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August 26, 2016
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EMU’s current account (CA) surplus has lent some support to the euro over the past two years at a time of relentless fixed income outflows. Germany is pivotal, as it accounts for 60% of the surplus. Since the rotation of fixed income assets out of Europe is likely to continue (‘Euroglut’) the balance of payments should therefore become even more bearish for the euro. The German surplus is likely to weaken by about 20% to 7% of GDP by the end of the decade due to unfavourable demographic trends, the housing boom and slowing globalisation. [more]
Current Issues Germany — The Eurozone’s current account (CA) surplus has lent some support to the euro over the past two years at a time of relentless Fixed income outflows. Germany is pivotal, as it accounts for 60% of the surplus. This report argues that the German surplus is likely to weaken by about 20% to 7% of GDP by the end of the decade. — Since the rotation of fixed income assets out of Europe is likely to continue – a dynamic we have referred to as ‘Euroglut’ – the balance of payments should therefore become even more bearish for the euro. — Unfavourable demographic trends and the domestic housing boom will be most detrimental to the surplus. Both factors will lower household saving ratios and are likely to result in higher import demand. As a new factor to this mix, record levels of immigration will accelerate the decline. Directly, it will raise import demand for foreign goods as well as remittances into home countries. Indirectly, the integration in the housing market is likely to cement excess demand for years to come and help drive real estate prices higher. — Externally, accelerating global growth relative to Germany’s cycle will benefit net export demand, but the net effect will be limited by the fact that global trade will probably remain subdued. The aftermath of ‘Brexit’ and weak demand from oil-exporting economies are particularly concerning for German exporters. — While our results are model-driven, we also provide deep dives into the main drivers of the German current account: the housing market, international trade and demographic change, including migration. Author s Heiko Peters +49 69 910-21548 heiko.peters@db.com Robin Winkler +44 20 754-71841 robin.winkler@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 Content Page Germany’s balance of payments is the pivot for global imbalances ......................................2 Our model points to a significant decline in the German surplus ........................................5 (1) International trade headwinds hamper export outlook .................................................8 (2) Rising import demand from accelerating housing boom ............................................... 10 (3) Ageing of the German population set to reduce the high savings rate of the households ................................................... 18 Conclusion .................................................... 21 Appendix ...................................................... 22 Germany’s CA surplus set to fall by 20% due to demography, housing boom and slowing globalisation 1 % of GDP %, pp Source: Deutsche Bank Research August 26, 2016 Germany's massive CA surplus set to decline -4 -2 0 2 4 6 8 10 95990307111519 DBe - 25 - 20 - 15 - 10 - 5 0 5 10 Global cycle Demography Housing market Global value chains Total (%) Germany's massive CA surplus set to decline 2 | August 26, 2016 Current Issues Germany’s balance of payments is the pivot for global imbalances The Eurozone as the world’s largest surplus region Global current account imbalances remain markedly below the pre-crisis peak. While the US retains the largest current account deficit, other regional imbalances have shifted in recent years. While the Chinese and Japanese surpluses have shrunk and oil exporters’ balances tipped negative in 2015 for the first time in seventeen years, low oil prices also allowed the Eurozone to emerge as the main surplus region. In the year to June, the Eurozone’s surplus remained close to its highs (EUR 348bn or 3.3% of GDP). ‘Euroglut’ drives euro and global yields On the financial account, fixed income outflows from the Eurozone also soared to record levels, with Eurozone investors searching for yield as aggressive ECB easing and prospective Fed tightening widened interest rate spreads. The yield for 10-year government bonds in the Eurozone has collapsed from 1.9% at the start of 2014 to -0.1%. Currently 60% of government bond yields in the Eurozone are in negative territory; and a staggering 88% of German bunds. Over the past year net portfolio investment outflows peaked at more than EUR 500bn. In previous research, we referred to these massive fixed income outflows as “Euroglut” 1 . Thanks to these large capital outflows, the broad basic balance—the balance between the current account balance on the one hand and FDI and portfolio flows on the other—fell deep into negative territory. This striking decline in the broad basic balance was the main driver behind the euro’s collapse after mid- 2014 and has also had implications for global asset prices. Partly these outflows simply recycle the current account surplus, but the fact that fixed income outflows have run at almost twice the rate of current account surpluses also suggests that European investors have been rotating asset stocks out of the Eurozone. Hence, importantly, a deteriorating current account 1 DB Special Reports: Euroglut a year on: alive and kicking, EUR/USD to break parity, 1 December 2015. Euroglut: a new phase of global imbalances, 6 October 2014 and Euroglut Revisited: The German Saver, 9 December 2014. Top-5 largest current account surplus/deficit countries 2 Sources: IMF, Deutsche Bank Research Strong shift in CA imbalances with increased surplus in the EMU and CA turning negative for oil states 3 % of global GDP Sources: IMF, Deutsche Bank Research Net international position and current account balances – Germany continues upward trend 4 Averages 2012-2015, global GDP weight in % Sources: IMF, Deutsche Bank Research CountryCA balanceNIIP DE2741.462 CN2201.732 KR9082 NL90407 CH71681 CA-50143 AU-51-727 BR-79-673 UK-132-391 US-417-6.568 USD bn (2015, 3y avg) Germany's massive CA surplus set to decline 3 | August 26, 2016 Current Issues surplus need not necessarily be offset by falling capital outflows. In our view, it would most likely weaken the basic balance even more. This implies that even more EMU assets will probably be exchanged for non-EMU assets. Germany is the main contributor to the EMU’s record surplus As Europe’s export powerhouse, Germany has contributed most to the Eurozone’s surpluses. Presently the German share amounts to almost 60% once adjusted for intra-EMU flows. Moreover, almost half the EUR 300bn increase in the Eurozone’s current account surplus since 2010 is due to Germany. As implied by the balance-of-payments data, German savers also account for the bulk of net saving in the Eurozone. While in the rest of the Eurozone private saving offsets public dissaving, in Germany both sectors are net savers (figure 9). With net portfolio investment outflows of EUR 206bn, 2 Germany is also responsible for 40% of the capital flows out of the Eurozone, though the flows are more difficult to disentangle. It is not possible to exclude the German flows from the Eurozone flows with the rest of the world as a large part of the German extra-EMU portfolio investments are channelled through the investment funds issued in Luxembourg and Belgium. These funds probably invest a substantial share in assets outside the Eurozone. Over the past four quarters, cumulated net portfolio flows to Luxembourg and Belgium amounted to EUR 147bn and to EUR 510bn, respectively. Hence, Germany is pivotal for the Eurozone’s balance of payments 3 and related movements in the euro. The rest of this report therefore attempts to project the German current account in particular until the end of the decade, which maps onto our forecast horizon for the euro. 2 Rakau, O. (2015). Investing the German household way: A little more risk. Focus Germany. 30 April 2015. 