/CSU has accommodated some of the SPD members’ key requests. Angela Merkel’s re- election could be carried out by early March – i.e. in time for the next official European Council meeting. Should the members’ ballot fail, Germany seems very likely to go for new elections. Authors Barbara Böttcher +49 69 910-31787 barbara.boettcher@db.com Dieter Bräuninger +49 69 910-31708 dieter.braeuninger@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 Germany enjoys a solid start into 2018 .........3 German wage round – approaching its first peak .........................................................5 Groko formation on the home stretch: concerns over SPD members’ verdict ...........8 DB German Macro Surprise Index ..............10 Export Indicator ............................................11 Event calendar .............................................12 Data calendar ...............................................12 Financial forecasts .......................................13 Data monitor .................................................14 February 6, 2018 German economy: It is party time German economy: It is party time 2 | February 6, 2018 Focus Germany Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F Euroland 2.3 2.3 1.7 1.5 1.4 1.5 3.3 2.7 2.1 -1.1 -0.9 -1.0 Germany 2.2 2.3 1.8 1.8 1.6 1.8 7.2 6.5 6.5 1.2 0.8 0.5 France 1.8 2.0 1.6 1.2 1.3 1.4 -0.8 -0.6 -0.6 -2.9 -2.7 -2.9 Italy 1.6 1.4 1.0 1.3 1.0 1.5 2.9 2.8 2.6 -2.1 -1.9 -1.8 Spain 3.1 2.9 2.3 2.0 1.5 1.6 1.8 1.7 1.6 -3.1 -2.2 -1.6 Netherlands 3.0 2.5 2.4 1.3 1.6 1.9 10.2 10.2 10.1 1.1 0.5 0.4 Belgium 1.8 2.2 1.7 2.2 1.6 1.7 -1.0 -0.7 -1.0 -1.8 -1.5 -1.5 Austria 2.8 2.5 2.3 2.2 2.0 1.7 2.2 2.5 2.8 -0.9 -0.7 -0.5 Finland 2.9 2.6 2.1 0.9 1.2 1.6 -1.0 0.0 0.5 -1.2 -1.0 -0.8 Greece 1.2 3.0 2.2 1.2 0.7 1.1 -1.0 -0.5 0.0 -1.6 0.0 1.0 Portugal 2.6 2.0 1.5 1.6 1.2 1.5 0.2 0.0 0.0 -1.4 -1.2 -1.2 Ireland 4.1 4.0 3.2 0.3 1.0 1.2 3.8 3.5 3.0 0.1 0.1 -0.4 UK 1.8 1.0 1.4 2.7 2.5 2.3 -4.5 -4.0 -3.5 -2.5 -2.1 -1.4 Denmark 2.1 2.0 1.9 1.1 1.6 1.6 7.5 7.5 7.0 -1.0 -0.5 -0.5 Norway 1.8 2.2 2.0 1.9 1.9 1.8 6.0 6.0 5.5 3.5 4.0 5.0 Sweden 3.0 2.7 2.5 1.8 2.0 2.2 5.0 4.5 4.0 1.0 1.0 0.5 Switzerland 0.9 2.1 1.8 0.5 0.3 0.7 10.5 10.6 11.0 0.3 0.3 0.2 Czech Republic 4.4 3.4 3.0 2.5 2.4 2.2 0.6 0.4 1.0 1.0 0.8 1.1 Hungary 3.9 3.5 3.1 2.3 2.5 2.9 4.2 3.4 2.9 -2.0 -2.4 -2.3 Poland 4.5 3.8 3.5 2.0 2.2 2.9 -1.3 -1.4 -1.2 -2.1 -2.4 -2.8 United States 2.3 2.7 2.3 2.1 2.1 2.1 -2.9 -3.2 -3.5 -3.6 -2.8 -3.2 Japan 1.8 1.2 0.8 0.5 0.4 0.8 4.1 4.6 4.5 -3.7 -3.2 -2.8 China 6.9 6.3 6.3 1.6 2.7 2.4 1.2 0.8 0.6 -3.7 -4.0 -4.0 World 3.8 3.9 3.8 2.9 3.3 3.0 *Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepancies compared to other DB publications. Sources: National Authorities, Deutsche Bank Forecasts: German GDP growth by components, % qoq, annual data % yoy 1 2018 2019 2016 2017F 2018F 2019F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F Real GDP 1.9 2.2 2.3 1.8 0.5 0.6 0.5 0.5 0.4 0.4 0.4 0.4 Private consumption 2.1 2.0 1.8 1.5 0.4 0.6 0.5 0.5 0.3 0.4 0.3 0.2 Gov't expenditure 3.7 1.4 1.0 1.0 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Fixed investment 3.1 3.0 3.7 3.6 1.0 1.0 1.0 0.8 1.0 0.9 0.9 0.8 Investment in M&E 2.2 3.5 5.1 3.1 1.0 1.0 1.0 0.5 1.0 0.7 0.7 0.5 Construction 2.7 2.6 4.0 4.9 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Inventories, pp -0.2 0.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Exports 2.6 4.7 4.8 4.5 1.2 1.2 1.2 1.2 1.1 1.0 1.0 1.2 Imports 3.9 5.2 5.2 5.1 1.3 1.4 1.4 1.4 1.2 1.2 1.1 1.2 Net exports, pp -0.3 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 Consumer prices* 0.5 1.8 1.6 1.8 Unemployment rate, % 6.1 5.7 5.3 5.3 Industrial production 1.4 3.0 1.8 1.5 Budget balance, % GDP 0.8 1.2 0.8 0.5 Public debt, % GDP 68.1 64.4 60.9 58.1 Balance on current account, % GDP 8.4 7.2 6.5 6.5 Balance on current account, EUR bn 262.6 232.0 212 214 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research German economy: It is party time 3 | February 6, 2018 Focus Germany Germany enjoys a solid start to 2018 — Recording growth of 2.2% in 2017 (2016: 1.9%), the German economy expanded for the eighth consecutive year. In calendar-adjusted terms, growth was up by as much as 2.5%, as there were three fewer working days than in 2016. — Robust and broad-based domestic demand remained the key driver. Private consumption was supported by strong income and employment growth. Moreover, the recovery of global trade provided a lift to export demand. This resulted in rising capacity utilisation and hence higher investment in machinery and equipment. — For the fourth quarter of 2017, we expect GDP growth of 0.5%. Whilst retail sales were flat on the previous quarter, industrial production was up sharply despite a negative “bridge day” effect in October. — Thanks to the solid underlying dynamics, Germany enjoyed a good start to 2018. This is reflected in industrial order intake, the robust labour market and in consumer and business sentiment indicators. GDP growth in 2017 broad-based According to initial calculations of the Federal Statistical Office, the German economy