Sectors and Resources

We see Germany in a technical recession, as we expect another ¼% GDP drop in Q3. Our forecast for 2019 is now 0.3%. Given no indication for a rebound we lowered our 2020 forecast to 0.7%. We acknowledge these revisions do not properly account for the recent accumulation of risks. Given the increasingly fragile state of the global economy, the realization of one or more risks could easily push the economy into a completely different scenario, where growth revisions of a few tenths of a percentage point will not be sufficient. (Also in this issue: German automotive industry, chemical industry, house prices, corporate lending, the view from Berlin, digital politics.) [more]

In case of a snap election in Germany, a CDU/CSU-Greens coalition could be an option. Given both camps' radically different political positions in many areas, such a coalition would require both to make significant compromises. A black-green government would need to direct its focus and its available financial resources to climate protection and the energy transition. Corporates and consumers would have to bear considerable costs. This also spells a dilemma for fiscal policy. A larger share of government spending would necessarily have to be allocated to providing subsidies and mitigating the social impact of a quicker energy transition. Citizens and corporates cannot hope for major tax relief. (Also included in this issue: German goods exports, German industry, labour market, automotive business cycle.) [more]

Capacity utilisation in the German electricity sector has steadily declined over the last few years and amounted only to 34% in 2017. Much of this downtrend is due to the development of renewable energy generation. Average capacity utilisation is particularly low at wind and photovoltaic power plants, which are dependent on the weather. At the same time, these plants benefit from extremely low marginal costs and priority feed-in conditions. This enables them to (temporarily) squeeze out other electricity providers, whose average capacity utilisation has declined as a consequence. There is a political preference for natural gas to compensate for the consequences of the exit from nuclear and coal power generation during the coming years. Nevertheless, there are some risks for operators and investors. [more]

This edition of Focus Germany has quite a lot but rather short articles. We are taking stock of the German economy after Q1’s surprisingly strong growth. We expect the economy to flatline in Q2 and foresee an only subdued recovery in H2 given the recent flare-up of several geopolitical hotspots, rather than their hoped for de-escalation. We cross-check this analysis with deep dives into the auto and the mechanical engineering sector. We look at the impossible trinity of Germany’s fiscal policy (tax cuts, higher social expenditures and the black zero) and peek into the difficulties finance ministers are facing in the digital economy. We discuss to what extent the upcoming EP and Länder elections might spell more trouble for the Groko and introduce our new German financial conditions index. [more]

For both environmental and economic reasons, a carbon tax would be superior to the current patchwork of subsidies and regulatory law (standards, bans, caps, quotas etc.) which characterises climate policy. However, the tax has a key disadvantage: while it sets a price for carbon emissions, it does not set a cap. That is why emissions trading is even superior to a carbon tax. Despite the convincing advantages of market-based in-struments, a fundamental re-orientation of German and European climate policy unfortunately appears unlikely. Instead, existing instruments will probably be adapted again and again once their negative side effects become too obvious. This will make climate policy less efficient than it could be and more expensive than necessary. [more]

The German logistics sector has continued to increase its overall turnover, despite the industrial recession. Logistics, one of the biggest sectors in Germany, seems to have decoupled from the industry to some extent. This is quite unusual. However, revenue growth in the logistics sector is supported by several developments: the boom in construction, a larger number of smaller deliveries due to the uptrend in e-commerce, the growing importance of value-added services and price effects. Nevertheless, the industrial recession is likely to have an impact on the logistics sector in the first half of 2019. We expect nominal revenues in the sector to stag-nate or even decline during the first half of 2019. [more]

Not least because they fear that the trend towards electromobility may cause losses in value added and job cuts in Germany, policymakers are debating subsidies for national battery cell production. From a regulatory perspective, supporting local manufacturing would be dubious and comes with high economic risks. On princi-ple, German automakers ought to be better judges than policymakers, both with regard to the indispensability of battery cell manufacturing in Germany and its long-term profitability. The state is not needed, at least not as a source of subsidies. [more]

Although the negative effects from the WLTP roll-out are currently petering out in German auto statistics, the recent weakness of global demand argues against a swift recovery of auto production in Germany. In 2019, passenger car sales look set to shrink slightly or at best stagnate in some key markets (US, EMU, UK), whilst rising only moderately in others (China). A rebound is unlikely to materialise before H2 2019, when output is also expected to turn positive in year-over-year terms. Going by the production index, annualised automotive output in Germany ought to be more or less flat in 2019, in our view. [more]

Despite broad-based weakness in recent months, the stock of orders in German manufacturing remained on the uptrend, partly led by the lack of skilled labour and one-off factors in the auto industry (WLTP, diesel). Whilst the high volume of unfilled orders should stabilise industrial production in the current year, the peak ought to be near, as suggested by recent results of the ifo business survey. On balance, manufacturing production in Germany looks set to be virtually flat in 2019. [more]

During the current cyclical upswing, which started in 2010, German manufacturing companies have increased their real gross capital expenditure by just above 3% p.a. In 2017, the industry accounted for 51% of total other capital spending (intellectual property) in Germany. This shows that manufacturing is the most important driver of research and development and thus of technical progress. The automotive and the pharmaceutical industries stand out from other sectors. The capital stock in energy-intensive industries has been shrinking for years now – a trend that gives cause for concern. While the German manufacturing industry is faced with long-term challenges, we believe that it is nevertheless sufficiently adaptable to remain competitive on a global scale. [more]