3 Note that one cannot deduce any direction of causality from balance of payments identities. … has been pushing down the EUR 6 USD/EUR, 12M mov. sum (left), EUR bn, 12M mov. sum (right) Sources: Eurostat, ECB, Deutsche Bank Research Slump in EMU broad basic balance… 5 EUR bn, 12M moving sum Sources: Eurostat, Deutsche Bank Research German gov’t bond yields on record lows 7 %, y-axis: duration, sovereign yield curve Sources: Deutsche Bundesbank, Deutsche Bank Research Germany's massive CA surplus set to decline 4 | August 26, 2016 Current Issues What drives the German surplus? From the balance-of-payments perspective, it is goods trade that has clearly been behind the steep increase since 2000 (figure 12). This narrative of Germany as an export powerhouse is well known. But it helps to look at the surplus from a flow-of-funds perspective. We can split the current account into net saving in the corporate, public and household sectors. Most of the increase in net saving since 2013 was driven by the non-financial corporations that increased from 1.7% in 2013 to 3.5% of GDP in 2015. Net investment remained very moderate, expanding by only about 0.5% of GDP, as capacity utilization level was at its long-term trend, the output gap remained negative and the global outlook was far from bullish. Thus, corporations largely retained profits provided in part by oil-price related windfall gains and reduced interest payments caused by the aggressive ECB policy. Despite surging refugee-related spending, the public sector surplus increased over the same period amounting to net savings of 1.2% of GDP, largely thanks to the healthy labour market causing buoyant tax revenues and to lower interest rate payments. 4 The household sector continues to have the highest savings gap and increased net saving to 4.9% of GDP in 2015 (or 8.1% of disposable income). Strong real wage increases and also the oil-price related windfall income gains were the main drivers. 4 Rakau, O. (2015). Euro area NFCs: Flush with cash, but lacking investment opportunities. Focus Europe. Deutsche Bank Research. 7 August 2015. Interest savings on their own alone explain almost half of the higher savings gap. Interest payments of the general government fell by EUR 7.5bn to 48.5bn or 1.6% of GDP in 2015. Germany accounts for almost 60% of EMU’s current account surplus 8 EUR bn, 4Q moving sum, Extra-EMU flows Source s : Eurostat, Deutsche Bank Research EMU CA surplus driven by German savings gap 9 Saving and investment gap, % of EMU GDP, 15 EMU countries Source s : Eurostat, Deutsche Bank Research Strong increase of the German NFC’s savings gap 10 % of GDP Source s : Eurostat, Deutsche Bank Research Interest payments of the general government trending down 11 % of GDP Source: Eurostat - 6 - 4 - 2 0 2 4 6 91 95 99 03 07 11 15 Net investments Savings gap Savings 0 1 2 3 4 5 6 7 959903071115 DEU EMU EMU ex DE Germany's massive CA surplus set to decline 5 | August 26, 2016 Current Issues Our model points to a significant decline in the German surplus The descriptive analysis so far suggests that the German current account surplus is a major driver for the EMU aggregate and is therefore a crucial factor for the movements of the Euro. How will it change in the next years? In a first step, we build a quantitative model from a large global panel dataset to identify the major drivers of the current account balances. We use these estimates to project the German current account development until 2020. We then drill into the driving forces – the sluggish export outlook, continuation of the housing boom and demographic trends – to arrive at the conclusion that the surplus is likely to decline by at least 20% in the years ahead. Increased German current account surplus driven by goods trade 12 EUR bn, 12M moving sum Sources: Deutsche Bundesbank, Deutsche Bank Research German savings gap of the private and public sector flip side of current account surplus 13 % of GDP *) S - I: Savings minus investment Sources: Federal Statistical Office, Deutsche Bundesbank, Deutsche Bank Research German balance of payments dominated by the current account surplus and bond outflows 14 EUR bn, 12M moving sum Sources: Deutsche Bundesbank, Deutsche Bank Research Net financial account driven by net portfolio investments outflows 15 EUR bn, 12M moving sum Sources: Deutsche Bundesbank, Deutsche Bank Research - 10 - 8 - 6 - 4 - 2 0 2 4 6 8 10 91 95 99 03 07 11 15 S - I non - financial corporations* S - I financial corporations* S - I private Households* S - I public sector* Balance on current account Germany's massive CA surplus set to decline 6 | August 26, 2016 Current Issues Our current account model is basically an improved version of the IMF’s External Balance Assessment (EBA) and uses the IMF dataset, which comprises 49 countries accounting for 90% of global GDP between 1986 and 2015. 5 The main variables are financial, cyclical, and policy-related. 6 Our improvement is twofold. First, we add house prices, for reasons we explain in the next section. Second, we account for changes in global value chains since the early 1990s. 7 Including these variables improves the fit of the model and, in our view, captures current account dynamics more realistically (see figures 60 to 62 in the appendix for a comparison of the estimated models). A global panel data model has the advantage of fully using information from across countries. There are, however, also some limitations due to the possible presence of structural breaks, nonlinearities and issues with the interpretation of the residual, which could be due to policy distortions, uncaptured fundamentals or limitations of the empirical model (as measurement or sampling errors or possible misspecification). 8 The comprehensive panel regressions (Full model (9) in figures 58 and 59) show that: — High housing valuations as measured against long-term price-to-rent ratios lower the current account balance. An increase of the price-to-rent ratio by 10% reduces the current account balance by 0.2% of GDP (see section “(2) Rising import demand from accelerating housing boom”). — The availability of information and communications technologies since the 1990s revolutionised company production processes enabling them to divide up their manufacturing into different stages across a number of countries. Multinational firms optimise their production processes using global value chains (GVC). Interpreting these changes in the production as a transitory, efficiency enhancing shock (via the greater use of imported intermediates) implies that a part of the income gain caused by the higher exports is saved thereby pushing up the current account balance. 9 According to our estimations, an increase of the foreign value added share of gross exports by 10% raises the current account balance by 0.9% (see section “(1) International trade headwinds hamper export outlook”). — Most IMF variables remain significant in our improved model and show the right signs (see figure 59). As in the IMF’s estimate the following variables are used in our model: traditional factors (e.g. net foreign assets, relative level of per worker income, rate of income growth, net oil and gas trade, old- age dependency ratio, population growth, aging speed and being a financial centre), financial factors (for example reserve currency status reflecting the exorbitant privilege esp. of the US, global capital market conditions, private credit), cyclical/temporary (for example relative output gap, terms of trade), policy-related (for example fiscal policy, health expenditures, FX interventions, capital controls). 5 IMF (2016). External Balance Assessment (EBA): Data and Estimates. 27 July 2016. 6 The External Balance Assessment (EBA) Methodology. IMF Working Paper WP/13/272. December 2013. 7 We added OECD house price data and OECD TiVA indicators to the IMF data set. As these indicators are only available for a smaller country sample and a shorter time period, we replicated the IMF estimates for the reduced sample. As the TiVA indicators are only available for the years 1995, 2005, 2008-2011, we linearly interpolated missing values. Most of the estimated coefficients remained qualitatively unchanged (see table in the Appendix). 