expanded by 2.2% in 2017. In calendar-adjusted terms, growth was even up by as much as 2.5%. The expansion was broad-based, with all major GDP components recording positive results. Private consumption (+2.0%) and gross fixed investment (+3.0%), in particular, contributed to GDP growth. At 2.6%, construction investment rose more or less by the same rate as in the previous year, whereas investment in machinery and equipment picked up visibly to 3.5%. Due to the lower number of refugees, government spending decelerated, up only 1.4 %. On balance, domestic demand edged up by 2.1%. Net exports contributed 0.2 %-points to GDP growth. Employment and income Thanks to the flourishing labour market, nominal disposable income rose by 3.9%. In real terms, it increased by 2.1%, given consumer inflation of 1.8%. Gross wages in 2017 were up by 4.4%, driven by a 2.7% increase in gross wages per employee to EUR 2,861 a month and 1.7% employment growth. Productivity per hour worked inched up by 1% in 2017. Average compensation, per employee and per hour worked, rose by 2.5%, well above productivity growth. As a consequence, unit labour cost advanced by 1.5% (per hours) resp. 1.8% (per persons), which weighed on the profitability of the business sector. The gradual narrowing of the gap versus the other larger EMU countries, which started after the crisis, has therefore continued. But when 2000 is taken as a base year, Germany still enjoys a substantially more modest ULC rise than most EMU peripherals. Q4 2017 likely expanded by 0.5% When publishing initial German GDP results for 2017, the Federal Statistical Office provided neither growth rates nor details for the fourth quarter. Final- quarter data and the revisions to the initial results for 2017 are due to be released on 14 February, followed by details on 23 February. Monthly economic data and sentiment indicators suggest that the German economy expanded at a Germany: Economic forecast 3 (% yoy, unless stated) 2016 2017F 2018F Real GDP 1.9 2.2 2.3 Private consumption 2.1 2.0 1.8 Gov't expenditure 3.7 1.4 1.0 Fixed investment 3.1 3.0 3.7 Investment in M&E 2.2 3.5 5.1 Construction 2.7 2.6 4.0 Inventories, pp -0.2 0.1 0.3 Exports 2.6 4.7 4.8 Imports 3.9 5.2 5.2 Net exports, pp -0.3 0.2 0.2 HICP 0.4 1.7 1.6 Public debt, % GDP 68.3 64.9 61.3 Unemployment rate, % 6.1 5.7 5.4 Budget balance, % GDP 0.8 1.2 0.8 Balance on current account, % GDP 8.4 7.2 6.5 Sources: Federal Statistical Office, Deutsche Bank Research – 8.0 – 6.0 – 4.0 – 2.0 0.0 2.0 4.0 6.0 99 02 05 08 11 14 17 Strong GDP growth for fourth year in a row 1 Real, % yoy Source: Federal Statistical Office -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 13 14 15 16 17 Rest Net-trade Construction Invest. in machinery & equip. Private consumption Sources: Federal Statistical Office, Deutsche Bank Research Growth contributions to yoy real GDP growth, pp Private consumption contributing half of GDP growth in 2017 2 German economy: It is party time 4 | February 6, 2018 Focus Germany robust rate of 0.5% in the final quarter of 2017, which would mark a slight slowdown following the particularly strong expansion in Q3 (0.8%). But we believe risks are slightly tilted to the upside, as indicated by our survey-based GDP models. Industrial production in October declined slightly, also due to two nationwide “bridge days”. Manufacturing output on such a day is, on average, around one- third lower than on a normal working day. But, as experience shows, the effect is smaller in months with two “bridge days”, because only one of the days is usually used for a long weekend. 1 After slipping slightly in October, industrial production gathered steam in November, recording a strong month-over-month increase of 4.3%. The PMIs point to further production gains in December. The Manufacturing PMI, for instance, marked an all-time high of 63.3 and, at 58.8, the Composite PMI was close to its 80-month high of 58.9. Incoming orders paint a similar picture, with average order intake in October and November up by around 2.7% on the third quarter. Robust growth was driven by domestic orders, but also by rising demand from the euro area and the non- EMU countries. Moreover, upbeat business sentiment was supported by favourable weather conditions. According to the recent release of the IAB Institute for Employment Research, there were no negative weather impacts on employment in Q4. On the demand side, private consumption looks set to have risen slightly in the final quarter, following a minimal dip in Q3. Domestic capital goods orders and business surveys at all-time highs suggest that investment activity will remain dynamic. At the same time, German export activity is supported by the ongoing recovery in the euro area and the upturn of global trade, which helps to mitigate the adverse effects of the recent euro appreciation. This is also reflected in the December survey on ifo export expectations. Though falling slightly to 19.9 (Nov: 21) balance points, they remain at elevated levels. Overall, German industry expects export growth to continue, albeit at a slower pace. On