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March 9, 2017
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At face value the pick-up of GDP growth at the end of 2016 (Q4: +0.4% qoq vs. +0.1% prev.) seems to fit with improving sentiment. However, given its composition we would argue that underlying growth was weaker than the headline suggests. We stick to our below consensus GDP forecast for 2017 (1.1%) and only make cosmetic changes in the details. We are raising our inflation forecast slightly overall for 2017, from 1.6% to 1.7%, compared with only 0.5% in 2016. We still expect core inflation to be only slightly above 1% in 2017. If the signs of global price increases are confirmed, then we could in fact see a more pronounced increase in core inflation, particularly if rising prices translate into second-round effects when wage negotiations are conducted in 2018. (Further articles: German industry, German election campaign) [more]
Focus Germany Germany: Between strong survey data and weak Q4 GDP details. At face value the pick-up of GDP growth at the end of 2016 (Q4: +0.4% qoq vs. +0.1% prev.) seems to fit with improving sentiment. However, given its composition we would argue that underlying growth was weaker than the headline suggests. In addition, while headline sentiment is admittedly impressive, details here are much less so, too. We stick to our below consensus GDP forecast for 2017 (1.1%) and only make cosmetic changes in the details. Core inflation – still subdued despite dynamic environment. Rising energy and food prices have recently provided considerable stimulus for German inflation, although it is expected to settle down again over the next few months. While domestic price trends will remain subdued for the time being, there is mounting evidence that the upward trend in inflation resulting from higher commodity prices becomes more entrenched. We are raising our inflation forecast slightly overall for 2017, from 1.6% to 1.7%, compared with only 0.5% in 2016. We still expect core inflation to be only slightly above 1% in 2017. If the signs of global price increases are confirmed, then we could in fact see a more pronounced increase in core inflation, particularly if rising prices translate into second-round effects when wage negotiations are conducted in 2018. German industry: small output gain in 2017 – adverse effect from Brexit and Trumponomics. In 2016, the manufacturing industry’s output in Germany increased by 1.4% in real terms (2015: 1.1%). We anticipate a rise of 0.5% in 2017. The weakness of investment activity in Germany and many key exports markets, which is attributable to a variety of uncertainty factors, is holding back German industry. The view from Berlin. German election campaign: Close contest likely dominated by myopic debates. Following Martin Schulz’ surprising nomination as SPD chancellor candidate and due to the following media hype, both Schulz and Chancellor Merkel (CDU) as well as their parties are in a neck and neck race in the polls. Polls suggest that a renewed grand coalition is the most likely election outcome, other options including a leftish red-red green coalition have become more likely. The play of (political) colours and the composition of the new governing coalition will in the end define the policy measures to be implemented. However, the prospects for an end of Germany’s present reform fatigue and for the implementation of policies to enhance the economy’s productive potential are very limited. On the contrary, the risk of short-sighted policies rolling back past decade’s reforms and embarking on unsustainable public expenditure policies has increased. While such a scenario might in the short run ease tensions within the EU and the EMU, Germany could possibly quickly lose its role as Europe’s beacon of stability. Authors Dieter Bräuninger +49 69 910-31708 dieter.braeuninger@db.com Eric Heymann +49 69 910-31730 eric.heymann@db.com Oliver Rakau +49 69 910-31875 oliver.rakau@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: Between strong survey data and weak Q4 GDP details ....................................... 3 Core inflation – still subdued despite dynamic environment ....................................... 7 German industry: small output gain in 2017 – adverse effect from Brexit and Trumponomics ................................................ 15 The view from Berlin. German election campaign: Close contest likely dominated by myopic debates.......................................... 19 DB German Macro Surprise Index ................. 30 Export Indicator............................................... 31 Event calendar ................................................ 32 Data calendar ................................................. 33 Financial forecasts.......................................... 34 Data monitor ................................................... 35 March 9, 2017 Growth and inflation leave ECB still unfazed Growth and inflation leave ECB still unfazed 2 | March 9, 2017 Focus Germany Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2016 2017F 2018F 2016 2017F 2018F 2016 2017F 2018F 2016 2017F 2018F Euroland 1.7 1.3 1.5 0.2 1.4 1.5 3.4 2.8 2.5 -1.8 -1.5 -1.5 Germany 1.9 1.1 1.6 0.5 1.7 1.6 8.4 8.0 7.8 0.8 0.5 0.2 France 1.1 1.3 1.1 0.3 1.2 1.3 -1.2 -0.3 -0.1 -3.2 -3.2 -3.1 Italy 0.9 0.7 0.7 -0.1 1.0 1.2 2.9 2.7 2.3 -2.3 -2.3 -2.3 Spain 3.2 2.5 2.2 -0.4 1.7 1.7 2.0 1.7 1.7 -4.4 -3.2 -2.8 Netherlands 2.1 2.1 1.5 0.1 1.0 1.2 10.5 10.2 10.2 -1.1 -0.7 -0.5 Belgium 1.2 1.1 1.3 1.8 2.0 1.8 1.0 1.0 1.0 -3.0 -2.5 -2.6 Austria 1.5 1.5 1.6 1.0 1.8 1.6 2.6 2.8 3.1 -1.4 -1.2 -1.0 Finland 1.6 1.2 1.5 0.4 1.3 1.4 -0.8 -0.4 -0.3 -2.3 -2.2 -1.7 Greece -0.1 1.4 1.6 0.2 1.3 1.0 -0.6 1.2 1.5 -3.7 -2.4 -2.2 Portugal 1.4 1.2 1.1 0.7 1.4 1.5 0.9 0.7 0.7 -2.8 -2.5 -2.5 Ireland 3.3 2.8 3.0 -0.2 1.1 1.4 12.0 10.0 8.0 -1.1 -1.1 -1.0 UK 1.8 1.7 1.1 0.7 2.3 2.7 -5.2 -4.8 -4.0 -3.3 -2.9 -2.5 Denmark 1.1 1.7 1.8 0.3 1.1 1.4 6.5 6.5 6.5 -2.1 -2.5 -1.9 Norway 0.7 1.6 1.8 3.6 2.7 2.5 4.4 6.2 7.0 3.7 3.9 4.2 Sweden 3.1 2.0 2.3 1.0 1.7 1.9 4.6 4.2 4.4 2.0 -0.2 0.0 Switzerland 1.3 1.5 1.7 -0.3 0.5 0.7 9.5 9.3 9.0 -0.1 -0.1 -0.1 Czech Republic 2.5 2.7 2.8 0.7 2.3 2.0 2.0 1.2 1.1 0.1 -0.6 -0.6 Hungary 2.4 3.0 2.8 0.4 2.2 2.9 5.6 4.5 4.1 -1.8 -2.5 -2.3 Poland 2.8 3.2 3.4 -0.6 1.7 2.0 -0.5 -1.2 -1.4 -2.6 -3.0 -2.9 United States 1.6 2.6 3.6 1.3 2.1 2.2 -2.8 -3.4 -4.1 -3.2 -3.0 -2.5 Japan 1.0 1.0 1.1 -0.1 0.5 1.1 3.7 3.9 4.0 -3.4 -3.7 -3.4 China 6.7 6.5 6.0 2.0 2.5 2.6 2.4 2.1 1.8 -3.8 -4.0 -4.0 World 3.0 3.4 3.8 4.2 5.3 4.4 *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 DX 2016 2017 2014 2015 2016 2017F 2018F Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Real GDP 1.6 1.7 1.9 1.1 1.6 0.7 0.5 0.1 0.4 0.4 0.3 0.4 0.4 Private consumption 0.9 2.0 2.0 1.0 1.4 0.7 0.2 0.2 0.3 0.3 0.2 0.4 0.3 Gov't expenditure 1.2 2.8 4.0 1.5 1.0 1.3 0.9 0.2 0.8 0.3 0.2 0.3 0.3 Fixed investment 3.4 1.7 2.3 0.4 2.8 1.8 -1.5 -0.2 0.8 -0.2 1.2 0.6 0.7 Investment in M&E 5.5 3.7 1.1 -0.2 2.4 0.9 -2.3 -0.5 -0.1 1.1 0.3 0.3 0.3 Construction 1.9 0.3 3.0 1.0 3.7 2.7 -1.7 -0.3 1.6 -1.4 2.2 1.0 1.2 Inventories, pp -0.3 -0.5 -0.1 0.2 0.0 -0.4 -0.1 0.3 0.3 -0.1 -0.1 0.0 0.0 Exports 4.1 5.2 2.6 3.0 3.7 1.4 1.2 -0.3 1.8 0.8 0.7 1.1 1.0 Imports 4.0 5.5 3.7 3.6 4.1 1.4 0.1 0.4 3.1 0.1 0.6 1.3 1.1 Net exports, pp 0.4 0.3 -0.4 -0.1 0.0 0.1 0.5 -0.3 -0.4 0.4 0.1 0.0 0.0 Consumer prices* 0.9 0.2 0.5 1.7 1.6 0.3 0.1 0.5 1.1 1.9 1.6 1.6 1.8 Unemployment rate, % 6.7 6.4 6.1 6.1 6.4 6.2 6.1 6.1 6.0 5.9 6.0 6.1 6.2 Industrial production 1.5 0.5 1.3 0.6 1.4 Budget balance, % GDP 0.3 0.7 0.8 0.5 0.2 Public debt, % GDP 74.9 71.2 68.3 65.9 63.4 Balance on current account, % GDP 7.3 8.3 8.4 8.0 7.8 Balance on current account, EUR bn 213 253 263 259 260 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research Grow th and inflation leave ECB still unfazed 3 | Marc h 9, 2017 F ocus G erm an y Germ any: Between st rong survey data and weak Q4 GDP details — At f ace val ue the pick -up of GDP growth at the end of 2016 (Q 4: +0. 4% qoq v s. + 0. 1% pr ev .) seem s to fi t wi t h im prov ing sentim ent. Moreov er, on past f orm sentim ent suggest s a f urther pic k- up i n growth i n Q1. Howev er, giv en i t s com posi ti on (m ateri al boost f rom publi c consum pti on and weak priv at e equi pm ent inv estm ent) we woul d argue t hat underl yi ng growth was lower t han t he headli ne sugge sts and we hav e lit tl e reason to lif t our 2017 c all . In addi t i on, whi l e headli ne sentim ent i s admit t edly im pressiv e, detai l s are m uch l ess so. O ur i niti al t em pt ati on to r ai se our H1 GDP f orec ast giv en the strongl y r i si ng sentiment ******* ********** * ********* **** ****** *** *** ***** * ** ** ** **************** ********** * ****** ************** **** ****** **** ******* ******** ****** **** **** ***** ********* ** *********** *** *** **** ** **** ******* * *** ********* ** ** ******************* ************** *** *** ******** **** ** **** ******* ********* ******************* ****** ********* ** ** ******** **** ****** **** ******** ****** **** ** ************ ***** ************ * **** * * *********** ** ** ******* ****** ********* *************** * ******** ******* ******** * ************* * ******** ********* ******* ** *********************** ** ****** * *** * **************** **** ******** *********** ********* *********** *** ************ *** **** ** ******* ************ *** ************* *********** ********* ********** *** **** ************** ************************** ** ******** *** ************ *** **** *********** *********************************** ***** * *** **************** ***** **** ******** ****** ** ****** ****** ** ******** ****** * ** ******* **************** ******* * ************* *************** ********* ** ** * *** *** ********** ************* * ***** ************************* *********** ** *** ****** ** * ****** ******** ***************** ** ******************** *** **** ****** *** * ******** ** ************ ****************** ***** ********* ** ** ** ***** * ** ******* ********** ************* **************** ****** ***** **** **** * ********** *** ******** * ******* ** ****** ************************** ************ ** * ********** *** ****** * ***** ******************* ******* ******* ********* ********* * ********* * ** ******** ****** **** ************* ***** ** **** ******** ***** ** ******** ** ******* ******************** ****** ***** ************* ***** ** ****** **** * ********* * * **** *********** ***** ** *** ***************** ***** **** *** ** **** *** ******** ******** ******* ********** ************* ******* ******* * ****** ** *** ******* ************************************* *********************************** ******** ** ************ ** **** ******************* ****** *** **** ********** **** ***** * *** ********* ****** **** ** ***** ********* ***** ******* ************** * *** ** * *** ******* **** ******* ****** ******* **** **** ** ****** ******** ** ***** *** ** **** ** **** ** ******** ***** ** **** ***** ***** *** ** ** ** * * * * * ** ** ** ** ** ** *** *** ******** *** *************** ******* ****** *********** *** ***** ********** *** ** ********* * * * ** **** * ******* * * * ** ** *** * *** * * ******** ************* * *** ******** * **** ** **** * *** * *** ** ** ** ** ** ** ** ** * ********** *** *** ***** ************* * ******** ************* * *** ******** * ****** ***** Growth and inflation leave ECB still unfazed 4 | March 9, 2017 Focus Germany This weakness in investment might also have played a role in the sudden spike of delivery times within the February PMI data, suggesting some capacity constraints in the face of the upward trend in orders, which is one of the reasons for our caution regarding the near-term impulse for actual production. Still, rising sentiment and some improvement of domestic investment goods orders suggest a marginal pick-up in private equipment investment in Q1. Growth even more tilted towards public sector An important but widely unnoticed fact is how much German growth has been tilted towards the public sector lately. In Q4 nearly 0.3pp of headline growth was contributed by public consumption and investment and only 0.15pp from the private sector. As a result the share in GDP rose further to around 27% the same level as seen during the 2009 crisis and during the 1990s. A larger importance of the public sector is by itself not a warning sign. However, this increase is strongly tilted towards government consumption (likely in part refugee related), while government investment does not show an upward trend as a share of GDP. With a lower refugee influx we continue to see a high probability of softer demand in 2017. -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 00 02 04 06 08 10 12 14 16 Non-public Equipment investment, % yoy Source: Federal Statistical Office Strong slowdown of private equipment investment 3 -40 -30 -20 -10 0 10 20 30 06 07 08 09 10 11 12 13 14 15 16 17 Domestic investment goods orders ex. airplanes, 1-quarter lead Investment in machinery and equipment (nat. acc.) Orders suggest investment pick-up in Q1 4 Germany, real, % yoy Source: Federal Statistical Office -0.5 0 0.5 1 1.5 2 10 11 12 13 14 15 16 Government Residual Real GDP Contribution to real GDP growth, qoq, %-points Sources: Federal Statistical Office, Deutsche Bank Research Private sector growth very weak in H2 2016 5 18 18.5 19 19.5 20 20.5 21 21.5 22 22.5 0 5 10 15 20 25 91 95 99 03 07 11 15 Government consumption Government investment Government consumption & investment Government share 6 Real, % GDP Source: Federal Statistical Office Growth and inflation leave ECB still unfazed 5 | March 9, 2017 Focus Germany Current account surplus to be weighed down by high real imports The EU Commission has again criticised the high and rising German current account surplus. We had already shown that the drop in oil prices in the last years was to blame. Excluding energy it had remained stable in the last three years. Moreover, in Q4 real import growth (+5.1% yoy) has remained above real export growth (+4.1%) for the sixth consecutive quarter, the longest streak at least since reunification, and as a result net exports were a large drag on GDP growth in Q3 as well as in Q4 (-0.4pp). This is, in our view, a much better guide to the underlying trend of the German current account than the nominal headline number. We expect the current account surplus to trend down moderately in the next years as we remain sceptical that global demand is actually on a sustainable uptrend. From a more cyclical, short-term perspective Q4 showed a material acceleration in exports and imports. While this suggests higher global demand and to some extend corroborates the uptrend in sentiment, it could also be some pent-up demand after previous weakness. Q1: Sentiment points to upside risks foremost for external demand .. Headline ifo and PMI have increased in February sending an overall encouraging message regarding the growth outlook. The Jan/Feb composite PMI as well as ifo expectations are consistent with 0.6% qoq GDP growth. However, both