8 See for a detailed discussion of the EBA model: IMF (2016) The External Balance Assessment (EBA) Methodology. IMF Working Paper WP/13/272. December 2013. 9 Brumm, J. et al. (2016). Global Value Chain Participation and Current Account Imbalances. 12th CompNet Conference. Prague 21-22 April 2016. Growth of German house price surpasses income growth and rent increases since 2009 16 % Sources: OECD, Deutsche Bank Research Spreading of global value chains since mid-1990s 17 %, foreign value added share of exports Sources: OECD, Deutsche Bank Research -30 -20 -10 0 10 20 30 40 50 707478828690949802061014 Price - to - rent Price - to - income Germany's massive CA surplus set to decline 7 | August 26, 2016 Current Issues In the near term, the oil-price should remain the single most important driver for the current account balance pushing it to the peak of 8.8% of GDP in 2016. Despite the increased quantity of oil and gas imports, the volume of oil and gas imports fell markedly. The oil and gas trade deficit decreased from 2.9% of GDP in 2013 to probably EUR 43bn or 1.4% of GDP in 2016 more or less fully explaining the increase of the current account surplus over this period (figure 19). Based on our commodity analyst’s current oil price (Brent) forecasts of a volatile bottoming out followed by a moderate recovery path to a level of USD 55 per barrel in 2017 (~20% yoy) and our forecast of a depreciation of the EUR vs. the USD below parity (~15% yoy), we expect the current account surplus to fall to 8.2% of GDP in 2017 as the oil import bill should increase to 2.0% of GDP. More medium term, the current account forecast becomes more challenging as it depends on the various domestic and global interactions as well as policy measures. Plugging in our forward projections for the various variables and assuming some factors to be constant, we estimate that the German current account surplus should fall by about 20% to about 7% of GDP in 2020. 10 The unfavourable demographical trends in Germany are the largest contributor to the decline of the current account balance, followed by the housing markets and the global value chains. By contrast, as Germany’s output gap will probably narrow and potential growth will likely slow relative to the rest of the world, this should have a slightly enhancing effect on the German current account. In the following, we discuss in more detail the qualitative drivers of these developments, which also points to a similar fall of the current account balance. On the one hand, our sluggish medium-term export outlook points to the end of the golden times when strong external demand has been a major driver of German growth. On the other hand, the housing boom and demographics point to a more domestically tilted economy and lower German excess savings. 10 The variables we project based on DB Economics research are demographical trends (increasing old age dependency ratio, high ageing-speed, increased spending for public health, slightly lower relative productivity), global cycle (relative underlying growth potential measured by the GDP growth forecast 5 years ahead, relative output gap, commodity terms of trade gap as a measure of the cyclical developments in commodity prices), the housing market (increasing price-to-rent ratio, credit expansion) and slightly reduced use of global value chains. Price effect far outweighed stronger demand for oil and gas 18 % yoy, 12M moving sum Sources: Federal Statistical Office, Deutsche Bank Research Reduction of oil and gas trade deficit largely explains the increased German goods trade surplus 19 % of GDP Sources: Federal Statistical Office, Deutsche Bank Research - 3.0 - 1.5 0.0 1.5 3.0 4.5 6.0 7.5 9.0 10.5 08 09 10 11 12 13 14 15 16 17 Goods trade balance ex oil Oil trade balance Goods trade balance +1.5pp DBe +1.6pp Germany's massive CA surplus set to decline 8 | August 26, 2016 Current Issues (1) International trade headwinds hamper export outlook The outlook for German export-oriented corporations remains extremely challenging given the structural weakness of the global trade, the uncertain future relations with the UK, political developments (e.g. Chinese reforms, the US election campaign, increased votes for populist parties in Europe) more intense competition from the emerging markets and the crunch in oil-exporting economies. We consider the latter factor especially concerning insofar as the supply of petro-dollars for intermediate export goods has put German corporations in good stead for many years. After outperforming global trade in 2015 thanks to the weaker Euro and a booming demand for German goods out of the US becoming the largest export destination, this year, German exporters are facing the double whammy of a weaker demand impact and the sharp downturn of the price impact (exchange rate effect). Our export indicator, which summarises both indicators, points to a significant deceleration of German exports to about 2.5% in 2016. Global trade remains challenging Despite our forecast of a slight acceleration of global growth in 2017, the relevant external demand for German goods – as approximated by global growth calculated via the aggregation of the country specific growth weighted with the share in German exports – is expected to fall again slightly in 2017 (figure 23). 11 This is mainly due to the US and China having a combined weight of 16% in total German exports, but 32% of global PPP-GDP and 44% of global USD-GDP. In the near term the uncertainty after the UK-Referendum and the upheaval in Turkey could be a drag on German exports. With 5.9% of total trade turnover the UK is Germany’s 5th largest trading partner and Turkey ranks 17 (1.7%). The UK accounted for more than 20% of the German trade surplus of EUR 248bn in 2015 (EUR +51bn; Turkey: EUR 8bn) being only slightly behind the US (EUR +55bn). 11 Heymann, E., Peters, H. (2016). Double whammy for German exports in 2016. Focus Germany. Deutsche Bank Research. 2 March 2016. German CA surplus expected to trend downward 20 % of GDP Sources: Deutsche Bundesbank, Deutsche Bank Research Decomposition of the underlying factors for the falling German CA surplus out to 2020 21 %, pp Source: Deutsche Bank Research Demand and price impulses for German exports 22 (+) positive / (-) negative Sources: Eurostat, Deutsche Bank Research German export weighted global growth a 23 % yoy Global GDP forecasts calculated with different country weights: USD GDP, PPP GDP, share in German total exports Sources: Deutsche Bank Research -4 -2 0 2 4 6 8 10 95990307111519 DBe - 25 - 20 - 15 - 10 - 5 0 5 10 Global cycle Demography Housing market Global value chains Total (%) Germany's massive CA surplus set to decline 9 | August 26, 2016 Current Issues Petro dollars drying up The golden age for oil-producers, when the oil price was above USD 100 a barrel and countries used their free-flowing oil revenues to finance government spending and investment, looks set to be over for now. Among the oil-producing countries, those that used to pool their surpluses in sovereign wealth funds and invest them internationally are doing comparatively well, especially Norway, UAE, Saudi Arabia or Kuwait. The weaker economic development in the oil states will continue to dampen German export growth. The current high level of global excess supply suggests that the oil price movements will remain volatile and still prices should stay relatively low. Our commodity strategists expect supply and demand to more or less balance in the second half of 2017. Our export indicator for oil states points to a renewed strong export decline of around 8% in 2016. The importance of the oil-producing countries as an export market for German industry as a whole looks set to continue to diminish as oil prices to remain far below USD 100 per barrel in the medium term. 12 Typically, German trade is highly synchronised with global trade over the medium term and despite the rise of China to the world’s largest trading nation Germany has been holding its global trade share relatively stable (figure 28). As we highlighted before, we expect global trade to remain subdued also in the medium term due to the interplay of various cyclical and structural factors. Our estimations point to a substantially fallen sensitivity of global trade to global growth pointing to a more or less co-movement of global trade and global growth in the coming years. 