balance, recent sentiment indicators suggest that strong growth momentum was maintained in the first weeks of the year. Recovering its moderate December losses in January, the ifo business climate was back at its all-time high of November. The PMI indices underscore this picture. At the beginning of the year, the Composite PMI is only 0.1 point below its December 80-month high of 58.9. The final readings of the January PMI indices underline this picture. For Q1 2018, we therefore also reckon with GDP growth of around 0.5%. From the German perspective, the first quarter of 2018 will be dominated by the formation of the new government and the wage negotiations in metal and electrical engineering industry (in progress), the public sector and construction industry (both start this month). Both events should at least not have a growth- dampening effect in the short term and could even further strengthen the cycle. In the current grand coalition negotiations, however, Germany’s competitiveness is, at best, being treated indirectly, for instance in infrastructure investment plans. More directly, companies in Germany will be burdened by the adverse effects of rising health insurance contributions and further labour market regulation, whilst, at the same time, massive corporate tax cuts on the other side of the Atlantic are luring foreign direct investment. Marc Schattenberg (+49 69 910-31875, marc.schattenberg@db.com) 1 See. Deutsche Bundesbank, Calendar effects on economic activity, monthly report, December 2012, pp. 53 -63. 90 110 130 150 00 02 04 06 08 10 12 14 16 DE ES FR IT NL US Unit labour costs 4 2000=100 Source: OECD -30 -20 -10 0 10 20 30 40 95 97 99 01 03 05 07 09 11 13 15 17 Government Private Total Machinery & equipment investment, % yoy Private sector investment in equipment is catching up 5 Source: Federal Statistical Office -4 -3 -2 -1 0 1 2 -40 -30 -20 -10 0 10 20 08 09 10 11 12 13 14 15 16 17 Investment M&E (left) Domestic investment goods orders ex. transport equipment ** (left) ifo export expectations* (right) PMI*, new export orders (right) *Lead of * 2Q * *1Q % yoy (left), standardised values (right) Sources: ifo, IHS Markit, Federal Statistical Office, Deutsche Bank Research Increase in equipment investment expected 6 German economy: It is party time 5 | February 6, 2018 Focus Germany German wage round – approaching its first peaks — IGM has started “24h-token strikes” to increase pressure ahead of the 6 th round of talks. The crunch point remains IGM’s insistence on a partial subsidy in case employees want to temporarily reduce their weekly working hours to 28. — Despite the intensification of the dispute, there still seems to be a willingness on both sides to avoid a collapse; both have signaled their intention to return to the negotiating table after Friday, when the current wave of strikes ends. — Improved offers by metal employers and VW support our long-held view that pay increases could be clearly north of 3%. Unions enjoy higher bargaining power compared to previous years The decentralized nature of the wage talks makes it hard to keep track. In principle there are still parallel talks in seven different regions, covering the whole of Germany, but it seems clear that both sides are trying to find a solution in Baden-Württemberg (South-West), which could then be adopted by the other regions. We have argued that this wage round could turn out to be quite difficult given the tight labour market in general and the excellent demand situation in the metal industry in particular. This suggests relatively high settlements compared to the sector’s old contract, which expired at the turn of the year (it had a duration of 21 months with a 2.8% increase in the first period followed by another 2% increase in April 2017). Altogether the annual increases amounted to 2.14% for 2016 and 2.67% in 2017. Collective wage increases in the overall economy were 2.1% in 2017 (on a monthly basis). IGM’s request for an individual option to cut working hours to 28 increases complexity Matters have been complicated further by IGM (the metal sector union) demanding an option to reduce individual weekly hours to 28 for up to two years, with a EUR 200 monthly subsidy from employers if hours are reduced to take care of a child or a close relative. The employers’ association has flatly rejected this request on the basis of surging demand with production already impaired by the lack of qualified labour. Moreover, the association has commissioned legal expertise, which argues that such a subsidy would be illegal given the resulting preferential treatment of employees who get reduced hours under such a contract compared to those who are already working reduced hours and are not entitled to the EUR 200 monthly subsidy. Although it is unclear whether this assessment would hold up in court, the impression is that IGM may be having second thoughts about its own demand – especially since the work forces in some SMEs do apparently consider such a measure detrimental to their company under current circumstances. Watch negotiations in the south-west We still