strongly overstated growth in the last two quarters by between 0.2-0.4pp (also see next sections). Moreover, while ifo expectations unexpectedly improved in February they remained well below the Q4 average and the February improvement was driven by the wholesale sector with a much less benign increase for the more reliable signal from the manufacturing sector. The manufacturing expectations (ifo) tend to lead the manufacturing PMI by one to two months pointing towards a weaker PMI's in the coming months. In addition, the gap between the assessment of the current situation and expectations in the ifo has risen further. Historically, ifo expectations are by far the better predictor of hard data. ... but beware the "new modesty" ... The EU Commission has analysed the predictive power of their monthly business & consumer survey for hard business cycle indicators like GDP growth in their Winter 2017 Economic forecasts. Based on a more comprehensive analysis they corroborate our finding that since the crisis soft data tends to overstate growth prospects if you base calculations on pre-crisis or full sample regressions. They argue, that participants' survey answers are relative to expectations or a perception of "normal" which has been weighed down by the macroeconomic weakness in recent years. This argument also applies to other surveys like the PMI and ifo and other types of hard data. For instance, the sharp rise in German PMI new orders (Feb.: 58.0) points to an acceleration of German industrial production towards +5% yoy based on a regression with data since 1997. Using a regression starting in 2013 points to a pick-up to 2.5% only and fits the 2016 data much better. -20 -15 -10 -5 0 5 10 15 20 92 96 00 04 08 12 16 Exports Imports Real imports continued to outpace real exports 7 Source: Federal Statistical Office Real, % yoy 42 44 46 48 50 52 54 56 58 86 91 96 101 106 12 13 14 15 16 17 ifo manuf. Expec. (left) Manufacturing PMI (right) Booming PMI, but ifo points in other direction 8 Source: Markit, ifo Index, 2005=100 (left); Index (right) 70 80 90 100 110 120 130 08 09 10 11 12 13 14 15 16 17 Climate Situation Expectations ifo expectations remain low 9 Sources: ifo Index, 2005=100 Growth and inflation leave ECB still unfazed 6 | March 9, 2017 Focus Germany … and the weather effect on construction The construction sector is highly sensitive to temporary disruptions due to bad weather, mostly cold winter weather. Based on details within the ifo survey Q1 2017 is likely to see such an impact. In January (17%) / February (>60%), on average over 40% of construction companies mentioned weather as a limiting factor to their activity, much more than the 15% average in Q4, which had still allowed a strong boost to construction investment (+1.6% qoq vs. -0.3% prev.) . Historically, this is consistent with a drop of construction investment in the range of -4% qoq (R2=49%) in Q1. Even if we assume an improvement in weather assessment in March an indicative drop of only -1 to -2% would by itself lower our Q1 GDP forecast by 0.2-0.3pp. Declining construction activity would also weigh on German monthly industrial production (it includes construction) leading to an on-going divergence with the improving sentiment data over Q1. A weak start to 2017 for construction is also supported by a much lower construction PMI. The flip side of this is of course a likely bounce back of roughly the same magnitude in Q2. The headline construction ifo remained well above its historic averages in February despite two consecutive declines. Moreover, there are substantial backlog and strong order momentum pointing to the underlying health of demand for construction, while capacity constraints limit how much this translates into surging output in 2017. Thus, a weak Q1 would not change our medium-term outlook of a moderate expansion. However, this potentially large swing in growth momentum, that we had seen already in 2016 with reversed signs (strong Q1, weak Q2 for construction) will make reading the underlying growth trend very hard. 2017 forecast largely unchanged: Let the hard data speak All told, we have to admit that recent sentiment readings suggest upside risks to our current GDP forecast for Q1. However, there sufficient offsetting evidence (sentiment details and GDP growth composition in Q4) for us not to hop on- board of the growth optimism bandwagon for early 2017. Hard data will need to convince us, but hard data might be strongly impacted by temporary headwinds in Q1/Q2 (weather on construction and oil price on consumption). Therefore, we stick to our cautious forecast as well as the overall composition and only make cosmetics changes with respect to the details. Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) -35 -25 -15 -5 5 15 25 35 -8 -6 -4 -2 0 2 4 6 8 10 00 02 04 06 08 10 12 14 16 Construction investment, % qoq (left) ifo construction, share of "bad weather" answers, chg. qoq (right, inv.) R^2=-0.49 Q1 2017 construction likely negative 10 Sources: ifo, Deutsche Bank Research, Federal Statistical Office Growth and inflation leave ECB still unfazed 7 | March 9, 2017 Focus Germany Core inflation – still subdued despite dynamic environment — Rising energy and food prices have recently provided considerable stimulus for German inflation, although it is expected to settle down again over the next few months. However, further developments are much more uncertain for core inflation, which has been very stable for years now and is currently a focal area not just for the ECB, as conventional models have often failed to come up with adequate forecasts in recent years. — On the one hand, wages and consumer prices for services have shown subdued domestic price development to date - a trend that is also unlikely to change in the near future. On the other hand, the impetus for German core inflation tends to be triggered from abroad in the form of rising import and producer prices. In this regard, there is mounting evidence to suggest an upward trend in inflation, over and above the direct price impetus resulting from higher commodities prices, boosted by a global upturn that is gaining ground according to business surveys conducted over the last few months. — We are raising our inflation forecast slightly overall for 2017, from 1.6% to 1.7%, compared with only 0.5% in 2016. We still expect core inflation to be only slightly above 1% in 2017. If the signs of global price increases are confirmed, then we could in fact see a more pronounced increase in core inflation, particularly if rising prices translate into second-round effects when wage negotiations are conducted in 2018. Expectations of moderate energy price developments, however, keep our forecast for headline inflation below the 2% mark in 2018. German inflation climbed to 2.2% in February 2017, which is not only the highest level seen in four-and-a-half years; the February figure also outstripped the value considered by the ECB to be consistent with price stability (“below, but close to, 2%”). Moreover, inflation in the euro zone was only slightly behind the German figure in February (2.0%). We already pointed out at an early stage that the substantial impetus for headline inflation provided by oil prices could trigger a strong response in the German media and political circles. 1 And indeed, there were recently more calls for an (accelerated) end to the highly accommodative monetary policy 2 . But the upsurge in inflation is primarily due to a base effect associated with energy prices in conjunction with increases in food prices that will presumably be of a more temporary nature. This means that it is not only the ECB that is focusing on core inflation to get a better idea of the underlying inflation outlook. 3 At the moment, however, there is no sign of any upward trend in core inflation for either Germany or the euro zone as a whole. Both show a volatile sideways trend at a low level. Our analysis in October showed that wage momentum – which is ultimately the decisive domestic economic variable for the core inflation trend over the medium-term – would likely cause little inflationary pressure in Germany in 2017. 4 In this article, we will discuss energy and food prices before looking at individual components of core inflation, and their outlook, in more detail. German core inflation is interesting for two reasons: firstly, German price development is included in the headline rate for the EMU area with a weighting 1 Peters, Heiko (2016). Data Flash Germany: Sep inflation 0.7% (highest since May 2015) – more to come. 13 October 2016. Deutsche Bank Research. 2 In the FAZ newspaper, for example, Clemens Fuest calls for a reduction in the QE programme starting as early as April. 3 ECB (2017). Introductory statement to the press conference (with Q&A). 19 January 2017. 4 Rakau, Oliver (2016). Focus Germany: Subdued industry outlook dampens wage growth. 28 October 2016. Deutsche Bank Research. Frankfurt. -1 0 1 2 3 4 5 97 99 01 03 05 07 09 11 13 15 17 Germany Euro area Source: Eurostat HICP, % yoy Inflation close to ECB target in early '17 1 -2 -1 0 1 2 3 4 06 08 10 12 14 16 Core Food Energy Food and energy are drivers 2 Contribution to headline inflation, pp Sources: Federal Statistical Office, DB Research Growth and inflation leave ECB still unfazed 8 | March 9, 2017 Focus Germany of a substantial 28%. Secondly, German inflation is likely to remain above average for the foreseeable future due to the country’s much better economic environment. This means that the outlook for German core inflation could allow conclusions to be drawn for the rest of the EMU. Energy inflation: massive base effect likely to be over soon Three-quarters of the increase in German headline inflation from the low of April (-0.1%) until recently is attributable to higher energy prices (figure 2). During this period, energy inflation accelerated from -8.5% to +7.2% in February, the fastest turnaround in energy prices seen since mid-2010 and the end of 1999. If we base our analysis solely on the relatively close historical connection between the change in oil prices calculated in euros, and energy prices at consumer level, we find that the energy price surge could actually have had even more of an impact on the inflation rate. This analysis suggests that energy inflation could easily have surged towards the 15% mark (figure 3). The link tends to be weaker, the higher the rates of change. This is also because, while companies can pass on rapid increases like this in the price of petrol, diesel or heating oil to their customers virtually right away, these components only make up just under 50% of energy spending (figure 5). The prices of liquid gas and district/central heating, on the other hand, lag around 10 months behind the oil price. Contractual price clauses are likely to have a dampening effect in this context. There is no clear link between electricity and oil prices. Particularly in the years since the introduction of the surcharge under the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz – EEG) and the liberalisation of the electricity market, electricity prices have been increasing at a rapid rate, independently of global energy prices. If the energy price inflation forecast is not based on the direct link between oil prices and consumer energy prices, but rather on the more nuanced links described above, the results improve considerably (figure 4). 5 5 Like the ECB’s forecasts, our oil price forecasts are also based on the futures contracts, which point towards an increase in the oil price to only almost USD 58 per Brent barrel by the end of 2017. We have assumed a constant EUR/USD exchange rate. An exchange rate in line with the DB House View would not change the results significantly. We assume a constant rate of inflation in line with the January value for the energy components not dependent on oil. -60 -40 -20 0 20 40 60 80 100 -15 -10 -5 0 5 10 15 20 05 07 09 11 13 15 17 VPI - Energie Oil price in EUR Sources: Federal Statistical Office, Deutsche Bank Research, Bloomberg Finance LP % yoy Oil price surge not passed on in full 3 -15 -10 -5 0 5 10 15 20 25 30 92 96 00 04 08 12 16 Model Actual Germany, CPI, energy prices, % yoy Sources: Federal Statistical Office, Deutsche Bank Research, Bloomberg Finance LP Model: Oil price based on Bloomberg Brent futures / constant EUR USD; forecasts of energy comp. with individual lags (trans. & liquid fuels, natural gas, central heat.); electrcity/hard fuels assumed constant German energy prices – highs reached in January/February 2017? 4 CPI - energy Growth and inflation leave ECB still unfazed 9 | March 9, 2017 Focus Germany This means that German energy price inflation is likely to have reached its peak in January and February at just under 10%. It is expected to fall considerably by mid-year (to under 4% in May), before picking up again significantly due to the delayed reaction of individual energy components (November 8%, figure 4). Despite the improved model, the forecast was a few percentage points ahead of the actual price increases in January and February; this means that parts of the oil price increase might not start showing up until the next few months, meaning that the inflation peaks could flatten out slightly. However, this is unlikely to change the fact that energy price inflation is expected to slow down again by mid-2017, which would take pressure off headline inflation and, as a result, also alleviate some of media pressure on the ECB. Stabilisation in food price inflation Rising food prices have also made a contribution to the marked increase in headline inflation in recent months. Whereas the price increase in April 2016 came to 0.5%, it was as much as 4.4% in February 2017. Based on the price expectations of German food producers (ifo business survey), food price inflation is not expected to increase any further, and is more likely to drop slightly, between now and mid-2017. Food commodity prices are not pointing towards any upside risks for the coming months either. Food import prices, on the other hand, recently increased considerably, which could initially create further price pressure. Commodity and import prices, however, are not as clearly correlated with consumer prices as the ifo price expectations (figures 6-8). As a result, we have assumed below that food price inflation will remain on a more or less sideways trend at a slightly lower level over the next few months. Core inflation: forecasts are difficult The energy inflation forecast hinges on the quality of the commodities price forecast due to the close correlation involved. However, the forecast quality is fairly modest, particularly for the price of oil. But the core inflation forecast is also becoming increasingly problematic. Since around 2012, for example, the core inflation forecasts based on conventional models have initially been too high, with core inflation actually remaining largely constant. These models are often based on the link between wage and/or consumer price inflation, and measures of macroeconomic capacity utilisation, e.g. unemployment (Phillips curve). 