13 Thus, the times when the global economy was becoming more and more open with significant welfare enhancing effects could be over. 14 Cyclical drivers The partly cyclical global weakness in capital investment is having a disproportionally adverse effect on global trade as capital investment has a particularly strong impact on trade compared to the other GDP demand components. The reason for this weakness lies in the combined effects of overcapacity, particularly in China, weak commodity prices and increased uncertainty caused by a number of geopolitical risks. Structural factors remain a drag First, multilateral negotiations about further trade liberalization have ground to a halt. Since the middle of the 1990s, liberalization has been implemented at a regional level as a second-best solution. The comprehensive Trans- Pacific Partnership free-trade agreement was a positive step. Negotiations about the Transatlantic Trade and Investment Partnership look set to drag on for a while yet. 12 Heymann, E., Peters, H. (2016). End of oil countries' golden age continues to dampen German export growth in 2016. Focus Germany. Deutsche Bank Research. 1 April 2016. 13 See for details Peters, H. (2016). Global trade growth to remain subdued. Focus Germany. Deutsche Bank Research. 11 May 2016. 14 If steps are taken to reduce existing overcapacity and if the reduction is not delayed by misguided political actions, global trade could get a boost in the medium term. Prompt implementation of the TPP and an agreement on TTIP could also provide new impetus to global trade. However, the increased number of additional trade restrictions put in place and the higher support for populist parties especially in several European countries point to a more nationalistic political orientation and a relatively low probability for trade liberalisation put forward. German export share to oil states declined 24 % of total German exports, 12MMA Sources: Eurostat, Deutsche Bank Research Typically high correlation between global and German export growth 25 % yoy Sources: IMF, Deutsche Bundesbank, Deutsche Bank Research Share of German exports to EMU on downward trend 26 % of total exports Sources: Eurostat, Deutsche Bank Research - 30 - 20 - 10 0 10 20 30 40 - 60 - 40 - 20 0 20 40 60 German exports Global trade Germany's massive CA surplus set to decline 10 | August 26, 2016 Current Issues Second, the number of trade restrictions has risen significantly since 2008 and the pace of new measures put in place accelerated recently. 15 There are 2,127 new barriers in force (as of May 2016). Despite declarations by G20 officials that they want to remove trade restrictions, only 708 of the 2,835 new restrictions imposed since 2008 have been revoked. Third, the transnational optimization of production processes through the establishment of global value chains seems likely to have reached its limits. As highlighted above, the creation of global value chains enhanced the efficiency of the corporations which saved part of the income gain caused by the higher exports thereby pushing up the current account balance. The proportion of foreign value creation contained in exports rose from globally 15% in 1995 to 24.3% in 2008, then dropped to 21% in 2009 due to the economic crisis, and was back at 24.1% in 2011. Especially German corporations gained their super- competitiveness to a large part from the particular use of the opening up of Eastern Europe and from the emerging markets to establish GVC. 16 According to our decomposition the slightly reduced use of global value chains will probably reduce the German current account surplus out to 2020 (figure 21). The golden times of strong external demand driving German growth will not return in the next years. Thus, German exports will probably grow on average by about 3.5% to 4% per year until 2020, more or less in line with the global trade outlook. (2) Rising import demand from accelerating housing boom Since the introduction of the euro in 1999, Germany has seen barely any house price growth. In the OECD, German house prices have only been lagged by 15 WTO (2016). Report to the TPRB from the director-general on trade-related developments, 4 July 2016. 16 Peters, H. (2013). Global value chains secure competitive advantages for German companies. Focus Germany. 1 July 2013. Deutsche Bank Research. Marin, S. (2010). Germany’s super competitiveness: A helping hand from Eastern Europe, VOX, CEPR’s Policy Portal, 20 June 2010. This was also one explanation for the robust German labour market situation during the global recession 2008/09 as multinational companies reduced employment not in their home country, but mostly in their foreign affiliates. Peters, H.; Weigert, B. (2013). Beschäftigungsentwicklung innerhalb deutscher multinationaler Unternehmen während der globalen Rezession 2008/2009. JBNST (233/4), p. 505-525. Global trade no longer outperforms global GDP 27 % yoy S ources: IMF - IFS, Deutsche Bank Research China’s remarkable rise to the world’s largest trading nation 28 % of global exports, 12MMA Sources: IMF, Deutsche Bank Research Global growth more inward-oriented recently 29 Exports of goods and services (% of GDP) Sources: The World Bank - WDI Germany's massive CA surplus set to decline 11 | August 26, 2016 Current Issues those in Greece, Japan and Portugal. In Scandinavia and the dollar bloc, by contrast, house prices more than doubled. But more recently German house prices have grown at a fast clip, and we argue that the boom will continue in the next couple of years. 17 And given the strong negative relationship between house prices and current account dynamics, this should be a key headwind for the German current account surplus. House prices and the current account Our enhanced IMF model above already showed a strong relationship between house prices and current account balances. Even outside a complex multivariate model, the link between the two factors is evident across countries and over time. Between 1999 and 2006, the height of the housing boom in the US, the vast majority of OECD economies saw rampant house price inflation (figure 32). Southern Europe and the Anglo-Saxon countries, however, saw much faster growth than Northern Europe and Germany in particular. Indeed, this was the “ Sturm und Drang” of the German current account surplus, which expanded by about 7pp over those years while Southern European and Anglo- Saxon countries’ external accounts deteriorated rapidly. This negative correlation has been even tighter since the Great Recession, though the national dynamics have reversed course sharply. Southern European countries have seen steep falls in real house prices whilst painfully consolidating their external accounts (figure 33). By contrast, Scandinavia, Germany and Switzerland have enjoyed solid house price growth without any improvement in their current accounts. Higher house prices, lower saving What is the transmission channel? The most straightforward interpretation is that house prices have a significant and negative impact on household saving through a wealth effect. By definition, the current account measures the economy’s net saving. As homeowners perceive themselves to be and become wealthier, they may decide to save less out of their income toward retirement. And households in possession of real estate but otherwise cash-constrained may increasingly be able to borrow against their illiquid property wealth. Hence, 17 Moebert, J. (2016). House prices: Imminent return to normal, overvaluation likely. Focus Germany. Deutsche Bank Research. 2 March 2016. German house prices have lagged OECD since introduction of the euro in 1999 30 Sources: OECD, Deutsche Bank Research Standard negative relationship between house prices and CA suggests downside to the latter in Germany 31 Sources: OECD, Deutsche Bank Research - 40% 0% 40% 80% 120% 160% Sweden New Zealand Australia Norway Canada UK France Belgium Switzerland Denmark Spain Finland Austria US Ireland Italy Netherlands Germany Greece Japan Portugal Real house prices, 1999 - 2015 90 95 100 105 110 115 120 125 130 - 4% - 2% 0% 2% 4% 6% 8% 10% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 CA/GDP Real house prices Germany's massive CA surplus set to decline 12 | August 26, 2016 Current Issues rising property values should accelerate domestic consumption growth, which has already begun to trickle into higher imports. 