do not expect that employers will agree to subsidise lower working hours. But we expect them to improve their wage offer further in exchange for more symmetric working-time flexibility. During the 5 th round of talks, they improved on their initial wage offer (2% plus a lump-sum payment) offering a 5.5 6.0 6.5 7.0 7.5 300 400 500 600 700 800 900 11 12 13 14 15 16 17 18 Vacancies (left) Unemployment rate, inverse, right Source: Deutsche Bundesbank Thou. ratio Labour market: Approaching full - employment 1 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 95 99 03 07 11 15 Effective pay Unemployment rate, inverse, right German Phillips curve: Shaping up? 2 Sources: Deutsche Bundesbank, Deutsche Bank Research % % German economy: It is party time 6 | February 6, 2018 Focus Germany 6.8% pay rise spread over 27 months. In a similar vein, VW – which traditionally has company-specific wage settlements – has beefed up its offer (3.5% starting in May, plus 2% in May 2019, with the whole contract running for 30 months, translating into annual increases of roughly 3% in 2018 and 2.5% in 2019). We still believe that the final deal for the metal sector could be much shorter; perhaps close to 4% and running slightly more than 12 months so that employers could argue that the actual (annual) increase remains clearly below the 4% threshold. Employers could alternatively offer a relatively high one-off payment, which would have the additional appeal of not lifting the basis for future wages. Such an agreement might be reached in February, as works council elections loom. IGM officials might be keen to have a settlement by then, which could add to their election chances. And if not? Wage talks tend to develop their own internal dynamics and may – despite the first positive signs of a solution – still hit a wall: That would mean that talks are declared failed by the unions. This would likely be followed by a strike vote among union members, which – if successful – could lead to fully fledged strikes. The last time such a scenario unfolded was in 2003. However, given the overall very cooperative stance of industrial partners in Germany, we see the likelihood of such a scenario as clearly below even. Other sectors? Watch construction! In 2018 wage contracts for close to 10m employees are up for renewal, i.e. about ¼ of all employed persons in the country. Besides the metal sector (3.9m), there are two other heavyweights – the public sector (2.7m) and the construction sector (0.7m) – where contracts expire by the end of February. The construction sector is running quite hot at the moment. There are reports that orders for renovations are no longer being taken by some companies, given the high demand for more lucrative new developments. There is anecdotal evidence that companies have started to offer iPads or even company cars to young people to win them for an apprenticeship. Against this backdrop, the union’s initial claim of a 6% pay increase and a fully fledged 13 th month salary looks almost modest. However, such an increase (13 th month salary) would add about another 4pp to the claim in the west. In the east it could add more than 8% in extreme cases, where so far not even partial payments for a 13 th month’s salary exist. IG Bau, the construction sector union, is also requesting that daily commute time to construction sites is counted as working hours. This could in extreme cases add almost 10% to the wage bill. The current basic agreement includes some (modest) compensation for commuting costs. Since the basic wage agreement (Manteltarifvertrag) can only be terminated by the end of the year, it seems unlikely that this issue will be dealt with in the upcoming pay round. In contrast to the metal sector’s regional approach, the construction sector has only one centralized bargaining process, which negotiates one joint contract for the construction industry and the building craft for the whole of Germany. The first round of talks will take place on February 7 th in Wiesbaden. A second round has been tentatively set for the end of February. The last wage round in 2016 kicked off with an initial claim of 5.9% and ultimately yielded pay increases (2016/2017) of 2.4% / 2.3% in the west and 2.9% / 2.4% in the east. The pay gap that still exists between east and west – currently 7% in comparisons between pay groups (but closer to 20% when the different grouping of workers in the east and the west is taken into account) – could be another crunch point, 20 25 30 35 40 45 50 55 60 65 70 00 02 04 06 08 10 12 14 16 18 Delivery times Order backlog Index, Manufacturing Signs of capacity constraints 3 Source: IHS Markit -2 0 2 4 6 8 10 12 14 16 70 80 90 100 110 120 130 140 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16 Business climate, left Lack of labour, right Construction sector: Booming 4 Source: ifo Index 2005 = 100 balance German economy: It is party time 7 | February 6, 2018 Focus Germany given the agreed aim to equalize pay by 2021, which would require that pay increases in the east be distinctively higher. While considerations of competitive