38.75 26.21 14.46 11.11 1.05 15.36 Car fuels Electricity Natural gas Liquid fuels Hard fuels Central heating Weights in total CPI consumer basket, per mille Source: Federal Statistical Office Not all energy price components depend on oil price 5 -6 -4 -2 0 2 4 6 8 10 12 80 90 100 110 120 130 140 99 01 03 05 07 09 11 13 15 17 ifo food sector- selling price expectations (left, 6M lead) Consumer food prices (right) % yoy (right); 2005=100 (left) Sideways trend for food price inflation? 6 Sources: Federal Statistical Office, ifo -6 -4 -2 0 2 4 6 8 10 12 -10 -5 0 5 10 15 99 01 03 05 07 09 11 13 15 17 Food import prices (left) Consumer food prices (right) % yoy (right) Source: Federal Statistical Office Marked increase in food import prices 7 -6 -4 -2 0 2 4 6 8 10 12 -30 -20 -10 0 10 20 30 40 50 60 99 01 03 05 07 09 11 13 15 17 Commodity food prices (left) Consumer food prices (right) % yoy (right) Food commodity prices paint unclear picture 8 Source: Federal Statistical Office Growth and inflation leave ECB still unfazed 10 | March 9, 2017 Focus Germany The ECB identified the variable and elusive interaction between global and domestic inflation drivers as one of the problems. More complex models based on more variables would have described price development better. In 2012/13, for example, euro zone inflation was spared a more substantial drop, despite the recession, because global growth, and thus also global inflation, remained robust. Inflation then proceeded to undercut even the low values that had been predicted on the basis of the extremely weak labour market and underutilisation. 6 The German Bundesbank confirms the marked influence that import prices have had on core inflation in Germany in recent years. 7 This serves as testimony not least to the openness of the German economy and the high proportion of imported intermediate/finished products. The ECB also recently demonstrated that up to 70% of national inflation rates in the OECD countries can be explained by the same factor: global inflation. This explanation still covers 40% if the view is restricted to the developed countries and the period from 2001-2012. 8 In addition, more recent analyses suggest that the link between the real economy and inflation might not be linear/constant over the economic cycle. 9 For example, wages and consumer prices could show more of a reaction to accelerating growth if macroeconomic capacities are already well utilised, while prices could show less of a reaction in an economic environment that is weak anyway. International environment suggest upsurge in inflation ahead The findings set out above together with the current global environment would, in their own right, support a significant acceleration in (German) inflation, which is not limited to energy and food prices. For instance, German import and producer prices, which usually translate into higher (core) inflation rates subject to a certain time lag, recently picked up considerable speed in tandem with global commodities prices, consumer prices and early indicators of price development. However, this can largely be attributed to commodities-related components (in addition to energy). This should put a damper on the extent to which and, most importantly, the speed at which this is passed on to consumers. Import prices for consumer durables and capital goods were recently still below the prior-year level, while components more dependent on commodities showed a more substantial increase. Although the depreciation of the euro provided an additional boost to import prices (figure 11), this trend has not continued over the last few months. In January, German producer prices were up by 2.4% year-on-year, compared to April 2016, when it was a year-on-year decrease of 3.1%. Once again, however, this largely reflects the impact of the commodities price trend (base effect). If we exclude energy, metals, chemicals and coking products, domestic sales prices in December were only up by 0.6% on the previous year, meaning that this inflation rate was largely unchanged from the level of the past three years (figure 10) – putting them on a similarly flat trajectory to core inflation. 6 Bobeica, elena and Marek Jaroci*ski (2017). Missing disinflation and missing inflation: the puzzles that aren’t. ECB Working Paper Series. 7 Deutsche Bundesbank (2016). April 2016 Monthly Report – The Phillips curve as an instrument for analysing prices and forecasting inflation in Germany. 18 April 2016. 8 Parker, Miles (2017). Global Inflation: the role of food, housing and energy prices. ECB Working Paper Series. 9 Gross, Marco and Willi Semmler (2017). Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area. ECB Working Paper Series. -0.5 0 0.5 1 1.5 2 2.5 3 99 01 03 05 07 09 11 13 15 17 Euro area Germany Sources: Eurostat, Deutsche Bank Research Core inflation, % yoy Core inflation exceptionally low 9 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 06 08 10 12 14 16 "Core" producer prices* Core inflation Sources: Federal Statistical Office, Deutsche Bank Research, Eurostat % yoy, *domestic sales, ex. energy, metals , chemicals and coke Prolonged stability for producer price inflation 10 Growth and inflation leave ECB still unfazed 11 | March 9, 2017 Focus Germany Measures of capacity utilisation are likely to have an unclear inflation impact at the current juncture. Production capacity utilisation in Germany is largely normal. This means that companies are likely to find it relatively easy to pass higher production costs on to their customers. However, this was also true the last years, and we actually expect slightly lower GDP growth in 2017, which could reduce economic capacity utilisation on the whole, at least marginally. The subjective evaluation of capacity utilisation is also suspected to have shifted upwards as long periods of lower technical utilisation pushed down perceptions of “normal” utilization levels. On the other hand, the gradual economic recovery in the EMU and the forecast higher growth in the rest of the world are pushing capacity utilisation levels up there too. This dampening effect on inflation – also indirectly via prices of imported intermediate goods – is therefore likely to become less pronounced. So overall, the price pressure should gradually start to mount also in areas other than pure energy and food price increases, with the risk of an acceleration that outstrips current expectations. Core inflation extremely stable of late However, the inflation outlook is also associated with considerable uncertainty. Although in retrospect, improved models explain the developments seen in recent years, this does not mean that they are also able to predict future inflation data in a much-changed environment. One striking phenomenon, for example, is the extremely high stability of German core inflation since 2015, a trend that has also been reflected across the euro zone as a whole. Fluctuation in core inflation (measured in terms of the standard deviation over the last 12 months) has generally only remained for a very short period at as low a level that has been seen consistently over the past two years. Fluctuation in the inflation rates for most components of German core inflation has also been much less pronounced over the past two years than the average fluctuation since 1999, and the inflation rates for the individual components have moved closer in line with each other. This means that pricing within the corporate sector may have become somewhat sluggish and that companies may only be passing on higher costs resulting from the oil price hike, for example, in a very cautious or limited manner. Second-round effects could therefore be limited until companies become more confident as regards the sustainability of the development. On the other hand, the cost increases that are clearly visible to all consumers and customers could present a welcome opportunity to enforce higher prices. In light of this uncertainty and the many question marks surrounding the results of model calculations, we would like to expand our inflation outlook to include a discussion of the main components of core inflation. Core inflation: rent and leisure the most heavily weighted The weightings assigned to the individual goods and services within the consumer price index are based on the corresponding shares of consumer spending. These are updated every five years for the national CPI based on a random sample of households that record their spending and income over a period of three months. Based on the weighting scheme for 2010, this showed that households spent around 10% on food and 11% on energy. The “energy” category includes spending on heating energy and electricity, and spending on vehicle fuel. This means that around 80% can be attributed to core inflation. -20 -15 -10 -5 0 5 10 15 -8 -6 -4 -2 0 2 4 6 8 06 08 10 12 14 16 Non-Euro area Euro-area Trade weighted Euro (right, inv.) Sources: Eurostat, Bloomberg Finance LP % yoy, German import prices, Import from..., excl. energy, food, beverages and tobacco Euro depreciation could drive import prices up 11 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 99 01 03 05 07 09 11 13 15 17 Euro area Germany Standard deviation, core inflation, last 12M Sources: Eurostat, Deutsche Bank Research Core inflation exceptionally stable 12 Growth and inflation leave ECB still unfazed 12 | March 9, 2017 Focus Germany The component with the highest weighting within the basket of goods (31% share of core inflation) is spending on housing (mainly rent, excluding utilities and energy), with a share of 25%. 10 This is followed by leisure, entertainment and culture, which account for 11% of consumer expenditure. Spending on transport (excluding fuel) accounts for just under 10% and the “Other goods and services” category (7%) also accounts for more than 5% of outgoings. Alternatively, consumer spending can also be split into services and goods. Goods are likely to be more dependent on import and producer prices and on international developments, whereas services – with the exception of housing – are affected to a much greater extent by labour costs and, as a result, by domestic wage momentum. Goods (excluding energy and food) account for 28% of total consumer spending, while services account for 52% (not including rent: 31%). Rent: short supply vs. inertia and regulation Due to the high weighting attached to it, rent is one of the main determining factors for core inflation. Rent excluding utilities was up by 1.6% year-on-year in January and February, a significant increase compared with the most recent low of 1.0% seen in April 2016. The last time rent inflation surpassed the 1.5% mark was at the end of 2014 and in 1998. The moderate acceleration was, however, preceded by a marked slowdown. This means that the increased rents have been making more of a contribution to core inflation again since mid-2016. It is difficult to arrive at an economic interpretation of the turnaround and the current acceleration. While it could be assumed that the rent price ceiling legislation had a temporary dampening effect, rent price developments in individual federal states do not reveal any clear link to the staggered introduction of the legislation in these federal states (starting with North Rhine- Westphalia in July 2015). In addition, the fundamental developments would have suggested more dynamic price development in 2015 too, as immigration remained at a very high level over the entire period due to the influx of refugees and labour migration from other EU states. We can only suspect weaker price pressure for a temporary period. The gap between job creation and the reduction in unemployment, for example, suggests that in early 2015, fewer 10 In the definitions used in the German national consumer price index system (VPI), owner- occupied property is also included in rent excluding utilities, which is why the proportion of spending is much higher, at 24%, than in the Eurostat definition used in the Harmonised Index of Consumer Prices (10%). 12.2 37.6 44.9 249.1 49.8 44.4 96.0 30.1 114.9 8.8 44.7 70.0 Alcoholfree beverages Acohol, tobacco Clothing and footwear Housing (ex. Energy) Furnishings, household equipment Health Transport (ex. Energy) Communications Recreation and culture Education Restaurants and hotels Miscellaneous goods & services Sources: Federal Statistical Office, Deutsche Bank Research Share in total consumer basket, per mille Housing and leisure most important factors for core inflation 13 -1 -0.5 0 0.5 1 1.5 2 n o n - a l c o h o l i c b e v e r a g e s A l c o h o l & t o b a c c o C l o t h i n g a n d f o o t w e a r H o u s i n g , w a t e r e x . e n e r g y F u r n i s h i n g s & h o u s e h o l d e q u i p . H e a l t h T r a n s p o r t e x . e n e r g y C o m m u n i c a t i o n s R e c r e a t i o n a n d c u l t u r e E d u c a t i o n R e s t a u r a n t s a n d h o t e l s M i s c . g o o d s a n d s e r v i c e s Sources: Federal Statistical Office, Deutsche Bank Research Core inflation components, change of infl. rate, Jan. 2017 vs. April 2016, % - points, 3 month average Mixed picture for core inflation 14 0 0.5 1 1.5 2 2.5 3 3.5 97 99 01 03 05 07 09 11 13 15 17 Euro area Germany Sources: Federal Statistical Office, Eurostat Actual rents for housing, % yoy Rents: how far will the trend go? 15 Growth and inflation leave ECB still unfazed 13 | March 9, 2017 Focus Germany immigrants entered the labour market and fewer Germans joined the labour market for the first time, which may have hindered the formation of new households with a considerably delayed knock-on effect on rent. However, this is not a very satisfactory argument, and rent price development in certain federal states has made an above-average contribution to the turnaround. Moreover, the rent inflation reported by the German Federal Statistical Office ( Statistisches Bundesamt) paints a much more subdued picture than the data released by bulwiengesa, for example (>4%). All in all, we expect to see the residential real estate market remain under significant price pressure given that residential construction remains subdued, immigration levels remain high and the gradual integration of refugees into the economy. This will be gradually reflected in the rent levels recorded by the German Federal Statistical Office. The relatively stringent German rent legislation and the considerable regional differences in the market situation (metropolitan areas vs. rural areas) are, however, likely to put a damper on the upward trend. We expect to see rents stabilise more or less at the current level, but also believe that there are upside risks. Little price pressure on service providers, but ... Services are labour-intensive, which is why wages are the decisive cost factor and why they tend to increase in tandem with developments in the price of services to a certain degree. However, this link is neither stable nor pronounced. What both time series have in common, nonetheless, is that they have recently been moving more or less sideways at a moderate level, and thus do not indicate any acute pressure on core inflation as a whole. We have already mentioned our cautious wage outlook. So from this angle, service providers are unlikely to come under any marked (additional) cost pressure that would prompt them to implement sharper price increases in the short-run. … imported inflation and higher demand could fuel goods inflation We believe that the biggest short-term upside risk lies in consumer goods prices. These prices show a significant level of correlation with producer prices, which could pick up considerable speed in light of the marked increase in the price outlook at producer level and the higher utilisation of industrial capacities around the globe. However, these prices are likely to take quite a few months to be reflected in the form of higher consumer prices. The price component of the -300 -100 100 300 500 700 0 0.5 1 1.5 2 2.5 08 09 10 11 12 13 14 15 16 17 18 Actual rents (left) Employment gap* (right) Sources: Federal Statistical Office, Federal Employment Agency, Deutsche Bank Research *Gap between employment growth and decrease of unemployment, both year-on-year in '000 % yoy (left); '000 (right, 18 months lead) Will the rent increase stabilise? 