18 At the same time as saving declines, investment is likely to increase as rising home prices trigger a supply response. The corollary of net saving (S-I) contracting is net imports rising due to an increased import of building material and probably especially due to more imports of consumption goods caused by the wealth effect (see before). 19 The more income an economy devotes to residential investment, the weaker its current account. This is nicely borne out by the OECD dataset (figure 34). Since 2007 in particular, the contraction in residential investment has been central to Southern European import compression. 20 The third channel is that a housing boom absorbs in both capital and labour from the tradable sector. The construction sector being highly labour-intensive, employment in construction tends to be highly elastic to housing demand although the elasticity falls with increasing capacity utilisation (figure 35). The reason this is associated with weaker current accounts is that workers are whisked away from manufacturing, thus raising real wages and reducing competitiveness in the export dependent sectors. Over time, then, housing and current account cycles appear to be closely interwoven. This is most evident in classic cases like Italy or Spain since joining the Eurozone (figure 36). In Spain a massive housing bubble burst after it peaked in 2007. 21 There was, however, no credit driven housing bubble in Italy. While Spain and Italy epitomise the relationship, the relationships plotted in figures 33-35 also suggest that given Germany’s current account surplus should have deteriorated by a few percentage points, rather than improving by 2%. The reason is that the German current account was supported by other factors such as burgeoning export demand, fiscal consolidation and supply-side reforms. Nonetheless, the relationship holds and a housing boom would push down the CA/GDP ratio, all things constant, and that is what we predict below. Germany’s continued housing boom 18 Though the empirical evidence for this in Germany is less clear than in the Anglo-Saxon world, see Hamburg et al (2005) Consumption, wealth and business cycles: why is Germany different? Deutsche Bundesbank Discussion Paper, No 16/2005. 19 Matsuyama (1990). Residential investment and the current account, Journal of International Economics, 28 (1-2), p. 137-153. 20 Also see Tressel et al (2014). Rebalancing in the Euro Area and Cyclicality of Current Account Adjustments. IMF Working Paper, p. 7. 21 Möbert, J., Peters, H., Lechner, M. (2013). German house price increases in perspective. Focus Germany. Deutsche Bank Research. 31 October 2013. Pre-crisis years saw a negative correlation between house prices and current accounts in OECD 32 Sources: OECD, Deutsche Bank Research This correlation has become even stronger post-crisis 33 Sources: OECD, Deutsche Bank Research R² = 0.1162 - 10% - 8% - 6% - 4% - 2% 0% 2% 4% 6% 8% 10% 12% - 40% - 20% 0% 20% 40% 60% 80% 100% 120% Change in CA/GDP Change in real house prices 1999 - 2006 Greece Spain Ireland Portugal Sweden Canada Norway New Zealand Australia Switzerland Italy Netherlands Finland US UK Germany R² = 0.4689 - 10% - 5% 0% 5% 10% 15% 20% - 60% - 40% - 20% 0% 20% 40% Change in CA/GDP Change in real house prices 2007 - 2015 Iceland Greece Spain Ireland Portugal Sweden Canada Norway New Zealand Australia Switzerland Germany Italy Netherlands Finland US UK Germany's massive CA surplus set to decline 13 | August 26, 2016 Current Issues The fundamentals in the German housing sector are already pointing to considerable excess demand. We expect house price inflation to continue its trend since 2009 in the years to come. On the demand side, migration will be the primary driver, but the leverage cycle on its own would continue to push prices up steadily. On the supply side, we are skeptical that even a rapid expansion in residential investment and construction activity will suffice to meet excess demand anytime soon. The slump following the long decade of oversupply since the mid-1990s has structurally eroded the construction industry, which will take time to ramp up again. Growing land scarcity and regulation (for example cap on rents, building regulations, environmental and energy standards) are additional bullish factors. 22 Record low mortgages to boost leverage Our real estate analysts note that late stages of housing cycles tend to be marked by high leverage ratios. 23 Until very recently, German real estate investors had leveraged only modestly, with mortgages up only 5% since 2009 in real terms and falling relative to GDP. But credit growth began to pick up a year ago, with year-on-year growth rates in new mortgages reaching 50% over the summer of 2015, and volume growth is set to accelerate further after a dip in the first half of this year amid regulatory uncertainty. Note that the rapid new mortgage expansion over the summer 2015 was heavily influenced by the mortgage credit directive, which came into force on 21 March 2016 and led to lending throughout Germany being brought forward. 24 22 Moebert, J. (2016). Residential construction: policy is contributing to only a gradual reduction in excess demand. Focus Germany. Deutsche Bank Research. 1 April 2016. 23 Scheufler (2016). Lower return expectations drive prices as leverage expands. Deutsche Bank Research. 17 May 2016. 24 Moebert, J. (2016). More rapid growth in the volume of mortgage lending in the coming years – rising macroprudential risks. Focus Germany. Deutsche Bank Research. 27 July 2016. Residential investment and current accounts negatively correlated 34 Sources: OECD, Deutsche Bank Research Labour allocation to construction also correlated with deteriorating current accounts 35 Sources: OECD, Deutsche Bank Research R² = 0.6486 - 10% - 5% 0% 5% 10% 15% 20% - 100% - 80% - 60% - 40% - 20% 0% 20% 40% Change in CA/GDP Change in housing investment 2007 - 2014 Iceland Greece Spain Ireland Portugal Sweden Canada Norway New Zealand Australia Switzerland Germany Italy Netherlands Finland US UK R² = 0.6053 - 10% - 5% 0% 5% 10% 15% 20% - 80% - 60% - 40% - 20% 0% 20% 40% Change in CA/GDP Change in construction employment 2007 - 2015 Iceland Greece Spain Ireland Portugal Sweden Canada Norway New Zealand Australia Switzerland Germany Italy Netherlands Finland US UK Germany's massive CA surplus set to decline 14 | August 26, 2016 Current Issues The main driver is that mortgage rates are hovering at all time lows. Fixed long- term financing of more than ten-year duration can now be obtained below 2%, and given the recent decoupling of the long-term relationship with bunds, mortgage rates are likely to play catch-up and fall even lower than bund yields as the ECB’s APP is likely to be extended beyond March of next year. For the average duration, Germany now has the lowest mortgage rates in G10 behind Sweden (figure 41). But Sweden of course has seen one of the fastest house price inflation since 1999 as well as in 2015 alone (+13% yoy in nominal terms in 2015). Another reason there is still significant upside in house prices is the changing composition of real estate investors. Unlike the up-cycle of the 2000s, the current housing cycle in the major cities has been dominated far less by leveraged investors than by domestic pension funds and indeed retail investors. The implication is that whereas an Anglo-Saxon private equity fund would stop investing at yields below 10%, pension funds and retail investors benchmark returns against real bund yields. They are therefore likely to chase property all the way to extremely low or indeed zero yields. 