position in world markets and likely the worry that employers shift production out of Germany in case of excessive settlements help to keep a lid on workers’ expectations in the metal sector, such considerations hardly matter in the construction sector. Hence workers’ expectations are probably running quite hot, too. Thus, we believe the risk that things reach a point such that even arbitration will not work is clearly higher in the construction sector than in the metal sector. In such a scenario, fully fledged strikes could probably start by the end of March. Public sector – Focus should be on pay Talks in the public sector (for employees at the federal level and in municipalities) will start on February 26 th (rounds 2 and 3 are planned for mid- February and mid- April). The public sector union ver.di will decide upon its wage claim on February 8 th . First discussions in the union’s committees point to demands of a 6% pay rise, as in the private sector. Of course, the current high fiscal surpluses are grist to ver.di’s mill, although the situation is quite heterogeneous across individual cities and municipalities. The final stage of the expiring two-year contract saw a 2.35% pay rise in February 2017. Public employees at the Länder level – who have separate wage negotiations – got a 2.35% pay raise at the beginning of the year, part of a deal struck back in February 2017. It seems that in the public sector, the discussion will focus mainly on a pay increase. But the debate about temporary employment – one of the last contentious issues for the formation of a Groko – revealed that temporary employment is actually more common in the public (7.4% of all contracts) than in the private sector (6.7%), which might bring this topic onto the agenda of the upcoming wage talks. What about overall wage growth? One likely explanation for the still rather modest pay demands (in the context of the current macro backdrop) of 6% – besides the above-discussed issues of the 28h option in metal or the 13 th month salary in construction – is that many companies are already paying above the collectively agreed wage level to retain qualified workers. Aside from strong anecdotal evidence, this can been seen in the increasing wage drift (the gap between collective wage increases and the wages and salaries that employees are actually receiving). In Q3 2017 the gap stood at 0.8 pp. Based on the wage increases for 2018 in contracts already agreed last year, and assuming that in the service sector (with lower productivity growth) settlements will probably end up more modest than in the booming metal industry, the overall increase in collective wages will probably remain slightly below 3% in 2018. By contrast, effective wages (wages and salaries per employee), which determine companies’ cost basis as well as consumers’ income levels, could increase by around 4%. Given that Germany accounts for 29.1% of EMU GDP (and that wages are gradually rising in the rest of EMU too) this supports our view that EMU core inflation will gradually increase and allow the ECB to exit QE by the end of the year, despite Bundesbank research showing that the pass-through of higher wages to prices is less than 50% in Germany. Stefan Schneider (+49 69 910-31790, stefan-b.schneider@db.com) 10 15 20 25 30 35 40 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Full-time Part time Total Part time workers in % total 2017 = Q1 to Q3 Average weekly working hours 5 Source: IAB hours 1.0 1.5 2.0 2.5 3.0 3.5 13 14 15 16 17 Collective wages (monthly basis) Wages & salaries per employee Germany: W age drift 6 % yoy Source: Deutsche Bundesbank German economy: It is party time 8 | February 6, 2018 Focus Germany Groko formation on the home stretch: Concerns over SPD members’ verdict Following about a week of intense meetings, coalition negotiations among the CDU, the CSU and the SPD have already reached their final state. The negotiations should end on February 6, the start of the carnival peak season, at the latest. The three parties will then present the draft of their joint coalition treaty. But that is only a stage victory. They will have to wait for the outcome of the SPD membership ballot, which will decide on the treaty and thus on the formation of a renewed Groko. This postal ballot will take two or three weeks. Thus, in a reasonable timeline, Angela Merkel’s re-election as Chancellor could be scheduled for early March – i.e. before the next meeting of the European Council on March 22 to 23. The past days’ speedy negotiations are surprising. Only a fortnight ago, the debates at the SPD party convention hinted at lengthy proceedings. There, the delegates criticised the result of the previous exploratory talks, i.e. the basis for the present negotiations and they called for corrections especially in the fields of asylum, labour market, and health policy. Finally, with these reservations only a relatively thin majority (56%) of the delegates voted for their party’s participation in official negotiations with the CDU/CSU. These additional requests have complicated matters. While some SPD grandees