16 -0.5 0 0.5 1 1.5 2 2.5 0 0.5 1 1.5 2 2.5 3 3.5 4 95 99 03 07 11 15 Pay rates (left, 4Q lag) Core inflation (right) % yoy, pay rates for overall economy, monthly basis Sources: Deutsche Bundesbank, Federal Statostocal Office German wages lagging behind core inflation 17 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 0 0.5 1 1.5 2 2.5 3 3.5 4 95 99 03 07 11 15 Services (ex. Rents, left) Negotiated wages (right) Sources: Federal Statistical Office, Deutsche Bundesbank, Deutsche Bank Research % yoy, 6M moving average Recent sideways movement in services and wage inflation 18 -1 -0.5 0 0.5 1 1.5 2 00 02 04 06 08 10 12 14 16 Germany EMU Source: Eurostat Pronounced goods disinflation in EMU 19 HICP, industrial goods ex. energy, % yoy, 3MMA Growth and inflation leave ECB still unfazed 14 | March 9, 2017 Focus Germany German purchasing managers index, for example, is more than half a year ahead of producer prices (excluding food) (figure 20), which are, in turn, around half a year ahead of consumer prices (figure 21). As a result, we expect to see an increasingly positive contribution to core inflation by rising goods price inflation via this channel in the second half of the year in particular. Inflation risks largely in 2018 Rising energy and food prices have recently provided considerable stimulus for German inflation, although price developments are expected to settle down again over the next few months, particularly for energy. But further developments in core inflation, which has been very stable for years now and has become more of a focal point not least in the ECB’s communications, are much more uncertain. Although wages and service prices are not showing any momentum at present, the impetus for German core inflation usually comes from abroad, triggered by rising import and producer prices, due to the open structure of the economy. Moreover, there is mounting evidence to suggest that an upward trend in inflation is starting to emerge beyond the direct price impetus resulting from higher commodities prices. The global upturn, which is gaining ground and resulting in higher production capacity utilisation, is likely to play a key role in this. However, this evidence is based primarily on confidence surveys such as the purchasing managers’ indices. In addition, developments like these tend to take some time to be reflected in consumer price inflation. We are raising our inflation forecast slightly overall for 2017, from 1.6% to 1.7%, compared with only 0.5% in 2016. We continue to expect that core inflation will remain on a sideways trend at a level of slightly above 1% for the next few months at minimum. If more signs of global inflation emerge, this will create certain upside risks for (core) inflation at the end of 2017, providing considerable upside potential for the core rate in 2018, particularly if the rising prices translate into second-round effects when wage negotiations are conducted. We currently expect to see core inflation climb towards the 1.5% mark, although low expectations regarding energy price development keep the forecast for headline inflation below 2%. Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 30 35 40 45 50 55 60 65 70 -1 -0.5 0 0.5 1 1.5 2 2.5 03 05 07 09 11 13 15 17 Producer prices - consumer goods ex. food (left) Manufacturing PMI - output prices (right) % yoy, 3MMA (left), index (right, 10M lead) Sources: Eurostat, Markit Producer prices could rise sharply 20 -1 -0.5 0 0.5 1 1.5 2 2.5 02 04 06 08 10 12 14 16 Producer prices - consumer goods ex. food (left) Consumer prices - goods ex. energy (left) % yoy, 3MMA Source: Eurostat Close correlation between consumer and producer prices 21 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 00 02 04 06 08 10 12 14 16 Goods (ind., ex. energy) Services (ex. rents) Consumer prices, % yoy, 3MMA Sources: Federal Statistical Office, Eurostat, Deutsche Bank Research Only slow rise in prices for goods and services since 2010 22 Growth and inflation leave ECB still unfazed 15 | March 9, 2017 Focus Germany German industry: small output gain in 2017 – adverse effect from Brexit and Trumponomics — In 2016, the manufacturing industry’s output in Germany increased by 1.4% in real terms (2015: 1.1%). We anticipate a rise of 0.5% in 2017. This would mean that the rate of growth for industrial output was below that for German gross domestic product for the fifth time in the past six years. The weakness of investing activity in Germany and many key sales markets, which is attributable to a variety of uncertainty factors, is holding back German industry. At sectoral level, outliers in output are likely to be low – as was the case in 2016. — If trade relations between Germany and the United States and between Germany and the United Kingdom deteriorate in the coming months and years due to changed political conditions, the automotive and pharmaceutical industries in Germany would be the hardest hit. These two sectors have an above-average export ratio and, at the same time, an above-average proportion of exports going to the US and UK (automotive industry: 25%; pharmaceutical industry: 27.7%). Adjusted for inflation, the manufacturing industry’s output in Germany increased by 1.4% in 2016 (2015: 1.1%). This means that the rate of growth for industrial output has been below that of gross domestic product four times in the past five years. Output would have been better if there had not been a decline in the fourth quarter, which, on a seasonally adjusted basis, was down by 0.3% on the previous quarter. The decrease was particularly strong in December. Over the course of 2016, neither output nor new orders in the manufacturing sector followed a stable trend. And in fact both experienced what was, at times, strong fluctuation, especially in the second half of the year. The fluctuation in new orders was partly due to high volatility affecting large-scale orders in other vehicle manufacturing, for example towards the end of 2016. On the whole, economic volatility in industry has been fairly moderate since 2011/2012. Overall, the level of industrial output in Germany last year was only 3.3% above the 2011 level in real terms. In 2016, international demand provided barely any impetus for German industry. The nominal volume of goods exported only rose by 1%, whereas it had increased by just over 6% in 2015. The main reason for this was weaker demand from the United States, which contracted by 6% in 2016. As spending on capital equipment in Germany rose by less than 1%, significantly higher growth in manufacturing output – which focuses on export-driven capital goods industries (46% of total revenue) – was not possible. The generally moderate economic conditions in industry were also reflected in the change in producer prices last year. These prices fell by 0.2% on average in 2016 (2015: fall of 0.4%). They started from a low level and, over the course of the year, in fact rose slightly. This trend was largely attributable to the commodity-related industries (chemicals, coking, metals), which mirror the global commodity price cycle. However, producer prices in the manufacturing sector have generally remained within a narrow range since late 2011 – which is a long time by historical comparison. Little momentum again in 2017 The outlook for 2017 contains mixed signals. On the positive side, global gross domestic product is likely to increase at a stronger rate than in 2016, driven by factors such as higher US growth and the end of the recession in Latin America (Brazil). Exchange rates could also provide some stimulus, for example if the 105 108 111 114 117 120 14 15 16 Production Orders Source: Federal Statistical Office Many ups and downs at the latest reading 1 Manufacturing industry in DE, 2010=100 95 105 115 125 12 13 14 15 16 Domestic Foreign Total Source: Federal Statistical Office Manufacturing industry in DE, orders, 2010=100 Big-ticket orders contributed to recent high volatility 2 90 95 100 105 110 05 07 09 11 13 15 Source: Federal Statistical Office Producer prices in the manufacturing sector DE, 2010=100 Recent recovery of producer prices due to increasing commodity prices 3 Growth and inflation leave ECB still unfazed 16 | March 9, 2017 Focus Germany euro were to depreciate sharply against the US dollar during 2017. It should be remembered, however, that the nominal trade-weighted euro exchange rate is at about the long-term average. While the euro has depreciated against the US dollar lately, it has appreciated noticeably against pound sterling in recent months. Another positive factor is that capacity utilisation in the manufacturing sector went up for the third time in a row at the start of the first quarter of 2017. It is thus roughly 2.5 percentage points above the long-term average, which indicates robust but not brisk growth in demand. Industry’s business expectations are still positive, although they did deteriorate right at the start of the year. However, there are also a number of negative factors for manufacturing in Germany. Economic growth in Germany and the eurozone as a whole will probably be lower in 2017 than in 2016. We believe the reluctance to invest – especially in capital equipment – is likely to persist. Political and economic uncertainties are playing a role here, including the consequences of the Brexit vote, the debate on the possible deterioration of transatlantic trade relations, elections in key EU member states and the danger of a ‘hard landing’ in China. 11 According to our forecasts for 2017, stimulus from the domestic economy will decline. Both consumer spending and government spending will grow at a lower rate than last year. The main reasons for this slowdown are a smaller increase in employment than in 2016, reduced growth in real disposable income (higher energy prices) and less immigration. On the whole, industrial output in Germany could increase slightly on average during 2017. Overall, we reaffirm our forecast from autumn 2016 that output in the manufacturing industry in Germany will increase by around 0.5% in real terms in 2017. Producer prices could go up slightly, even if this is predominantly due to higher commodity prices in individual sectors being passed on. Key sectors of industry: significant outliers not really expected At sectoral level, there were barely any major outliers – whether positive or negative – in the growth rate for domestic output in 2016. We expect this to remain the case in 2017. In the following section, we will take a look at the situation in individual sectors. — Automotive: Output in the automotive industry in Germany increased by 2.2% in 2016. We anticipate growth of just 0.5% in 2017. Demand for cars in international sales markets (USA, UK, China) is likely to advance at a slower rate than last year – and might even fall. We also anticipate less growth in Germany and the rest of continental Europe. Finally, it should be noted that this sector started 2017 with a negative carry-over effect following a weak end of 2016. — Mechanical and electrical engineering: Domestic output in the mechanical engineering sector grew by 0.4% in 2016. The rise for electrical engineering was 1.9%. Given the reluctance to invest, both in Germany and in many other international markets, growth rates will not take off in 2017 either. We expect the rate of increase to be 0.5% for mechanical engineering and 1% for electrical engineering. Because of its high level of local value creation, mechanical engineering would benefit if the euro depreciated against the US dollar. However, any increase in US infrastructure spending would provide little momentum for the German mechanical engineering sector. Firstly, this would not have any effect until the second half of 2017 at the earliest. And secondly, increased spending on infrastructure predominantly benefits domestic (construction-related) sectors of the economy. 