Macroeconomics

EMU’s current account (CA) surplus has lent some support to the euro over the past two years at a time of relentless fixed income outflows. Germany is pivotal, as it accounts for 60% of the surplus. Since the rotation of fixed income assets out of Europe is likely to continue (‘Euroglut’) the balance of payments should therefore become even more bearish for the euro. The German surplus is likely to weaken by about 20% to 7% of GDP by the end of the decade due to unfavourable demographic trends, the housing boom and slowing globalisation. [more]

The manufacturing sector is one of Germany's biggest employers. On average, more than 5.2 million people were working in manufacturing in the first half of 2016. This represents an increase of 6.3% compared with the beginning of 2005 – and comes in spite of the deep recession of 2008/2009. In the period under review, job growth was particularly strong in mechanical engineering, the food industry, the rubber and plastics industry, and the metals industry. Expansion of employment in German industry has slowed recently, however. Because of the low rate of global growth and muted investment activity, employment in the industrial sector is likely to stagnate up to 2017 – albeit at a high level. [more]

Many of the things that had us gasping in amazement when we watched science fiction films just a few decades ago have now become a mass-market reality. Today, Hollywood shows us what we can expect if we continue to develop digital technologies at the current pace. Of course, artificial intelligence and its use in all areas of our lives are undoubtedly still a long way off. However, substantial progress is being made especially when it comes to pattern recognition, modern data analysis and the use of self-learning algorithms. Without this technological progress, we would no longer be able to cope with the exponential growth in data volumes and data potential of which we can still only begin to conceive. We need the machines. [more]

The debate about whether a negative interest rate policy (NIRP) helps or hinders the transmission mechanism of monetary policy continues to rage. The BIS and many others – including us* – long ago issued warnings about throwing open the monetary floodgates and the side effects of negative central-bank interest rates, and now Mark Carney, the governor of the Bank of England, has also clearly rejected negative interest rates, despite using all the means at his disposal to prevent the UK economy from sliding into recession after the Brexit shock. The package of measures he launched in August significantly exceeded market expectations, but Carney has ruled out negative interest rates, referring to the adverse impact on the capital markets. [more]

There is a high level of excess demand in the housing market and it has grown in recent years. Demand for credit is also growing at a correspondingly rapid pace. The supply of credit could be boosted by further monetary stimulus. In the medium term, more buoyant lending is likely to increase interest rate risk. However, if lending growth remains low, there will be increased risk of overvaluations and a house price bubble. This is particularly true when little new housing is financed and lending is largely for existing property. Given the high level of excess demand in the housing market and the fact that office buildings are being converted to residential buildings, office space is also likely to be in short supply in the coming years. As a result, rents in the office market can be expected to rise more strongly, and could – for a time – outstrip the rise in rents in the housing market. Since Chancellor Merkel assumed office in 2005 her term has been dominated by crisis management, which often required leadership and moderation of differing interests in Europe. Managing the UK’s departure from the EU will have top priority for the time being. Nonetheless, Merkel is likely to focus her attention on domestic topics as much as on European ones in the upcoming months given the looming federal elections in autumn 2017. Also in this issue: Fewer insolvencies in German industry. [more]

The 2008/2009 economic and financial crisis caused the number of insolvency proceedings instituted to increase by 48% in 2009 alone. However, the number of insolvencies has been following a downward trend since then. As a result, fewer proceedings were instituted in 2015 than in 2008 across nearly all sectors of industry. The prospects for this trend continuing in 2016 are good. Over the past few years, the number of insolvencies in any given industry has been significantly influenced by the prevailing economic conditions in that industry and – related to this – the value of the euro against the currencies of major trading partners. [more]

One of the widely discussed patterns of the UK-referendum vote is its demographic distribution. Some surveys find that voters older than 65 were more than twice as likely to have opted for “leave” than those younger than 25 years.* Demographic differences with respect to perceptions of Europe are not unique to the UK. [more]

Breathtaking. No other word really does justice to the profound changes unleashed by digitalisation and the accelerating pace at which new technologies are appearing. Of course, many of these technologies are still in their infancy and in some cases still have a rather visionary character, but they nevertheless hold unforeseen and lucrative potential. The race for digital technologies and successful monetisation strategies has been on for some time, especially among the large, well-known internet platforms. However, start-ups are increasingly throwing their hat into the ring and causing quite a stir among the business models of established companies. As a result, many innovation-stimulating digital technologies are gradually finding their way into traditional companies where they are evolving into a comparative competitive advantage (not only) for Germany as a business location. [more]

The political and economic implications as well as the order of events of the Brexit are currently very hard to predict. We assume that Europe – as usual in recent years – will “muddle-through”. The ECB will not panic, but wait to assess the consequences of the UK’s choice to exit the EU. Due to Brexit we lower our 2017 German GDP forecast to 1.3% from 1.6%. About half of that is due to lower export growth. The other half of the revision results from lower investment in machinery & equipment by German corporates. All told, domestic demand should only feel a marginal impact given that the fundamental drivers – healthy labour market and construction sector – remain intact. Further topics in this issue: German consumers, labour market and Germany in the aftermath of the EU referendum in the UK. [more]

Following the UK referendum, Brexit will also leave traces on German industry. After all, 7.5% of all German exports went to the UK in 2015, making it Germany’s third most important export market after the United States and France. The automotive and pharmaceutical industries are likely to be hit the hardest by Brexit. This is because the UK accounts for 12.8% and 10.5%, respectively, of these two industries’ total exports. In addition, they both generally have an above-average export ratio. The UK referendum is likely to have an impact on individual companies’ investment decisions and German companies’ UK pricing structures in the short term. [more]