have requested substantial corrections, CDU and CSU representatives have rejected modifications of the basic agreement altogether. However, options for a compromise emerged soon. A case in point was the CDU/CSU’s increased willingness to accommodate requests important to SPD members, e.g. enhanced benefits from the statutory health insurance scheme (reduced appointment waiting times for scheme members). On the other hand, the SPD no longer insisted on major corrections of the original compromise on asylum policy which provided for a limit of refugee immigration (max. 220,000 per year) and restrictive rules for family reunification (max. 1,000 per month plus hardship cases). When the media reported last Tuesday that the SPD has widely accepted this key CSU project, it was clear that the negotiators had achieved a breakthrough. So far, little detail is known beyond the principal points stipulated in the exploratory talks and the outline of the compromises on the SPD’s additional requests. Notwithstanding these modifications and (possibly) further clarifications, especially with regard to European policy issues, the final treaty will most likely primarily reflect the political projects and priorities already known. This means a forthcoming Groko is likely to widely use the current fiscal headroom to finance a further rise of social expenditures, to promote infrastructure investment (esp. on digitalisation, education and transportation) and to provide tax relief for low- and middle-income earners. We expect that these measures will over time lead to a gradual decline in the (general government) fiscal surplus. The distribution of cabinet posts amongst the three parties is still open. This issue, too, will be part of the coalition agreement. However, the SPD will formally nominate its cabinet members, i.e. the persons who will take the respective offices, only upon completion of the membership survey. According to press reports (Spiegel online, Jan 26) party leader Schulz will join the cabinet as Foreign Minister or as Finance Minister. In the days after the presentation of the new coalition treaty, Schulz and his leadership team will have to go extra miles to enlist their party members’ support for the treaty and thus to clear the final hurdle on the way to a renewed Groko. A difficult task to undertake, given the widespread reservation among Germans 0 10 20 30 CDU/CSU SPD Greens FDP Left AfD Others Recent surveys* Federal election result % * Average of major recent surveys (Allensbach, Emnid, Forsa, Forschungsgruppe Wahlen, Infratest dimap, INSA) Major political parties' popularity & result of the past federal election 1 Source: Wahlrecht.de 0 10 20 30 40 50 60 70 80 90 Education Pensions Foreigners/Integration/Refugees Social inequalites Environment Most important problems in Germany 2 Max. 2 answers, percentage of those asked, % * From the federal election (September 22) onwards Source: Forschungsgruppe Wahlen: ZDF Politbarometer 0 10 20 30 40 50 60 ZDF Politbarometer* ARD Deutschland- Trend* (very) good (very) bad The German's attitude with regard to a Groko 3 "Do you think a Groko is ..."; % of those asked Sources: Infratest dimap, Forschungsgruppe Wahlen * Published February 2 German economy: It is party time 9 | February 6, 2018 Focus Germany and SPD supporters. Public sentiment is mixed. Some surveys show a (small) majority for the Groko proponents over the sceptics, others indicate the opposite. The assessments of the exploratory talk results is similarly ambiguous. According to the January ZDF-Politbarometer (Forschungsgruppe Wahlen), 38% of all respondents think that the results are good, while 41% stated they are not. A similar picture has emerged among SPD supporters (41% vs 47%). Solely among CDU/CSU supporters do the proponents dominate the scene (57% vs. 23%). The SPD’s youth wing, strongly opposing a renewed Groko, has invited people to (temporarily) become SPD members to participate in the members’ ballot and to vote No. According to press reports (FAZ, WDR), the SPD has registered several thousand new members in the past few days. The relevant registration deadline is February 6, though. Arithmetically the campaign’s impact should be limited, as the SPD has 443,000 members (as of end-2017). In autumn 2013, in a similar survey on the past Groko’s coalition treaty, the participation rate was nearly 78%. Only in a close call might the newcomers tip the balance. Should the membership ballot fail, Germany seems likely to go for new elections. However, a positive member ballot result still seems the most likely scenario. Given public sentiment and the critics’ campaign, though, the approval rate should hardly be as convincing as in autumn 2013 when 76% of the participants greenlighted the CDU/CSU-SPD coalition. 