25 That said, we do not expect such a strong reaction as for example in the US at the peak of the housing bubble when net savings of US household sector were strongly negative (-2% of GDP on average in 2005/2006). Migration has tipped the fundamental balance The cheap-money dynamic above would keep prices well supported on its own, but the all-time high net immigration of the past year has also created a largeshortage in the residential housing market. We expect that the influx of asylum-seekers and prospective immigrants since last year, even if it were to peter out this year, will keep the housing market in excess demand for years to come. Demand effects are likely to be concentrated in the metropolitan areas given their attractiveness and networks effects playing a decisive role. 26 We start with the demand side. Estimates provided by the Cologne Institute for Economic Research show that immigration is the decisive factor. Germany’s base demand for new apartments due to depreciation and demographics is about 270,000 units in a typical year. Yet owing to the decline in the construction industry since the mid-1990s, fresh supply was considerably lower in the past few years. To return to the above average, an additional 50,000 units 25 Scheufler (2016). Lower return expectations drive prices as leverage expands. Deutsche Bank Research. 17 May 2016, p. 18. 26 Peters, H. (2015). Metropolitan regions are where the future lies, Focus Germany. 2 October 2015. Italy and Spain exhibit a particularly strong housing-current account correlation 36 Sources: OECD, Deutsche Bank Research Asylum influx changing composition of foreigners 37 % of all 9.7m foreigners in Germany Sources: Federal Statistical Office, Deutsche Bank Research 80 90 100 110 120 130 140 150 160 - 4% - 3% - 2% - 1% 0% 1% 2% 3% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Italy CA/GDP Real house prices Real residential investment 50 70 90 110 130 150 170 190 210 230 - 10% - 8% - 6% - 4% - 2% 0% 2% 4% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Spain CA/GDP Real house prices Real residential investment 20102015change Turkey24.116.5-7.6 Poland6.28.11.9 Italy7.76.5-1.1 Romania1.95.03.1 Syria0.44.03.6 Greece4.13.7-0.4 Croatia3.33.30.0 Other52.352.80.5 Germany's massive CA surplus set to decline 15 | August 26, 2016 Current Issues need to be built annually for the rest of the decade. This extra demand could likely be met. Although only about 250k homes were completed in 2015, building permits shot up to 310k, more or less sufficient to meet the structural demand. Yet the record arrival of refugees since 2015, and of work immigrants from the CEE countries after the delayed opening of the labour market in 2011 and 2014, has been a game-changer. Last year, net migration jumped to the historical peak of 1.22 million. Between end-2015 and mid-2016 the number of foreigners grew by an additional 600,000 pushing the share of foreigners to almost 12% or 9.7 million. While most immigrants from CEE – roughly 40% of immigrants since 2001 – have entered both the labour and the housing market immediately, enormous uncertainty remains around the number of refugees and asylum-seekers that are ultimately going to stay in Germany as permanent residents and enter the labour and housing markets. A share of refugees are expected to return to their home countries, whether voluntarily or not, while many of those granted residency will be likely to bring their families over time. Bearing this uncertainty in mind, the Cologne Institute estimates that successful asylum-seekers and refugees alone will require additional 100k units of housing per year until 2020, though they draw wide confidence bounds at 68k and 158k. 27 Total demand will therefore be about 420k units, which is still well below the 500k upper range of estimates provided by some industry experts. 28 Given the solid economic development, the favourable labour market situation showing supply bottlenecks and the high wage level, Germany should continue to be a attractive destination for migrants. However, we expect net migration to decline in the medium term. Once the freedom of movement applied to the Eastern European countries (2011/2014) their citizens most inclined to migrate, who are typically younger and more qualified, swiftly left their home countries. Following this initial effect, however, migration should diminish considerably over the next few years. 29 Additionally, given the harsher stance towards refugees and the closed European borders, it is very unlikely to see a renewed refugee influx as in 2015. 27 Deschermeier et al. (2015). Immigration, Housing Demand and Construction Demand. June 2016. Cologne Institute for Economic Research, IW-Report No 18. 28 Witkowski et al (2016). Zur Wirkung der Fluechtlingskrise auf die langfristige Wohnimmobiliennachfrage in Deutschland, Deutsche Immobilien Akademie. 29 Bräuninger, D.; Peters, H. (2014). Temporary immigration boom: A wake-up call for politicians? Standpunkt Deutschland. 28 July 2014. New mortgage volume typically increases when mortgage rates fall 38 Sources: Federal Statistical Office, Deutsche Bank Research Mortgage rates could fall even further 39 Sources: Bloomberg Finance LP, Deutsche Bundesbank, Deutsche Bank Research Net migration to Germany by nationality 40 % of total net migration in 2015 Sources: Federal Statistical Office, Deutsche Bank Research 30 35 40 45 50 55 60 65 70 1% 2% 3% 4% 5% 6% Average mortgage rate Latest New mortgage volume, EUR 0% 1% 2% 3% 4% 5% 6% 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Mortgage rates 1 - 5 years >10 years 10Y bund 0 10 20 30 Syria Romania Afghanistan Poland Iraq Albania Croatia Bulgaria Italy Kosovo Other Germany's massive CA surplus set to decline 16 | August 26, 2016 Current Issues Construction cannot be ramped up easily On the supply side, it will be difficult to ramp up construction fast enough to meet this extra demand in the next few years, and excess demand is likely to keep house prices on the rise. There remain plenty of constraints. Some are external to the industry, primarily the scarcity of building land in urban centers. This is reflected in the fact that increases in land prices has long overtaken house prices (figure 43). Other construction costs have also increased at a faster clip than general inflation in the past few years, largely due to environmental regulation rising bureaucratic hurdles. 30 The more immediate constraint, however, is that the construction sector has been in structural decline for more than a decade and therefore shed capacity. Many workers in the sector have been either retrained or in unemployment for years, leading to eroding skills. Both the Federal Employment Agency and the Ifo institute have warned over this lack of skilled manpower. Immigration from Eastern Europe in particular has gone some way toward filling the gap, and some asylum-seekers could have the requisite skills to enter the construction sector over time. 30 Moebert, J. (2016). Residential construction: policy is contributing to only a gradual reduction in excess demand. Focus Germany. Deutsche Bank Research. 1 April 2016. Germany with 2nd lowest mortgage rate among G10 41 Sources: Deutsche Bank, Haver Analytics Additional housing demand of ~100k units shifts the real estate market into excess demand 42 Source: Deutsche Bank Research Land prices have long diverged from house prices due to scarcity in urban centers 43 % Sources: Deutsche Bank Research, Haver Analytics Non-land construction costs have also outpaced general inflation, hampering a supply response 44 % Sources: Deutsche Bank Research, Haver Analytics 0% 1% 2% 3% 4% 5% 6% New Zealand Australia UK Canada US France Denmark Norway Japan Italy Spain Germany Sweden Average first - home mortgage rate 0 50 100 150 200 250 300 350 400 450 500 Demand - supply 2016 Migration Backlog Base demand Building permits 2015 Excess demand 90 100 110 120 130 140 150 0002040608101214 House prices (nominal) Land prices CPI 90 100 110 120 130 140 000204060810121416 Construction costs: material Construction costs: labour CPI Germany's massive CA surplus set to decline 17 | August 26, 2016 Current Issues We restrict our current account analysis to the indirect impact on housing (excess) demand as well as, briefly, to two other effects: First, migrants tend to have a high demand for imports from their home countries. Second, they tend to remit some of their earnings back home. Migrants have immediate import demand Immigration typically has also a positive effect on bilateral trade flows between the home and host country. According to the literature a 10% increase in the stock of immigrants boosts trade by 1 to 1.5% with imports typically showing a stronger reaction given the preference of immigrants for goods from their home country. The effect is normally the stronger, the larger the differences in cultures, languages and institutions between the home and host country, as the informal trade barriers could be reduced significantly. 