11 See Heymann, Eric and Oliver Rakau (2017). Uncertainty is slowing capital expenditure. Germany Monitor. Deutsche Bank Research. Frankfurt am Main. -20 -10 0 10 20 30 40 50 11 12 13 14 15 16 17 Expectations Current assessment Source: ifo Institute Manufacturing industry in DE, balance of positive and negative company reports Expectations deteriorate at the current edge 4 50 60 70 80 90 100 07 08 09 10 11 12 13 14 15 16 Capacity utilisation Average since 1992 Source: ifo Institute Capacity utilisation slightly above long-term average 5 Capacity utilisation in the manufacturing industry in Germany, % 100 105 110 115 120 125 05 06 07 08 09 10 11 12 13 14 15 16 Source: ECB Nominal effective trade weighted EUR exchange rate, Q1 1999=100 Euro exchange rate relatively stable recently 6 Growth and inflation leave ECB still unfazed 17 | March 9, 2017 Focus Germany Nevertheless, German engineering firms may receive a boost if US companies step up their spending on capital equipment as a consequence of the tax reliefs that have been promised. However, this could be offset by possible fiscal disadvantages for US imports. — Metals: In 2016, the metals industry registered a 1.4% rise in output in Germany. Manufacturing of metal products (up by 2.3%) fared better than metal production (down by 0.8%). According to our forecast, the metal products sector will see expansion of 0.5% in 2017, which will again be slightly better than that of metal production, where overcapacity in steel production in many major producer countries continues to be a big problem for the industry. Stronger growth in metal products manufacturing is likely to be prevented by the lack of momentum in customer sectors. — Chemicals: In 2016, the chemicals industry in Germany saw its output decrease by 0.4%. This was the third consecutive reduction and the fourth in the last five years. As capital stock in the chemicals industry in Germany has been dwindling for years and, at the same time, German companies have been carrying out expansion investment on a grand scale abroad, the suspicion that the continuing decline in the sector’s output is due to structural, not cyclical, reasons is looking more and more likely to be true. We expect output in the chemicals industry to fall again in 2017 (by 1%). — Food: Output in the food industry in Germany went up by 1.3% in 2016. This was the best result for this very stable industry since 2010. Migration to Germany has pushed up demand. In 2017, we anticipate that output will hold more or less steady, although the substantial negative carry-over effect from the weak final quarter will play a role. — Other industries: Of all the major manufacturing sectors, the plastics industry registered the sharpest rise in output last year (3.4%). Among other factors, it benefited from the growth in consumer spending. We expect output to be up by 2% in 2017. The construction materials industry was buoyed by the healthy development particularly in residential construction in 2016. Its output increased by 3.2%, and we believe a rise of 1.5% is probable for 2017. Output in the pharmaceutical industry in Germany advanced by 2.5% in 2016, with immigration providing a boost. The environment for exports is expected to deteriorate in 2017. Overall, we anticipate that output will climb by 1%. Driven by the growth of technical textiles, the textile industry in Germany saw a 1.9% rise in output last year. We predict that the moderate uptrend of recent years will continue in 2017, with an increase of 1%. Brexit and Trumponomics: automotive and pharmaceutical industries hardest hit The vote for Brexit and the election of Donald Trump as the new US president were two defining events of 2016 and will have a massive impact on economic conditions in Germany and elsewhere in the coming years. This will particularly apply to foreign trade relations with the UK and US. In 2016, the US was the biggest German export market, while the UK was the third largest. Together, the two countries account for around 16% of the total volume of German exports, compared with ‘only’ 13% in 2010. In the coming months and years, Germany’s trade relations with the United States and United Kingdom will face considerable downside risks compared with the current situation (possible taxes and tariffs on US imports; end of the free movement of goods between the UK and EU). However, the impact of the economic risks will vary from sector to sector. In chart 10, the x-axis shows the deviation in each sector of the share of exports to the US and UK from the average proportion of total exports to these two countries. The y-axis shows the deviation in each sector of the export ratio from 100 110 120 130 140 11 12 13 14 15 16 Automotive Mech. engineering Electr. engineering Source: Federal Statistical Office Strong short - term fluctuations, but hardly any growth of late 7 Production in selected sectors in DE, 2010=100 90 100 110 120 11 12 13 14 15 16 Chemical industry Metal production Manufacturing of metal products Source: Federal Statistical Office Chemical production has been declining recently 8 Production in selected sectors in DE, 2010=100 8.9 8.4 7.1 6.6 6.3 5.1 5.0 52.7 US FR UK NL CN IT AT Others Source: Federal Statistical Office US and UK: important export markets for the German industry 9 Share of single export markets in total German exports of goods, 2016, % Growth and inflation leave ECB still unfazed 18 | March 9, 2017 Focus Germany the average export ratio of the entire manufacturing industry. Accordingly, the top right quadrant contains those sectors that have an above-average export ratio and, at the same time, an above-average share of exports going to the US and UK. This means that the automotive industry (proportion of exports to the US and UK: 25%) and pharmaceutical industry (27.7%) in Germany would be the hardest hit by a deterioration in trade relations with these two countries. The top left quadrant contains sectors with an above-average export ratio, but their proportion of exports to the US and UK is below the average for industry as a whole (e.g. mechanical engineering, chemicals, parts of the electrical engineering sector). The sectors in the bottom left quadrant would be least affected (directly) by a reduction in trade with the US and UK. One example is the food industry, which is significantly below the average in respect of both variables. The potential fallout from a deterioration in trade relations with the US and UK would be felt in the export business of German industrial companies not only in 2017 but also in subsequent years. However, the effect cannot yet be reliably quantified as the changes to trade relations are as yet unknown. Nevertheless, even small decreases in trade would be noticeable because of these two countries’ great importance to German exports in absolute terms. Germany exported goods with a value of EUR 193 billion to the United States and United Kingdom in 2016. Eric Heymann (+49 69 910-31730, eric.heymann@db.com) -30 -20 -10 0 10 20 30 -10 -5 0 5 10 15 Automotive Pharma Food Chemicals Mech. engineering Other vehicle construction Sources: Federal Statistical Office, Deutsche Bank Research Automotive and pharma are most dependent on the US and the UK 10 x - axis: deviation* from avg. US and UK export share by sector, pp. y-axis: deviation* from avg. export ratio of the total manufacturing industry, pp. 0 10 20 30 40 50 60 Automotive Mech. eng. Electr. eng. Pharma Chemicals Metal industry Source: Federal Statistical Office German automotive industry dominates exports to the US and the UK 11 German exports to the US and the UK, 2016, EUR bn Growth and inflation leave ECB still unfazed 19 | March 9, 2017 Focus Germany The View from Berlin German election campaign: Close contest likely dominated by myopic debates Campaign is speeding up In recent weeks the campaign for the German federal election on September 24 has speeded up. Unofficial starting points were the SPD’s hasty and surprising nomination of Martin Schulz as chancellor candidate on January 25 and the CDU/CSU meeting in Munich on February 5 to 6 where the two sister parties’ grandees unemotionally nominated Chancellor Merkel as their common candidate. Since Mr. Schulz’ nomination the SPD seems to experience a new heyday. According to major surveys the party was able to nearly completely reduce the then huge backlog in the popularity ratings, i.e. from about 15pps to about 2pps at present. Thus the CDU/CSU’s options for coalition building have decreased markedly. If elections were held next Sunday neither the CDU nor the SPD would have a clear alternative to a renewed grand coalition. Even a three party alliance among the CDU/CSU, the Greens and the FDP would fail a majority, according the latest surveys. However, this is only a snapshot. In the remaining six and a half months much can change, e.g. also as a reflection of the election results in the Netherlands and especially in France. Performance of top candidates important Past weeks changes in the public sentiment have again demonstrated the key role of the parties’ top candidates at least with regards to the two big parties. While it is open whether Schulz’ popularity rating will remain at its present high level – neck and neck to and in some surveys even above Merkel’s rating – it is obvious that the voters have a clear alternative now. Angela Merkel who has been chancellor for more than 11 years represents continuity while Martin Schulz is a new face in German politics albeit as the former President of the European parliament he belonged to the establishment in Brussels. 12 The more personalized the campaign will become the harder it could be for the smaller parties as their candidates are less known and less popular. Both opposition parties have nominated two top candidates for gender and political reason. The Greens’ party members have elected Katrin Göring-Eckardt und Cem Özdemir. This was astonishing as both belong to the party’s pragmatic wing while the fundamentalist more leftish wing got nothing. However, the fundamentalists have owned the debate on the party’s election platform, so far (see below). For the left party their parliamentary party leaders Sahra Wagenknecht and Dietmar Bartsch will run. While Wagenknecht belongs to the party’s strong left arm Bartsch is said to support the more pragmatic wing. The Left will campaign for a “policy change”. So far the Left party did not advocate a coalition with the SPD and the Greens, however, recently Wagenknecht has stated that such an alliance would be possible if it re-establishes the welfare state and peruses a peaceful foreign policy. The FDP, too, wants to bring an end to the grand coalition. Party leader Christian Lindner will run twice as top candidate, namely for the important state election in North-Rhine Westphalia on Mai 14 as well as for the federal election. “We want a strong result in North-Rhine Westphalia and thus at the same time a 12 See Focus Germany, dated January 30, 2017: The view from Berlin. Martin Schulz’ unexpected nomination likely to push the SPD’s campaign but unlikely to derail Merkel. The election puzzle 2 0 5 10 15 20 25 30 35 CDU/CSU SPD Greens Left AfD FDP Others * Average of major surveys (Allensbach, Infratest Dimap, Forsa, Forschungsgruppe Wahlen, TNS Emnid) Source: Wahlrecht.de Major German political parties' popularity* 1 Surveys from mid-February to early-March 2017, % Voters Programmes Topics Coalitions Parties / Candi - dates Growth and inflation leave ECB still unfazed 20 | March 9, 2017 Focus Germany strong signal for a political change in the whole republic”, Lindner stated to rationalize his double role (source: WDR). 13 The AfD will decide on the top personnel and its campaign platform only in late April. According to press reports the party will present a team of campaigners instead of a single person or a duo. However, it is open whether such a team will be able to hide the party’s ongoing leadership conflicts. Security and social justice likely to dominate the campaign While especially the big parties’ candidates have already attracted ongoing public interest the political debate has only gradually picked up pace, so far. This also reflects the absence of a mega topic at present. According to surveys the German public still considers refugees and integration by far as the most pressing topic (in January mentioned by 50% of those asked) followed by the issues of social justice (10%) and pensions (9%). But compared to the situation one year ago the immigration issue has lost brisance given the strong decline in the refugee influx from about 900.000 in 2015 to 280.000 in 2016 with a further drop likely in 2017. Therefore, the political actors have the opportunity to set their own agenda. Here the parties’ election programmes have a role to play. At present, however, the major parties have only presented buzzwords and guidelines for their campaigns while details are still debated. (See table 5 for the dates of the major parties election programme launches.) This is especially true for the major parties’ proposals on tax policy. This vagueness is astonishing given the tax policy’s marked impact in the context of the social justice issue as well as its potential impact on the economy. Of course, exactly this could be the reason behind the parties’ hesitation. Notwithstanding missing details it is already obvious that the major parties primarily build upon their traditional issues, i.e. the CDU/CSU will primarily focus on internal security, a sustainable fiscal policy and tax relief for the middle class and families while the SPD will campaign for enhanced “social justice”. Thus the two big parties, the CDU/CSU and the SPD, will try to serve their traditional constituencies to fully exploit their potential at the ballot. With this approach the two parties aim at attracting those voters who have migrated to the smaller parties or refused to vote at all in the past (state) elections. In addition, especially the AfD will try to keep European topics high on the agenda. The prominence of this issue, however, will primarily depend on the course of the Brexit negotiations in Brussels, on the result of the French election and on the number of refugee entering Germany, i.e. on the stability and of the EU-Turkey agreement. Reform fatigue insufficiently addressed The more the campaign will focus on the traditional issues the higher the risk that the parties will fail to debate the looming problems of the German economy. This risk is all the more virulent as the impressive stability of the German economy and especially the upswing in employment in the past few years have masked reform backlogs. To improve the employment prospects of the several hundred thousand migrants who will enter the labour market in the next few years, to prevent job losses and to strengthen productivity in the era of intensified digitalization Germany should enhance the flexibility of its labour market, increase (public) investment in the education system and take further measures securing the competitiveness of Germany as a location for production 13 http://www1.wdr.de/nachrichten/landespolitik/fdp-landesparteitag-neuss-100.html Dates for launches of the major parties' election platforms* 5 Party Event Date CDU/ CSU Strategy meeting June SPD Party convention end-May Left party Party convention June 9 to 11 Greens Party convention June 16 to 18 FDP Party convention April 28 to 30 AfD Party convention April 22 to 23 * The parties have already established processes to debate their programmes. Party members are invited to participate actively in the debate. Source: Parties' homepages, media -75 -25 25 75 Schäuble Schulz Merkel Özdemir Seehofer Lindner Bartsch Petry (AfD) satisfied not satisfied Question: "Are you (very) satisfied or less/not satisfied with the political work of ...?" % Source: Infratest dimap ARD Deutschland-Trend, Feb. 2017 Germans' assessment of major politicians 3 0 100 200 300 400 500 600 700 800 900 2013 2014 2015 2016 2017e* Asylum applications Refugees Sources: BAMF, BMI Asylum applications & refugees 4 in '000 * Own estimates Growth and inflation leave ECB still unfazed 21 | March 9, 2017 Focus Germany and invention. However, at present only the FDP and parts of the CDU/CSU seem to insistently address these important issues. Parties’ agendas cannot be taken at face value Notwithstanding the mentioned constraints it seems reasonable to take a closer look at the parties’ agendas and priorities. 