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 total CDU/CSU supporters SPD supporters good not good Source: Forschungsgruppe Wahlen: ZDF Politbarometer (Jan 19) "Do you think the results of the exploratory talks among tte CDU, CSU and SPD are ..."; % The German's rating of the Groko exploratory talks results 4 German economy: It is party time 10 | February 6, 2018 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 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 14 15 16 17 18 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 Bloomberg Tickers Indicator Reporting month Publication date Current value Bloomberg consensus Surprise Standardised surprise Quantile rank GRCP20YY Index CPI (% yoy) 11 2017 13/12/2017 1.8 1.8 0.0 0.2 0.3 GRIFPBUS Index IFO Business Climate 12 2017 19/12/2017 117.2 117.5 -0.3 -0.4 0.3 GRIMP95Y Index Import Price Index (% yoy) 11 2017 22/12/2017 2.7 2.6 0.1 0.4 0.7 MPMIDEMA Index Markit Manufacturing PMI 12 2017 02/01/2018 63.3 63.3 0.0 0.0 0.4 GRUECHNG Index Unemployment Change (000's mom) 12 2017 03/01/2018 -30.0 -13.0 17.0 0.5 0.7 MPMIDESA Index Markit Services PMI 12 2017 04/01/2018 55.8 55.8 0.0 0.0 0.5 GRFRIAMM Index Retail Sales (% mom) 11 2017 05/01/2018 1.9 1.0 0.9 1.0 0.9 GRIORTMM Index Factory Orders (% mom) 11 2017 08/01/2018 -0.4 0.0 -0.4 -0.2 0.4 GRIPIMOM Index Industrial production (% mom) 11 2017 09/01/2018 3.4 1.8 1.6 1.4 0.9 GRCAEU Index Current Account Balance (EUR bn) 11 2017 09/01/2018 25.4 25.3 0.1 -0.3 0.4 GRCP20YY Index CPI (% yoy) 12 2017 16/01/2018 1.7 1.7 0.0 0.2 0.3 GRZ ECURR Index ZEW Survey Current Situation 1 2018 23/01/2018 95.2 89.6 5.6 0.7 0.8 GRZEWI Index ZEW Survey Expectations 1 2018 23/01/2018 20.4 17.7 2.7 0.4 0.7 MPMIDESA Index Markit Services PMI 1 2018 24/01/2018 57.0 55.5 1.5 1.7 0.9 GRIFPBUS Index IFO Business Climate 1 2018 25/01/2018 117.6 117.0 0.6 0.3 0.6 GRIMP95Y Index Import Price Index (% yoy) 12 2017 29/01/2018 1.1 1.1 0.0 0.3 0.6 GRCP20YY Index CPI (% yoy) 1 2018 30/01/2018 1.6 1.7 -0.1 -0.4 0.2 GRUECHNG Index Unemployment Change (000's mom) 1 2018 31/01/2018 -25.0 -17.0 8.0 0.1 0.6 GRFRIAMM Index Retail Sales (% mom) 12 2017 31/01/2018 -1.9 -0.4 -1.5 -0.9 0.2 MPMIDEMA Index Markit Manufacturing PMI 1 2018 01/02/2018 61.1 61.2 -0.1 -0.2 0.3 Sources: Bloomberg Finance LP, Deut sche Bank Research German economy: It is party time 11 | February 6, 2018 Focus Germany German Export Indicator The Export Indicator identifies the effects on German exports of changes in global demand on the one hand, and currency movements on the other (price impact). 2 Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) 2 See for details Focus Germany, March 3, 2016. German economy: It is party time 12 | February 6, 2018 Focus Germany Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) Germany: Events of economic-, fiscal- and euro-politics DX Date Event Remarks Since early Jan Metal wage round The IGM union has started the wage talks with the demand for a 6% wage hike plus an option to reduce individual weekly hours to 28 (with employer subsidies). 5 or 6 Feb (Probably) End of the coalition negotiations, Berlin Finalizing the negotiations the CDU, CSU and SPD will present their joint draft coalition treaty. Major projects will be European policy, intensified investment on digitalisation and education as well as increased social spending. 15 Feb Start of the construction sector wage round The IG Bau union demands a 6% pay increase and a fully-fledged 13th month salary. We believe the talks will be very difficult and might include strikes. 19-20 Feb Eurogroup and ECOFIN meeting, Brussels Situation in the euro area, (poss.) thematic discussion on growth and jobs – investment in human capital, Ireland – Post Programme Surveillance – 8th review. End Feb (Probably) End of SPD membership ballot The SPD carries out a postal ballot. This will take 2 to 3 weeks. We expect a thin majority for the Groko proponents. 26 Feb Start of the public sector wage round (federal and municipal level) The union Ver.di will decide upon its wage claim on Feb 8. Public employees at the Länder level got - in a separate wage round (in 2017) - a 2.35% pay raise at the beginning of this year. Early March (Prob.) Election of the Federal Chancellor, Bundestag Berlin Provided that the SPD members will agree on the treaty, Angela Merkel will be re-elected as the chancellor of a renewed Groko. This will be her 4th term. 4 March General election in Italy It is open whether the new parliament can establish a stable government. Anyway, government formation will likely be difficult. 8 March ECB Governing Council meeting, press conference Review of the monetary policy stance. The QE programme - reduced to EUR 30 bn per month since January – continues until September 2018. Given the robust economy, we expect the end of net asset purchases by year-end. 12-13 March Eurogroup and ECOFIN meeting, Brussels (Possibly) Greece – state of play, annual ex-ante reporting on debt issuance plans, (possibly) preparation of international meetings: inflation and exchange rate developments. 