31 Remittances As immigrants are normally leaving parts of their families/relatives behind, they save a high share of their incomes to provide financial help to their families/relatives in their home country or, for example, to build a house in their home town for a later phase in life. Thus, remittances are expected to increase when net migration to Germany increases which adds to Germany’s structural deficit in the secondary income balance. A changing labour market participation in the host country of earlier immigration cohorts also plays a role. Recently, the volume of remittances increased to EUR 4.1bn in June (12M moving sum), which was the highest level since the end-1990. Going forward, remittances should increase further given the elevated net-migration levels, which on margin have a weakening effect on the EUR. 31 Genç, M. (2014). The impact of migration on trade. IZA World of Labor. June 2014. The German construction industry has structurally declined since the mid-1990s 45 Sources: Federal Statistical Office, Deutsche Bank Research Unlike manufacturing, productivity in construction has stagnated 46 Sources: Federal Statistical Office, Deutsche Bank Research 50 70 90 110 130 150 170 600 700 800 900 1000 1100 1200 1300 1400 1500 91959903071115 Employees Hours worked (rhs) Millions of hours per month Thousands 80 100 120 140 160 180 200 92960004081216 Total economyConstruction Manufacturing Real output per hour worked Germany's massive CA surplus set to decline 18 | August 26, 2016 Current Issues (3) Ageing of the German population set to reduce the high savings rate of the households As highlighted before, we expect net migration to Germany to diminish considerably over the next few years. Thus, in the medium-term the challenging demographical fundamentals will come to the forefront with far reaching changes on the German society and the economy, which will become more domestically oriented as consumer demand will constantly shift for example to more medical services and less transportation. Given the manifold implications, we will concentrate on the channels most relevant for the current account balance. The decomposition of our projection out to 2020 based on the global panel data model showed that the German demographical trends have the largest negative effect on the current account balance (figure 21). In an international comparison, Germany will be one of the largest hit countries. 32% of the German population will likely surpass the average effective retirement age of 63 over the next 20 years. 32 Measured by the old age dependency ratio, Germany (32%) has the fifth oldest population globally behind Japan (43%), Italy (35%), Greece (33%) and Finland (32%). This can also be seen by the far stronger shifted German population pyramid to older ages compared to the global pyramid (figure 50), which is set to continue. The German natural population change, which is the difference between the number of live births and death (figure 55), is continuously negative since 1972 given the permanent low fertility rate. The increase of the population was solely driven by net migration. The share of foreigners increased from 7% in the mid-1970s to almost 12% today. The effect of the demographical changes on the current account balance can be best demonstrated via the current account and excess savings nexus. Over households’ life-cycles, the savings rate varies markedly. Monthly German household’s incomes reach their peak for the age group 35 to 45 at EUR 3826 per month and remain more or less on that level for the age group 45 to 55. For both groups the savings rate is the highest with about 14%. 32 According to the OECD, the average effective German retirement age is about the EU average, but below the OECD average in 2014. Asylum influx and labour migration from Eastern Europe pushed net migration to historical high 47 Million persons Sources: Federal Statistical Office, Deutsche Bank Research Remittances expected to increase further 48 EUR bn (left, 12M moving sum), persons (million, right) Sources: Deutsche Bundesbank, Eurostat, Deutsche Bank Research German old age dependency ratio very high 49 %, (65+/15-64y) Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision - medium variant, Deutsche Bank Research - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 50 55 60 65 70 75 80 85 90 95 00 05 10 15 Net migration natives Net migration foreigners Net migration total Germany's massive CA surplus set to decline 19 | August 26, 2016 Current Issues Household incomes then fall continuously as increasing shares of each age cohort are in retirement. For persons 80+ the household income is about 35% lower compared to the age group 45 to 55. But their consumption level does not decrease in proportion to incomes, and so saving ratios would fall drastically (figure 53), though they never fall below zero. As can be seen from figure 50, Germany is currently benefitting from a large share of persons in the age group 45 to 55 (17% of the population) who enjoy one of the highest household incomes among all age groups and have a high savings rate. Once this group moves up to the next age group (55-65), this should reduce the German total savings rate by 0.5pp. In the coming years, the continued ageing of the German population will likely be the main demographical driver pushing down the current account surplus. The continued ageing will be a clear drag on the savings rate. Germany’s population is very old compared to the global population (2015) 50 x-axis: share of the respective age as % of total population y-axis: Age Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision - medium variant, Deutsche Bank Research German population pyramid continues to shift to older age groups 51 x-axis: share of the respective age as % of total population y-axis: Age Sources: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision - medium variant, OECD, Deutsche Bank Research Life-cycle incomes, consumption and savings peak for age group 35 to 45 52 EUR, 2013 Sources: Federal Statistical Office, Deutsche Bank Research Savings slump with retirement entry 53 Index, age group 35 to 45 = 100, 2013 Sources: Federal Statistical Office, Deutsche Bank Research 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Total 18 to 25 25 to 35 35 to 45 45 to 55 55 to 65 65 to 70 70 to 80 80+ Private consumption Other expenditures Savings Monthly household income 0 20 40 60 80 100 18 to 25 25 to 35 35 to 45 45 to 55 55 to 65 65 to 70 70 to 80 80+ Private consumption Other expenditures Savings Monthly household income Germany's massive CA surplus set to decline 20 | August 26, 2016 Current Issues German savings rate remains in positive territory even with old age 54 % of income, 2013 Sources: Federal Statistical Office, Deutsche Bank Research German population dynamics driven by net migration – natural change negative since the 1970s 55 Million persons Population decrease in 2011 due to structural break in the time series (2011 Census). Sources: Eurostat, Deutsche Bank Research Despite current net migration on historical peak, population expected t o decline strongly … 56 Million persons Sources: Federal Statistical Office, Deutsche Bank Research … and old age dependency ratio to shoot further up 57 % (65+/15 - 64y) Sources: Federal Statistical Office, Deutsche Bank Research 0 2 4 6 8 10 12 14 16 18 to 25 25 to 35 35 to 45 45 to 55 55 to 65 65 to 70 70 to 80 80+ 50 55 60 65 70 75 80 85 - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16 Natural change Net migration Total population change Population (Jan, 1st; right) Census 2011 break 60 65 70 75 80 85 15 19 23 27 31 35 39 43 47 I II III Scenarios: I Net immigration drops to 200,000 p.a. II Net immigration drops to 100,000 p.a. III Net immigration = 0 30 