14 These will not only influence the election campaign but also the policies of the next government. However, with regards to the latter aspect the election programmes should not be taken at face value, instead their impact is limited compared to countries with a majority voting system. In the German system usually even the big parties are not able to reach a majority in the Bundestag so that they need a partner to form a coalition. As coalitions result from political compromises among the parties involved their election platforms are hardly a blueprint for their government programme. One the one hand this calls into question the value of exegeses of the parties’ campaign platforms. On the other hand it rationalizes the following exercises, namely to compare the forthcoming programmes without knowing all their details. CDU/CSU Security, an agenda for jobs and tax relief for the middle class are major topics Up to now the refugee crises, asylum policy and internal security have dominated the debates among the conservatives. Statements at the joined meeting of the CDU and CSU executive committees in Munich on February 5 to 6 indicate that this will remain conservatives’ key issue in the election campaign. Both sister parties argue for a lasting reduction in the number of refugees albeit the CDU has not adopted the CSU’s request for an upper limit of 200,000 refugees per year. To reach its common goal the CDU/CSU advocates an enhanced protection of the EU’s external borders and measures to fight the causes of emigration in the countries of origin. In contrast to the upper limit the CDU has agreed to the CSU’s demand for transit camps at the German borders for proper control and registration of refugees. Another major pillar of the two sister parties’ campaign will be an Agenda 2025 with measures to secure existing jobs, to create new jobs and to strengthen the German economy in the era of digitalisation. As Chancellor Merkel and CSU leader Seehofer have announced this agenda only a few days ago without giving further details it is still a black box at present. In the Munich declaration the two politicians have already advocated a stepwise increase in public spending on education, on R&D and other infrastructure investment, especially to meet the challenge of digitalization, but without giving concrete numbers. These and other spending proposals, however, will likely be subject to the availability of funding as maintaining a balanced federal budget in the next years, too, is a top fiscal policy priority of the conservatives. In case a balanced federal budget is granted, the federal government shall be allowed to spent funds from additional tax receipts. According to broadly accepted but not yet decided proposals these funds shall be used for three purposes (i) tax relief for people in lower and middle income brackets and transfers to families, (ii) infrastructure as just mentioned and (iii) unscheduled spending obligations and debt reduction. Furthermore, the CSU similar to Finance Minister Schäuble and other influential CDU politicians calls for an (a stepwise) abolishment of the income and corporation tax surcharge (5.5% on the respective tax dues). In addition a senior official from the CDU parliamentary group presented the prospect of a corporate tax reform, but he added that plans will be elaborated 14 Here we only deal with parties likely to pass the 5%-threshold and to get seats in the Bundestag. 20 25 30 35 40 45 1990 1994 1998 2002 2005 2009 2013 2017* CDU/CSU SPD Source: Wahlrecht.de % of second votes Big parties' performance in the past 6 elections since German unification 6 * Average of the latest surveys -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 -40 -30 -20 -10 0 10 20 30 2011 2012 2013 2014 2015 2016 Federal government Others authorities* Total Total as % of GDP Source: Federal Statistical Office EUR bn (left scale); % of GDP (right scale) * State (Länder) governments, municipalities and public social insurance schemes Total state and federal government budget balances in Germany 7 Growth and inflation leave ECB still unfazed 22 | March 9, 2017 Focus Germany only after the election. Such a reform would primarily aim at enhancing the businesses’ competiveness. It also would be a precondition for the realisation of Finance Minster Schäuble’s and the SPD’s proposal to abolish the withholding tax on capital gains and to (re-)integrate the taxation of individual capital income into the income tax scheme. Without a suitable corporate tax reform the proposal would result in a high double taxation of dividends, e.g. Commitment to the Euro will remain high To benefit from Chancellor Merkel’s experience and international reputation the CDU/CSU is also likely to address European politics and Germany’s role in geopolitics. Merkel and her CDU/CSU have shaped European politics – though with varying coalition partners – over the last decade. There will be no significant change to the observed policy even though the position of the two sister parties on future European politics has not yet been spelled out in detail. Commitment to the EU and the euro will remain high. However, the preparedness for further risk sharing is low as indicated by the reluctance to move on with banking union (deposit insurance) and discussions around certain elements of a fiscal union. Fiscal support for ailing euro area member states will only come with conditionality, the increasing uneasiness of the conservative MPs in voting for Greek bail-outs proves this conviction. Chancellor Merkel has started to talk about a two-speed EU more recently as an answer to the diverging preparedness of the EU-27 to move on with integration. Apart from the fact, that this concept is already reality in certain areas of European integration, she did not elaborate on the topic. All in all the CDU/CSU will likely continue to highlight the need for continuity, stability, order and trust in difficult times of permanent global change as they already did in the Munich declaration. 15 It is surely not by chance that these days Chancellor Merkel often uses the buzzword “disruptive changes”. SPD Mr. Schulz’ campaign focuses on social justice Given the impressive recovery in the latest polls, Mr. Schulz and the SPD seem to have hit the mark with their focus on “social justice”, albeit this is not the general public’s major concern. The data, too, hardly indicate growing inequality in Germany, at least not in the past few years. In 2015 the Gini coefficient for the net income distribution was about the same as in 2008 (0.301 vs. 0.302). However, in the interim period the coefficient hovered between 0.283 in 2012 and 0.307 in 2014. 16 Obviously, much depends on the basis year, and of course, critics from the left side tend to refer to the extremes. In international comparison these figures are relatively low, anyway. They contrast the relatively high Gini coefficient for the market income distribution in Germany (OECD 2013: 0.508). The increase in gross income inequality, however, is an almost global phenomenon visible even in the Scandinavian countries. In Germany, the huge difference between the Gini coefficients for disposable income and for market income distribution demonstrates the already intensive income redistribution in this country. 15 See the CDU/CSU’s common Munich declaration, dated February 6, 2017. 16 Respective OECD figures for the households’ disposable income: 2008: 0.285 and 2013: 0.292. 0.27 0.275 0.28 0.285 0.29 0.295 0.3 0.305 0.31 2008 2009 2010 2011 2012 2013 2014 2015 Source: Federal Statistical Office Respective year; 2008 to 2015 average Gini coefficient* for the distribution of the net equivalence income in Germany 8 * The coefficient varies between 0 for a complete equality and 1 for maximal inequality: One person alone gets all income (Here net income adjusted for family size) 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 DK SE NL DE FR CH IT ES UK US Source: OECD Gini coefficient*; 2014 or latest data available * The coefficient varies between 0 for complete equality of the distribution and 1 for maximum inequality Distribution of households' disposable income in selected OECD countries 9 Growth and inflation leave ECB still unfazed 23 | March 9, 2017 Focus Germany Plea for higher wages, corrections of the Hartz reforms and extended worker rights Nevertheless Schulz addresses the issue with respect to many areas, especially to the labour market and tax policy. Concerning the first issue the SPD advocates higher wages and “good jobs”. „We have a considerable backlog with regard to wage income“, Mr. Schulz told the media. This was astonishing, as German politicians usually refrain from commenting on the wage setting as the latter is exclusively the bargaining partners’ job. (In the past three years wages have increased solidly at 2% p.a. real and 2.6% p.a., albeit the momentum has declined somewhat in 2016 due to the immigration among others. 17 ) The catch word „good jobs“ summarises demands for extended labour protection like the right to switch back from part-time to full-time work at the same workplace, the right for further training and the call for re-regulation of the dismissal law, i.e. substantial restrictions on companies’ option to offer part-time contracts. In addition Schulz argues for a prolongation of the benefit periods in the statutory unemployment insurance scheme, especially for elder workers. Thus the SPD applies the axe on one of the major and most efficient elements of its former Chancellor Schröder’s Hartz IV reforms. Schröder substantially reduced the maximum benefit period for beneficiary aged 45 or more – e.g. for the 58+ from 32 months to 18 months (at present up to 2 years again) and for those below 55 to 12 months (at present up to 15 months for those aged 50 to 55). Studies show that due to this measure the unemployed’s willingness to accept a job, especially a job in the low-wage sector, has significantly increased. 18 There is broad agreement that this has contributed to the substantial decline in the unemployment rate in recent years. Recently Schulz has modified his proposal by specifying that only unemployed persons participating in a qualification programme shall be eligible for an extended benefit period. The statutory unemployment insurance shall pay the new benefit, called benefit Q (for qualification), for up to one year to those aged below 50 and up to two years for the 58+. 19 This new proposal is likely to propel the cost but hardly to diminish the negative impact. According to experts the new proposals which also include a dilution of the eligibility requirements for the unemployment benefit could cost up to EUR 1 bn per year. To animate benefit Q the state will likely have to offer qualification programmes. The track record of such public programmes, however, is unsatisfactory. They often primarily resulted in revolving door effects, instead of higher employment. Training on the job proved to be a better alternative. The Hartz IV reforms rightly aimed at bringing the unemployed back into employment as early as possible. Furthermore, for elderly employees benefit Q will also open a new misguided way to early retirement. Higher taxes for higher incomes and fight against tax evasion While the SPD like the CDU/CSU is still vague with respect to important details, the guidelines of its tax proposals have already emerged from such discussions and party grandees’ statements. On the one hand the SPD will reduce the tax burden for low- and middle-income earners. This sounds similar to the CDU’s plan. But one should notice that the SPD will likely use narrower definitions of these groups so that a smaller group of the society would get relief. Given the already relatively low tax burden for low-income earners, ex party leader Gabriel advocated reductions in the contributions rates to the social security schemes 17 See Focus Germany, dated October 28, 2016: Subdued industry outlook dampens wage growth 18 Lo, Simon et al. (2013). Stellschraube Arbeitslosengeld. Kürzere Bezugsdauer zeigt Wirkung. IAB Forum 2/2013. 19 While today it is up to the labour agencies to send unemployed persons to training programmes in future the unemployed shall have the right to participate in such programmes. Benefit periods in the statutory unemployment scheme 11 Eligibility restriction, i.e. minimum scheme membership period required Age Maximum benefit period Months Years Months 12 below 50 6 16 below 50 8 20 below 50 10 24 below 50 12 30 50 to 55 15 36 55 to 58 18 58+ 24 Source: BMAS -0.5 0 0.5 1 1.5 2 2.5 3 3.5 2008 2010 2012 2014 2016 Real wages Nominal wages Source: Federal Statistical Office Wage development in Germany 10 %, yoy Growth and inflation leave ECB still unfazed 24 | March 9, 2017 Focus Germany for this group. Astonishingly, Schulz has not repeated this demand, so far. In addition the family taxation/subsidisation system shall be altered in favour of families with low income, especially single parents. On the other hand the tax burden on higher incomes shall be increased moderately. This is likely to entail (moderate) increases in the income tax top rates (at present 42% for income above EUR 54,058 and 45% for income above EUR 256,304). Furthermore, the taxation of capital gains shall be changed fundamentally, i.e. the withholding tax with its 25% flat rate shall be abolished (see Schäuble’s proposals above). Albeit – in contrast to the 2013 campaign – the SPD does not argue for the (re-)introduction of a wealth tax it advocates the taxation of very huge private assets. According to Schulz fighting company tax evasion will be another major topic. In line with plans from the European Commission and the OECD he advocates an obligatory country by country reporting for multi-national companies so that they shall pay the taxes where they generate their profits. Although Schulz seems to make this a cornerstone of his election-platform, he simply jumps the EU’s bandwagon. Schulz advocates solidarity in the EU Fairness and solidarity is also the slogan for Schulz‘ previous métier European politics. While Schulz and his party have taken almost all decisions in the course of the euro crisis in line with its conservative coalition partner, they recently have become more critical regarding the CDU/CSU’s strong focus on consolidation in the euro crisis taking a swipe at the lack of investment and growth orientation that has – in their view – fuelled divergence and social problems. Tolerance with the Greek situation seems to be higher than within the CDU/CSU. Following the Brexit referendum, Gabriel and Schulz published a paper calling for a re- foundation of Europe. 