22-23 March European Council Debates on the future of the EU, foreign affairs and international relations. Source: Deutsche Bank Research Date Time Data Reporting period 6 Feb 2018 8:00 New orders manufacturing (% mom, sa) December 7 Feb 2018 8:00 Industrial production (% mom, sa) December 9 Feb 2018 8:00 Trade balance (EUR bn, sa) December 9 Feb 2018 8:00 Merchandise exports (% mom, sa) December 9 Feb 2018 8:00 Merchandise imports (% mom, sa) December 14 Feb 2018 8:00 Real GDP (% qoq) Q4 2017 23 Feb 2018 8:00 Real GDP (% qoq) - Details Q4 2017 21 Feb 2018 9:30 Manufacturing PMI (Flash) February 21 Feb 2018 9:30 Services PMI (Flash) February 22 Feb 2018 10:30 ifo business climate (Index, sa) February 27 Feb 2018 14:00 Consumer prices preliminary (% yoy, nsa) February 2 Mar 2018 8:00 Retail sales (% mom, sa)* January 28 Feb 2018 09:55 Unemployment rate (%, sa) February Germany: Data calendar DB forecast Last value -0.4 3.4 -0.4 0.4 *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 -0.2 2.2 1.5 1.6 5.4 5.4 1.2 -1.9 61.5 56.5 61.1 57.0 117.0 117.6 0.5 0.8 20.4 -1.8 22.3 4.1 0.5 0.8 German economy: It is party time 13 | February 6, 2018 Focus Germany Financial Forecasts DX US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 1.375 -0.10 0.00 0.50 -0.75 -0.50 0.05 0.50 1.50 0.02 0.50 Mar 18 1.625 -0.10 0.00 0.50 -0.75 -0.50 0.05 0.50 1.50 0.03 0.75 Jun 18 1.875 -0.10 0.00 0.50 -0.75 -0.50 0.05 0.50 1.50 0.05 1.00 Sep 18 2.125 -0.10 0.00 0.50 -0.75 -0.50 0.05 0.50 1.50 0.05 1.00 3M interest rates, % Current 1.77 0.07 -0.33 0.52 Mar 18 1.83 0.05 -0.30 0.55 Jun 18 2.08 0.05 -0.30 0.55 Sep 18 2.33 0.05 -0.30 0.75 10Y government bonds yields, % Current 2.75 0.10 0.70 1.49 Mar 18 2.60 0.00 0.55 1.50 Jun 18 2.75 0.00 0.55 1.60 Sep 18 2.75 0.00 0.70 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 1.24 109.18 0.88 1.42 1.16 9.77 7.44 9.56 4.15 310.65 25.28 Mar 18 1.22 115.00 0.91 1.34 1.19 9.60 9.30 4.12 313.57 25.39 Jun 18 1.24 117.00 0.92 1.35 1.22 9.40 9.20 4.07 317.00 25.26 Sep 18 1.26 119.00 0.93 1.35 1.24 9.15 9.00 4.07 316.00 25.13 Sources: Bloomberg Finance LP, Deutsche Bank Research German economy: It is party time 14 | February 6, 2018 Focus Germany German data monitor DX Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Aug 2017 Sep 2017 Oct 2017 Nov 2017 Dec 2017 Jan 2018 Business surveys and output Aggregate Ifo business climate 111.2 114.5 115.9 117.2 116.1 115.4 116.9 117.6 117.2 117.6 Ifo business expectations 104.3 106.2 107.6 109.9 107.9 107.5 109.3 111.0 109.4 108.4 Industry Ifo manufacturing 106.2 109.7 112.0 113.3 112.3 111.5 112.9 113.8 113.2 113.9 Headline IP (% pop) 1.2 1.9 1.1 2.7 -1.1 -1.2 3.4 Orders (% pop) -1.1 0.8 3.7 4.1 1.3 0.7 -0.4 Capacity Utilisation 85.8 86.0 86.7 87.3 87.9 Construction Output (% pop) 4.4 5.1 -0.8 0.0 0.1 -2.6 3.8 Orders (% pop) 0.1 -2.8 -2.1 -2.2 0.4 0.6 9.0 Ifo construction 128.5 130.5 133.0 134.1 133.4 134.0 135.1 133.2 133.9 133.6 Consumer demand EC consumer survey -0.6 3.6 4.1 5.5 3.3 3.9 5.2 5.3 6.1 7.4 Retail sales (% pop) 0.0 1.4 0.4 -0.1 -0.3 1.2 -1.3 1.9 -1.9 New car reg. (% yoy) 6.7 0.0 0.3 4.2 3.5 -3.3 3.9 9.4 -1.0 Foreign sector Foreign orders (% pop) -0.6 1.0 4.1 4.7 2.0 1.1 -0.5 Exports (% pop) 2.8 1.6 0.7 2.4 -0.4 -0.3 4.1 Imports (% pop) 3.3 3.7 1.4 -4.4 2.3 1.1 Net trade (sa EUR bn) 59.4 60.7 62.5 21.3 21.9 19.9 22.3 Labour market Unemployment rate (%) 5.9 5.7 5.7 5.5 5.7 5.6 5.6 5.5 5.5 5.4 Change in unemployment (k) -52.3 -41.7 -25.0 -55.7 -8.0 -24.0 -13.0 -21.0 -30.0 -24.0 Employment (% yoy) 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Ifo employment barometer 110.3 111.1 111.9 112.9 111.2 112.3 112.1 113.2 113.6 113.8 Prices, wages and costs Prices Harmonised CPI (% yoy) 1.9 1.6 1.7 1.6 1.8 1.8 1.5 1.8 1.6 1.4 Core HICP (% yoy) 1.0 1.4 1.5 1.3 1.5 1.5 1.1 1.3 1.4 1.3 Harmonised PPI (% yoy) 2.8 2.8 2.7 2.5 2.6 3.1 2.7 2.5 2.3 Commodities, ex. Energy (% yoy) 32.7 8.9 4.2 -5.6 4.8 5.3 0.7 -6.2 -10.5 -11.1 Crude oil, Brent (USD/bbl) 54.5 50.8 52.2 61.5 51.9 55.5 57.6 62.7 64.4 69.2 Inflation expectations EC household survey 18.9 17.6 16.3 16.0 15.8 18.1 16.0 17.2 14.8 16.6 EC industrial survey 13.0 12.2 11.7 14.2 10.4 12.8 12.3 13.4 16.9 15.1 Unit labour cost (% yoy) Unit labour cost 0.9 2.5 1.7 Compensation 2.6 2.7 2.6 Hourly labour costs 0.9 4.0 2.8 Money (% yoy) M3 5.9 5.6 4.7 4.3 4.7 4.7 4.9 4.5 4.3 M3 trend (3m cma) 5.6 5.3 5.0 4.7 5.0 4.7 4.8 4.7 Credit - private 3.3 3.8 3.9 4.2 3.8 3.9 3.9 4.0 0.0 Credit - public 21.0 4.1 5.5 -2.9 -7.5 5.5 -0.6 -4.4 -2.9 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HWWI, ifo, Markit German economy: It is party time 15 | February 6, 2018 Focus Germany Focus Germany 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 Main Fax: +49 69 910-31877 E-mail: marketing.dbr@db.com Available faster by E-mail: marketing.dbr@db.com * German economy: It is party time .............................. February 6, 2018 * Outlook 2018: Robust growth – fragile politics ............................. December 15, 2017 * Economic backdrop supportive for Jamaica talks .... November 3, 2017 * Jamaica coalition unlikely to offer a goody bag ........... October 6, 2017 * Booming economy – will wages follow? .................. September 6, 2017 * 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 © Copyright 2018. 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 with out notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. 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