35 40 45 50 55 60 65 70 15 19 23 27 31 35 39 43 47 I II III Scenarios: I Net immigration drops to 200,000 p.a. II Net immigration drops to 100,000 p.a. III Net immigration = 0 Germany's massive CA surplus set to decline 21 | August 26, 2016 Current Issues Conclusion The likely fall of the German current account surplus from the record high of almost 9% to 7% of GDP in 2020 will reduce global imbalances. Germany has had the world’s largest current account surplus in the world over the past three years. The surplus will decline not only due to domestic factors such as an ageing population, the housing boom, and record immigration. It will also weaken as a result of a structural slowdown in the growth of global trade. A weaker German balance will also tend to weaken the Eurozone’s aggregate current account surplus. Some of the deterioration will benefit the balances of Germany’s European neighbours and thus offset the impact on the aggregate current account balance. But the main decline will be vis-a-vis the traditional importers in Asia, the Middle East, and elsewhere. Moreover, although a smaller surplus would also suggest less recycling on the financial account, we see the rotation of capital stocks out of the Eurozone as relatively independent from the current account. Overall, therefore, we expect the German and thus the Eurozone’s basic balances to deteriorate further and to increase the downward pressure on the euro. Germany's massive CA surplus set to decline 22 | August 26, 2016 Current Issues Appendix Overview on panel data structure of full model estimation 58 Sources: IMF, OECD, Deutsche Bank Research Global current account balance reduced form panel data estimations 59 Pooled panel data estimation with AR(1) Prais-Winsten correction and panel heteroskedasticity robust standard errors. * significant at 10%; ** significant at 5%; *** significant at 1%; L. one year lagged variable; (+) variables are constructed relative to a (GDP - weighted) country sample average, in each year. Sources: IMF, OECD, Deutsche Bank Research Variables L. NFA/Y0.016**0.016**0.0080.016**0.016**0.012*0.0090.0090.006 L. NFA/Y*(dummy if NFA/Y < -60%)-0.010-0.0100.0020.0040.003-0.007-0.006-0.0060.012 Financial Center Dummy0.026***0.026***0.026***0.024***0.024***0.028***0.027***0.027***0.026*** L.Output per worker, relative to top 3 economies0.0290.0290.0220.0330.022-0.089**-0.043-0.0660.043 L.Relative output per worker*K openness0.052**0.052**0.0830.074**0.083**0.145***0.111**0.134***0.065 Oil and Natural Gas Trade Balance * resource temporariness (+)0.353***0.353***0.222**0.292***0.208**0.404***0.354***0.348***0.275*** Dependency Ratio (+)-0.086-0.086-0.089-0.221**-0.198**0.0550.0700.059-0.090 Population Growth (+)-0.817**-0.817**-1.027**-0.868*-0.517-1.300**-0.293-1.055*-0.471 GDP growth, forecast in 5 years (+)-0.379***-0.379***-0.447*-0.640***-0.584***-0.496***-0.491***-0.560***-0.410* L.Public Health Spending/GDP (+)-0.437***-0.437***-0.043-0.525***-0.474***-0.068-0.194-0.090-0.031 L.demeaned VIX*K openness0.054***0.054***0.0330.060***0.066***0.0190.0270.0180.038 L.demeaned VIX*K openness*share in world reserves-0.142**-0.142**-0.077-0.142*-0.134*-0.085-0.057-0.066-0.086 Own currency's share in world reserves-0.048***-0.048***-0.076***-0.065***-0.071***-0.032**-0.046***-0.041***-0.069*** Output Gap (+)-0.375***-0.375***-0.399***-0.420***-0.413***-0.301***-0.331***-0.318***-0.374*** Commodity ToTgap*Trade Openness0.206***0.206***0.167***0.204***0.204***0.218***0.180***0.255***0.192*** Safer Institutional/Political Environment (index) (+)-0.109***-0.109***-0.175***-0.151***-0.139***-0.121***-0.130***-0.122***-0.173*** Demeaned Private Credit/GDP (+)-0.019**-0.019**-0.030***-0.023**-0.024***-0.012-0.024***-0.015*-0.024** Cyclically adjusted Fiscal Balance, instrumented (+)0.384***0.384***0.784***0.454***0.355***0.666***0.650***0.699***0.758*** (diff Reserves)/GDP* K controls, instrumented (+)0.308*0.308*-0.0070.451*0.493**0.977**-0.0980.0590.078 rel. Dependency Ratio*Aging Speed0.124***0.124***0.095*0.0630.0490.164***0.201***0.199***0.146*** rel. Aging Speed * Dependency Ratio0.096**0.096**0.0930.210***0.180**-0.011-0.005-0.0240.112 Foreign value added share of gross exports0.044*0.092*** Backward participation in global value chains0.119** Forward participation in global value chains0.065** Price-to-income ratio (%, valuation relative to long-term avg.)-0.024** Price-to-rent ratio (%,valuation relative to long-term avg.)-0.018***-0.023*** Average of Price-to-income and price-to-rent ratio-0.025*** Constant-0.015***-0.015***-0.021***-0.028***-0.055***-0.013***-0.016***-0.018***-0.043*** Time Observations Countries Root MSE 0.0280.0270.025 0.0320.028 0.031 0.031 0.027 425 31 (1) (2) (3) (4) (5) (6) (7) 642 31 591 27 707 42 606 27 425 31 707 42 1212 1212 4949 0.032 House prices (I) House prices (II) Full model House prices (III) 1995-20111995-20111995-20111995-2011 (8) (9) IMF EBA 1986-2013 1986-20131995-2011 1995-20111995-2011 EBA full dataset EBA adj sample GVCs (I) GVCs (II) Germany's massive CA surplus set to decline 23 | August 26, 2016 Current Issues Estimated vs. actual current account balances (I/III) 60 % of GDP Sources: IMF, OECD, Deutsche Bank Research Germany's massive CA surplus set to decline 24 | August 26, 2016 Current Issues Estimated vs. actual current account balances (II/III) 61 % of GDP Sources: IMF, OECD, Deutsche Bank Research Germany's massive CA surplus set to decline 25 | August 26, 2016 Current Issues Estimated vs. actual current account balances (III/III) 62 % of GDP Sources: IMF, OECD, Deutsche Bank Research 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 - m ail: marketing.dbr@db.com Available faster by E - mail: marketin g.dbr@db.com  German industry: growth in employment likely to end ( C hart in f ocus ) ................................ .............................. A ugust 24 , 201 6  Focus Germany: ECB helps industry and boosts property prices (Current Issues – Business cycle ) ................................ .... July 27 , 201 6  Fewer insolvencies in German industry ( Talking point ) ................................ ................................ ... July 21 , 201 6  Start - ups inspire markets with digital technologies (Fintech # 7) ( Talking point ) ................................ ................................ ..... July 6 , 201 6  Focus Germany: German consumer vs Brexit (Current Issues – Business cycle) ................................ ...... July 4 , 201 6  Focus Germany: Growth and fiscal outlook: Risks remain (Current Issues – Business cycle) ................................ ..... June 3, 2016  German manufacturing output: a g ood first quarter, but no stable uptrend ( Talking point ) ................................ ................................ ... May 27 , 201 6  Focus Germany: How to pay for retirement? (Current Issues – Business cycle) ................................ .... May 12 , 201 6  Focus Germany: Solid growth but difficulties for exports and construction ( Current Issues – Bus iness cycle ) ................................ ...... April 4 , 201 6  The end of the golden era for oil states continues to curb German export growth in 2016 ( Talking point ) ................................ ................................ March 22 , 201 6  Focus Germany: German growth after oil, EUR and ECB (Current Issues – Business cycle) .............................. February 2, 201 5  Capital investment in Germany at sectoral level: Service providers continue to expand while industry contracts slightly (Current Issues – Germany) ................................ .......... January 9, 201 5  Focus Germany: Outlook 2015: Recovery with risks attached (Current Issues – Business cycle) ................................ January 6 , 201 5  Case for higher investment in infrastructure – despite questionable “gap analysis” ( Standpunkt Deutschland ) ................................ ......... December 5 , 2 01 4  Focus Germany: Structural downshift in global trade burdens growth outlook (Current Issues – Business cycle) ............................ December 2, 201 4  Konzept Issue 01 © Copyright 2016. 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. 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