20 The ten-point plan calls for more growth orientation of the EU (including giving more flexibility to the stability pact and the EU’s fiscal rules), an institutionalised mechanism for debt restructuring and an upgrade of the EFSI both in terms of design as well as volume for investment spending. While this certainly cannot be taken as the overall position of the SPD, it gives some hints to where the two influential SPD leaders would like to set the priorities. The Greens Balancing leftish ideas and centrist candidates In mid-November 2016 the Greens party convention has agreed on guidelines for the party‘s politics. These guidelines are amongst the pool of ideas for the Greens’ election platform. On June 16 another convention shall approve the final version. Beforehand party members will be asked to comment and contribute. Last November the party delegates have agreed the rather leftish proposals which we summarise here. However, the party members who have already surprisingly elected two moderate centrist candidates as the frontrunners in the elections might water down same of these ideas. If not the candidates will have to cope with a programme at odds to their own ideas. Notwithstanding future corrections the Greens are likely to campaign for an open and fair society. The first attribute refers to their refusal of a more restrictive asylum policy and marked increases in the funds for internal security (and also in defence spending). “Fair society” euphemises the strong call for intensified redistribution in the party’s present leftish agenda. Major elements thereof are (i) the (re-)introduction of a wealth tax, especially on “very rich” people’s assets, (ii) an increase in the income tax top rates and (iii), 20 “Europa neu gründen”, http://www.spiegel.de/media/media-39397.pdf Growth and inflation leave ECB still unfazed 25 | March 9, 2017 Focus Germany the abolishment of the withholding tax on capital gains in line with the SPD’s proposal. In addition, the Greens advocate a fundamental reform of the taxation of (married) couples and families. The present the equalization of spouses’ income in the income tax that usually markedly reduces the respective couples’ taxable income shall be abolished. For the time being, however, only newly married couples shall be subject to the new rule. Instead transfers for families/children with low and medium income shall be increased. More restrictive labour market regulation Under the label of fairness the Greens also favour stiffer labour market regulation, e.g. equal pay for contract and regular staff from the first day of hiring, additional restrictions on the companies’ options to hire staff temporarily and the abolishment of the mini-jobs. The demand for the Introduction of a basic pension (with benefits above welfare level) for the public pension scheme’s long-term members can be interpreted as a first step towards the Greens pet project for the future, the introduction of a basic income scheme. Strong commitment to the EU The Greens consider the EU the best entity to cope with the major economic, social and political questions of today and actively promote more competences for the EP and a stronger role of the EU in many policy areas. 21 They support the euro and back the fiscal rules with at the same time calling for the implementation of a debt redemption fund to smoothen the negative repercussions of the austerity policy. Also, in the context of a review of the budgetary framework of the EU they support the idea of a fiscal capacity for the euro area. Banking union as well as a capital markets union is seen as necessary. The Left Tax hikes and public spending spree Unsurprisingly, the Left tops the SPD’s and the Green’s demands for intensified redistribution and more restrictive labour market regulation. In contrast to the latter the Left has already published a detailed draft election programme. It advocates substantial tax hikes, an enormous expansion of public spending especially on pensions and welfare and a hike of the minimum wage, among others. Neither of these proposals have serious consideration for the need of the German business that has to perform on global markets with intensive competition. Proposals for taxes hikes include (i) introduction of a wealth tax (5% for assets higher than EUR 1m), (ii) substantial increase in the inheritance tax and (iii) in the corporation tax (10pps increase in the tax rate to 25%). Furthermore, the income tax scale shall be altered fundamentally to shift the tax burden further on to people with higher income. 22 The funds from the tax hikes shall be used to finance intensified public spending on education, infrastructure and housing (e.g. 250,000 public dwellings p.a.). The Hartz IV welfare system shall be replaced by a kind of basic income scheme 21 Green Declaration on the Future of Europe, https://www.gruene-bundestag.de/uploads/ tx_ttproducts/datasheet/reader_Europaerklärung-web.pdf 22 The draft programme provides for an increase in the basic allowance to EUR 12,600 p.a. from EUR 8,820 in 2017, an increase in the top tax rate by 11pps to 53% for income above EUR 70,000 p.a. (at present EUR 54,058) and in the special rate for very high income to 60% and 75% for income above EUR 260,000 and EUR 1m p.a., respectively, from 45% for income above EUR 256,304 p.a. in 2017. 0 2 4 6 8 10 12 Greens Left* Source: Wahlrecht.de % of second votes * Until 2002 PDS; ** Average of the latest surveys Performance of the Greens & the Left party in the past 6 Bundestag elections 12 Growth and inflation leave ECB still unfazed 26 | March 9, 2017 Focus Germany with benefits (for singles) of EUR 1050 per month. The benefits from the public pension scheme shall be increased markedly (replacement rate of 53% instead of 48% at present, retirement at the age of 65 – or at 60 after a working career of 40 years). The Left is also in favour of massive state interventions, especially in the labour and the housing market. Among others: increase in the minimum wage from EUR 8.85 to EUR 12, introduction of a strict principle of equal pay, strong restrictions on contract work and on temporary work contracts, strong limits on rent increases. Overhaul of the EU The Left acknowledged the EU in principle (no call for euro/ EU exit) but wants to see a complete overhaul of the Union. A broad investment and spending programme should address social inequality and shortcomings in education and social security. Sahra Wagenknecht, one of the party’s top candidates, is rather critical in her statements on the development of the euro area. She proclaims that the euro has divided Europe and that the austerity policy forced by Germany has aggravated this development. FDP Enhancing the economy’s flexibility As far as is known today the FDP’s ideas are likely to follow party leader Lindner‘s dictum, that income has to be generated first before it can be redistributed, i.e. that the government should be more concerned about the production side of the economy and less about redistribution. In line with this guideline the FDP is likely to campaign for a business-friendly tax policy, for more efficient public authorities and enhanced flexibility of markets, especially the labour market The FDP’s focus in tax policy is on the reduction of the complexity of the different taxes as well as on the reduction of the citizens’ and the businesses’ tax burden. The liberals, e.g., want to amend the income tax scheme by a flexible tax schedule to prevent the taxation of income which (in Germany’s progressive tax scale) solely results from an increase in inflation. The income and corporation tax surcharge (5.5%) shall be abolished by 2019. A comprehensive corporate tax reform shall provide for a level playing field among different legal forms as well as among different methods of financing, e.g. equity vs. bonds. The rules for profit assessment shall be simplified. Red tape shall be reduced across-the-board, especially to make it easier to start a business. The party also calls for initiatives, e.g. in the education system, to make Germany fit for the age of digitalization. The EU should stick to its rules Party leader Christian Lindner favours a debt restructuring for Greece followed by a euro area exit of the country. It should be kept in the EU, though, and enjoy the (fiscal) solidarity of the Union in terms of transfers from the structural and regional funds. More general, any rescue package for a euro area member should be linked to strict conditionality. To avoid a slide into over-indebtedness, the FDP calls for an insolvency regime for states. In the context of banking union the FDP rejects the Commission’s proposal for a deposit insurance scheme as this would lead to an acceptable risk sharing. 42 44 46 48 50 52 54 2000 2005 2010 2015 2020 2025 2030 Source: BMAS Replacement rate of pensions from the statutory public pension scheme 13 Net replacement rate before taxes*, % * Pension of a person with average work & salary income who has paid contibutions to the scheme for 45 years 0 2 4 6 8 10 12 14 Source: Wahlrecht.de % of second votes* The FDP's performance in the past 6 Bundestag elections 14 * Red line = 5% threshold which a party has to pass to get seats in the Bundestag; ** Average of the latest surveys Growth and inflation leave ECB still unfazed 27 | March 9, 2017 Focus Germany AfD Largely populist agenda The AfD has a similar agenda as other conservative and right wing populist parties in Europe. It is characterised by strong reservations about immigration, especially of refugees and against the EU and especially the euro. The AfD, e.g., advocates a restrictive asylum policy and more deportations and refuses double citizenship. To prevent inflows of refugees and migrants the party calls for the restoration of controls at German borders as well as the complete closure of the EU external borders. The AfD rejects the building of a European federal state, advocates the shift of competences from the EU level back to the individual member states and demands the “orderly” dissolution of the euro area. Should this not be possible in the normal process of the parliamentary decision process they call for a referendum on Germany’s exit of the monetary union (the German constitution does not foresee referenda, however). Until then, the target2 balances should be squared by year-end. Banking union is seen very critical and any deposit insurance scheme is rejected. Another main topic is fiscal and tax policy including calls for public debt reduction to enhance the sustainability of public finances, for an income tax reform to reduce the tax burden for families and low- and medium-wage earners and to simplify the tax scale. In contrast to the fundamental fiscal policy aim the party also argues for increased transfers to families/children, e.g. higher pensions for mothers/fathers. On paper a r2g alliance with obvious overlaps … While each party has its own priorities none will be able to run the country without at least one coalition partner. Therefore a short comparison of the main ideas with respect to feasible future government coalitions might be useful. Such an exercise shows obvious overlaps between the SPD’s, the Greens’ and the Left party’s ideas. This holds especially for four areas: — Fiscal policy: The three parties want to get rid of Finance Minister Schäuble’s credo for a balanced budget in favour of an expansive fiscal policy stance. Given Germany’s debt brake, the leeway for deficit spending would be rather limited, however. Nevertheless the three parties argue for an increase in public spending on infrastructure, education, social housing and on transfers for families with low income, especially single parents. — Intensified redistribution. While the income tax burden for people with low and medium income should be reduced they want to increase it for those with higher and especially with very high income. Capital gains shall be subject to the income tax, i.e. the withholding tax shall be abolished. Multi- national companies shall pay taxes in those countries were their profits are made. The Left party as well as the left wingers among the Greens and the SPD also favour the introduction of a wealth tax. — Rollback of former Chancellor Schröder’s Hartz IV reform. In contrast to Schröder’s carrot and stick approach, the SPD, the Greens and the Left tend to damage the approach by abolishing the second part, i.e. the sanctions and social benefit reductions which were meant to enhance the unemployed persons’ incentives to take a job. In addition, worker protection shall be intensified and stronger equal pay rules established. 0 5 10 15 20 25 30 35 40 45 CDU/CSU SPD AfD Results of the Allensbach survey, % Source: IfD Allensbach AfD's vs bigger parties' popularity 15 Growth and inflation leave ECB still unfazed 28 | March 9, 2017 Focus Germany — Introduction of a uniform (semi-public) health care insurance scheme by merging the (funded) private insurance providers with the (semi-public) providers in the statutory scheme (details open). In contrast to the fit of major ideas in fiscal, labour market and social policy the three parties are divided on internal security issues and on international and European politics. Especially, the dividing lines between the SPD and the Greens on the one hand and the Left on the other hand with regards to the latter two issues could become a stumbling block for the formation of a red-red green (r2g) coalition. Controversial subjects are the foreign relations with Russia given the Left’s refusal of the sanctions against Russia as well as with Turkey as the Left also opposes the EU-Turkey agreement. The Greens’ and the Left’s reservations against higher defence spending could make it difficult for such an alliance to agree on a common basis for the relations with Germany’s NATO partners. ... but polls point to a grand coalition as the most likely outcome Although Mr. Schulz’ and his party still fly high in the polls a renewed grand coalition is still the most likely scenario according to the polls as the SPD’s upswing has come at the cost of the Greens’ and the Left’s popularity ratings, too. Thus, the much debated r2g alliance would lack the majority of Bundestag seats from the present point of view. A renewed CDU/CSU-SPD coalition would mean continuity in major areas, especially in European, in defence and in international politics where these parties’ ideas still match up. In addition, calls for increased public spending on infrastructure and education and on pensions (for low-wage earners with a longer working career) can be heard from all three parties. Conflicts, however, would become more likely in fiscal and labour market policy. The SPD obviously would demand a more expansionary fiscal policy stance. As the balanced budget is part of the CDU/CSU’s brand essence the conservatives are unlikely to give in here or only if the SPD became a very heavy weight due to a similar number of seats in the new Bundestag as the conservatives. Reform standstill could erode Germany’s competitiveness If the present programmes were the basis of a new grand coalition’s government programme the business would have no prospect for tax relief in contrast to families and people with small and medium income. The abolishment of the withholding tax on capital gains and/or a slight increase in the income tax top rates as well as a stricter taxation of multi-national companies would become likely. With regards to labour market policy a standstill was the most likely outcome as the CDU/CSU’s business wing strongly opposes the SPD’s proposals so that they would block each other. Furthermore parts of the CDU as well as the SPD seem to follow a paternalistic idea of the state and thus to be satisfied with the status quo. But a standstill in times of intensified technological change would mean a setback, in effect. While all this was hardly good news for Germany as a location for invention and production it is encouraging that recently Chancellor Merkel has praised her predecessor Schröder’s Agenda 2010 reforms. She rightly emphasised that the creation of 2.5 million new jobs and the reduction of the unemployment by a half since 2005 was unthinkable without these reforms. 0 0.5 1 1.5 2 2.5 3 3.5 DE DK ES FR IT NL PL PT UK US 2015 2016e Source: NATO Defence spending in selected NATO states 16 % of GDP (based on 2010 prices) 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 37 38 39 40 41 42 43 44 2000 2004 2008 2012 2016 Employed (left) Unemployed (right) German labour market: impressive upswing since 2005 17 Source: Federal Statistical Office m Growth and inflation leave ECB still unfazed 29 | March 9, 2017 Focus Germany A Jamaica coalition would need much give-and-take In Late November 2016 Chancellor Merkel answered to the then growing speculations about a future coalition with the Greens, that the Greens were not a favourite coalition partner. And the Chancellor pointed to “a number of difference” that could be recognised easily. 23 In the meantime such speculations have lost substance. According to the polls such a coalition is no longer feasible. If the CDU/CSU becomes the strongest party in the September election again its sole alternative to a renewed grand coalition will likely be a three party alliance including the Greens as well as the FDP. To work properly such an alliance would need the strong willingness to consent from all sides. From the present point of view the CSU’s and the Greens’ asylum policy approaches, e.g., are as different as fire and water. Also the Greens’ leftish tax policy proposals – i.e. the introduction of a wealth tax, fundamental reform of souses/family taxation – and their proposals for stricter equal pay regulations would not fit to the conservatives’ and even less the liberals’ ideas. While it would be difficult to reconcile the different ideas on taxation an agreement on the general fiscal policy stance should be possible immediately as the parties have high preferences for a sustainable fiscal policy. Public spending would likely be more focussed on infrastructure and education and less on social benefits. Tax payers and contributors to the statutory pension scheme would benefit from the Greens’ and the FDP’s opposition against new pension benefit increases. Under a black-green-yellow (Jamaica) coalition the commitment to the euro area (and the EU more generally) would remain strong but conditionality will still play an important role. Large-scale stimulus or a decisive call for a substantive institutional build-out (risk-sharing via fiscal union or deposit insurance scheme) remains unlikely given the overall reluctant sentiment in the public to accept a more open transfer union as well as the apparent performance of the AfD. Conclusions Political fragmentation is on the rise in Germany, too. (Taken the sisters CDU/CSU as two parties) Seven parties are expected to be represented in the Bundestag (much less though than e.g. in the Netherlands or Italy) and coalition building will be required to secure a parliamentary majority. As a result of the SPD’s upswing following Mr. Schulz nomination as chancellor candidate it has become hard to tell which of the two big parties will lead a new government. While polls still point to a renewed grand coalition is the most likely election outcome (and the Germans’ favourite result), other options including a red-red green coalition have become much more likely recently. The play of (political) colours and the composition of the new governing coalition will in the end define the policy measures to be implemented. However, the prospects for an end of the Germany’s reform fatigue and for the implementation of the necessary policies for enhanced flexibility are very limited. Instead the risk of short-sighted policies prepared to rollback past decade’s labour market reforms and to switch to an expansionary, unsustainable fiscal policy stance has increased. While such a scenario might in the short run ease tensions with the EU and the EMU, Germany might possibly stop being the beacon of stability within Europe. Barbara Böttcher (+49 69 910-31787, barbara.boettcher@db.com) Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) 23 http://www.spiegel.de/politik/deutschland/angela-merkel-die-gruenen-sind-kein-bevorzugter- partner-a-1123864.html 0 5 10 15 20 25 30 35 40 CDU/CSU-SPD SPD-Greens CDU/CSU-Greens CDU/CSU-FDP % of those asked Source: Forschungsgruppe Wahlen: ZDF Politbarometer The Germans' favourite government coalitions 18 Growth and inflation leave ECB still unfazed 30 | March 9, 2017 Focus Germany DB German Macro Surprise Index The DB German Macro Surprise Index compares published economic data with market forecasts and thus provides clues as to the direction of future forecast revisions. 24 Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 24 See for details Focus Germany. August 4, 2014. Last 20 published economic data for Germany DX Bloomberg Tickers Indicator Reporting month Publication date Current value Bloomberg consensus Surprise Standardised surprise Quantile rank GRIMP95Y Index Import Price Index (% yoy) 12 2016 27.01.17 3.5 2.7 0.8 1.0 1.0 GRFRIAMM Index Retail Sales (% mom) 12 2016 31.01.17 0.0 0.6 -0.6 -0.2 0.4 GRUECHNG Index Unemployment Change (000's mom) 1 2017 31.01.17 -25.0 -5.0 20.0 0.6 0.8 MPMIDEMA Index Markit Manufacturing PMI 1 2017 01.02.17 56.4 56.5 -0.1 -0.1 0.3 MPMIDESA Index Markit Services PMI 1 2017 03.02.17 53.4 53.2 0.2 0.2 0.7 GRIORTMM Index Factory Orders (% mom) 12 2016 06.02.17 5.2 0.7 4.5 2.0 1.0 GRIPIMOM Index Industrial production (% mom) 12 2016 07.02.17 -3.0 0.3 -3.3 -2.7 0.0 GRCAEU Index Current Account Balance (EUR bn) 12 2016 09.02.17 24.0 24.8 -0.8 -0.6 0.3 GRZEWI Index ZEW Survey Expectations 2 2017 14.02.17 10.4 15.0 -4.6 -0.5 0.3 GRCP20YY Index CPI (% yoy) 1 2017 14.02.17 1.9 1.9 0.0 0.2 0.3 GRZECURR Index ZEW Survey Current Situation 2 2017 14.02.17 76.4 77.0 -0.6 -0.2 0.4 GRIFPBUS Index IFO Business Climate 2 2017 22.02.17 111.0 109.6 1.4 0.9 0.8 GRGDPPGQ Index GDP (% qoq) 12 2016 23.02.17 0.4 0.4 0.0 -0.1 0.3 MPMIDEMA Index Markit Manufacturing PMI 2 2017 01.03.17 56.8 57.0 -0.2 -0.2 0.3 GRUECHNG Index Unemployment Change (000's mom) 2 2017 01.03.17 -14.0 -10.0 4.0 0.0 0.5 GRCP20YY Index CPI (% yoy) 2 2017 01.03.17 2.2 2.1 0.1 0.8 0.8 GRIMP95Y Index Import Price Index (% yoy) 1 2017 02.03.17 6.0 5.5 0.5 0.7 0.9 MPMIDESA Index Markit Services PMI 2 2017 03.03.17 54.4 54.4 0.0 0.0 0.5 GRFRIAMM Index Retail Sales (% mom) 1 2017 03.03.17 -0.8 0.3 -1.1 -0.6 0.2 GRIORTMM Index Factory Orders (% mom) 1 2017 07.03.17 -7.4 -2.5 -4.9 -2.3 0.0 Sources: Bloomberg Finance LP, Deutsche Bank Research -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 14 15 16 17 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 Growth and inflation leave ECB still unfazed 31 | March 9, 2017 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). 25 Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 25 See for details Focus Germany, March 3, 2016. Growth and inflation leave ECB still unfazed 32 | March 9, 2017 Focus Germany Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Germany: Events of economic-, fiscal- and euro-politics DX Date Event Remarks 9 March ECB Governing Council meeting, press conference Review of the monetary policy stance. 9-10 March European Council, Brussels Poss. debate on the implementation of strategies for the Single Market (digital single market, capital market union and energy union) as part of the Bratislava Roadmap. 15 March Elections in the Netherlands The right-wing PVV is currently the most popular party (~20%), marginally above PM Rutte’s VVD conservatives. Polls suggest a government can be formed without the PVV. 17-18 March G20 Finance Ministers and Central Bank Governors Meeting, Baden-Baden Debates on structural reforms to strengthen economic resilience, on measures to improve investment conditions, esp. in Africa (‘Compact with Africa’ initiative), on enhancing reliability and fairness in taxation and on digitalization among others. 20-21 March Eurogroup and ECOFIN, Brussels Fiscal surveillance: (poss.) EDP implications of the Commission winter forecast, macro-economic imbalances procedures – in depth reviews of euro area countries, thematic discussion on growth and jobs – pensions, (poss.) Greece – state of play among others. 25 March EU Heads of states and governments, Rome Meeting to celebrate the 60s anniversary of the Treaty of Rome, finalising the reflection process on the EU's future. 26 March State election in the Saarland Establishment of a renewed CDU-SPD coalition headed by MP Kramp- Karrenbauer likely, as both parties lack feasible alternative options. End-March UK government Triggering Art. 50 TEU? We still consider a notification by end-March the most likely scenario. 7-8 April Eurogroup and informal ECOFIN, Malta (Poss.) Thematic discussion on growth and jobs – ease of doing business and non-price competitiveness, preparation of international meetings: exchange rate developments among others. 21-23 April IWF and World Bank Spring Meeting, Washington D.C. Debates on the situation in the global economy and on international financial markets as well as foreign exchange markets. 27 April ECB Governing Council meeting, press conference Review of the monetary policy stance. Our baseline remains a tapering announcement in September to begin in January. Source: Deutsche Bank Research Growth and inflation leave ECB still unfazed 33 | March 9, 2017 Focus Germany Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Germany: Data calendar DX Date Time Data Reporting period DB forecast Last value 10 Mar 2017 8:00 Trade balance (EUR bn, sa) January 21.2 18.3 10 Mar 2017 8:00 Merchandise exports (% mom, sa) January 3.3 -2.8 10 Mar 2017 8:00 Merchandise imports (% mom, sa) January 0.5 0.1 30 Mar 2017 9:30 Manufacturing PMI (Flash) March 56.0 56.8 30 Mar 2017 9:30 Services PMI (Flash) March 53.8 54.4 27 Mar 2017 10:30 ifo business climate (Index, sa) March 110.0 111.0 30 Mar 2017 14:00 Consumer prices preliminary (% yoy, nsa) March 2.0 2.2 31 Mar 2017 8:00 Retail sales (% mom, sa) February 0.2 -0.8 31 Mar 2017 10:00 Unemployment rate (%, sa) March 5.9 5.9 6 Apr 2017 8:00 New orders manufacturing (% mom, sa) February - -7.4 7 Apr 2017 8:00 Industrial production (% mom, sa) February - -3.0 12 May 2017 8:00 Real GDP (% qoq) Q1 2017 0.4 0.4 Sources: Deutsche Bank Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit Growth and inflation leave ECB still unfazed 34 | March 9, 2017 Focus Germany Financial forecasts DX US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 0.625 -0.10 0.00 0.25 -0.75 -0.50 0.05 0.50 1.50 0.90 0.05 Mar 17 0.875 -0.10 0.00 0.25 -0.75 -0.50 0.05 0.50 1.50 0.90 0.05 Jun 17 1.125 -0.10 0.00 0.25 -0.75 -0.50 0.05 0.50 1.50 0.90 0.05 Dec 17 1.375 -0.10 0.00 0.25 -0.75 -0.50 0.05 0.50 1.50 0.90 0.05 3M interest rates, % Current 1.11 0.06 -0.33 0.36 Mar 17 1.23 0.05 -0.30 0.35 Jun 17 1.48 0.05 -0.30 0.40 Dec 17 1.73 0.05 -0.30 0.40 10J government bonds yields, % Current 2.53 0.08 0.29 1.18 Mar 17 3.00 0.08 0.35 1.30 Jun 17 3.60 0.05 0.45 1.55 Dec 17 3.10 0.00 0.85 1.75 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 1.06 113.67 0.87 1.22 1.07 9.52 7.43 8.94 4.32 309.52 27.02 Mar 17 1.03 116.00 0.90 1.14 1.06 9.46 7.46 9.08 4.40 313.27 27.00 Jun 17 1.00 119.00 0.88 1.14 1.04 9.39 7.46 8.90 4.38 315.51 27.00 Dec 17 0.95 125.00 0.90 1.06 1.00 9.25 7.46 8.50 4.40 320.00 26.00 Sources: Bloomberg, Deutsche Bank Growth and inflation leave ECB still unfazed 35 | March 9, 2017 Focus Germany German data monitor DX Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Business surveys and output Aggregate Ifo business climate 106.7 107.9 108.1 110.6 109.5 110.5 110.4 111.0 109.9 111.0 Ifo business expectations 100.6 101.8 102.3 105.6 104.5 106.0 105.4 105.5 103.2 104.0 Industry Ifo manufacturing 100.6 101.9 102.5 105.3 104.2 105.8 104.9 105.2 104.4 105.7 Headline IP (% pop) 1.7 -0.8 0.3 0.1 -1.4 0.5 0.5 -2.4 2.8 Orders (% pop) 0.9 -0.4 0.7 4.0 -0.4 4.8 -3.6 5.2 -7.4 Capacity Utilisation 85.0 84.4 84.8 85.7 86.0 Construction Output (% pop) 1.4 -5.3 1.9 3.1 -1.3 2.0 3.7 -2.4 -5.6 Orders (% pop) 6.7 0.2 -5.2 8.9 1.7 9.0 -1.0 0.5 Ifo construction 122.8 124.6 126.9 129.7 128.4 128.9 129.5 130.7 129.3 127.4 Consumer demand EC consumer survey -6.1 -3.2 -2.5 -1.5 -2.9 -2.5 -1.2 -0.7 0.2 -2.1 Retail sales (% pop) 0.6 -0.1 0.3 0.5 -0.6 1.5 -0.7 0.0 -0.8 New car reg. (% yoy) 4.5 9.4 4.2 -0.3 9.4 -5.6 1.5 3.7 10.5 -2.7 Foreign sector Foreign orders (% pop) 2.1 -1.4 2.6 2.8 -0.1 4.5 -4.1 3.7 -4.9 Exports (% pop) 0.5 0.4 -0.2 2.4 -1.0 0.6 3.3 -2.8 Imports (% pop) -0.1 -1.2 1.4 3.6 -0.7 1.1 3.5 0.1 Net trade (sa EUR bn) 61.5 65.6 61.8 60.3 20.9 20.7 21.3 18.3 Labour market Unemployment rate (%) 6.2 6.1 6.1 6.0 6.1 6.0 6.0 6.0 5.9 5.9 Change in unemployment (k) -32.0 -29.3 -22.7 -31.0 -2.0 -15.0 -8.0 -19.0 -25.0 -15.0 Employment (% yoy) 1.3 1.2 1.2 1.3 1.2 1.3 1.3 1.4 1.4 Ifo employment barometer 108.4 108.2 109.0 111.2 110.1 110.7 111.1 111.8 110.7 110.6 Prices, wages and costs Prices Harmonised CPI (% yoy) 0.1 0.0 0.4 1.0 0.5 0.7 0.7 1.7 1.9 Core HICP (% yoy) 1.1 1.0 1.1 1.2 1.1 1.1 1.0 1.4 1.1 Harmonised PPI (% yoy) -2.8 -2.6 -1.7 0.2 -1.4 -0.4 0.1 1.0 2.4 Commodities, ex. energy (% yoy) -14.6 -6.5 2.9 19.2 4.7 9.1 19.3 29.5 34.5 37.7 Oil price (USD) 35.1 46.9 47.0 51.1 47.3 51.4 47.1 54.9 55.5 Inflation expectations EC household survey 5.3 3.6 6.2 10.0 6.4 7.4 11.8 10.8 17.3 18.9 EC industrial survey -2.4 1.7 3.0 6.2 2.7 5.4 6.8 6.3 11.4 13.8 Unit labour cost (% yoy) Unit labour cost 2.1 0.3 1.5 1.7 Compensation 2.6 2.0 2.3 2.3 Hourly labour costs 3.9 0.6 2.4 3.5 Money (% yoy) M3 7.7 7.2 6.6 5.7 6.6 5.4 5.1 5.7 5.6 M3 trend (3m cma) 6.4 5.7 5.4 5.5 Credit - private 2.0 2.7 2.6 2.9 2.6 3.0 2.9 2.9 3.1 Credit - public -9.1 9.7 -0.1 8.9 -0.1 4.2 5.3 8.9 15.5 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HWWI, ifo, Markit dbStandpunkt 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 In “dbStandpunkt” we analyse and comment on financial and economic issues, raise awareness of the key issues and contribute to the discussion. Through dbStandpunkt, we aim to cut through the day-to-day noise and focus on the key strategic questions faced by Germany in the 21st century. * Beacon of stability: The foundations of Germany’s success ........................................... December 15, 2016 * The dark sides of QE: Backdoor socialisation, expropriated savers and asset bubbles ................................................... November 1, 2016 * A darker Europe ............................................................ June 23, 2016 * The ECB must change course ......................................... June 8, 2016 * Influx of refugees: An opportunity for Germany ...... November 13, 2015 * Misguided policy raises risk of housing bubble ................ May 28, 2015 * Case for higher investment in infrastructure – despite questionable ”gap analysis” ......................... December 5, 2014 * Temporary immigration boom: A wake-up call for politicians? ......................................... July 28, 2014 * The economics of sanctions: The West can afford to be tough ..................................... May 16, 2014 © Copyright 2017. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. 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