European bank recovery continues, but balance sheet growth is still lacking

The extraordinarily hot and dry summer weather will cause severe crop shortfalls in Germany, according to experts' estimates. Due to the adverse weather conditions, the crop outlook for European neighbouring countries, as well as other large food producers such as the USA or Australia, is quite poor, too. Over the past weeks, wheat prices for delivery in December 2018 were up by just under 20%. [more]

European banks had a patchy start to the year. The common theme of Q1 performance was the continued slight shrinkage of the industry, visible in many core indicators. Overall results were solid though, showing further progress in asset quality and resilience in light of tighter regulation (IFRS 9). [more]

Several aspects of the European data protection regulation GDPR could have far-reaching implications for competition in the EU’s data economy and the competitiveness of the bloc’s tech industry and AI startups. Data protection “made in Europe” could give European companies a competitive edge as users become increasingly privacy-aware. But GDPR could also end up rather strengthening the position of incumbent tech giants and throw the continent further behind the US and China in the emerging race for global AI dominance. If potential negative implications of the regulation for the EU’s data economy materialize, EU lawmakers should not hesitate to make adjustments accordingly. [more]

When reporting on bitcoin, blockchain and cryptocurrencies these days, the speaker is faced with the question: Shall he discuss the technology or move directly to the presentation of the social and economic implications? Conveying a complex technology in just a few minutes is risky. In Alice's rabbit burrow, the speaker and his audience quickly lose track of each other. But the audience may also be left clueless by the direct presentation of the potentially revolutionary implications. In the face of this dilemma and the complexity of cryptosystems, we will try to shed light on the issue by means of metaphors. We hope you will join us on our journey into the blockchain universe. [more]

The third and fourth pipeline strings for Russian gas transports through the Baltic Sea to Greifswald/Germany, which are also known under the term of “Nord Stream 2”, are now under construction, doubling the existing transit capacity of Nord Stream 1. The project continues to be highly controversial, given arguments that it might drive a wedge between the EU countries, the United States’ opposition and the risks it poses to the triangle of energy, environmental and security policies. That – also thanks to Germany’s initiative – Russian gas flows through the Ukraine look set to continue following the expiry of the old contracts in 2019 is a step forward and may foster acceptance of Nord Stream 2. In the face of the recent realignment of global gas trading, this would be in the interest of (nearly all) players. [more]

At 0.3% qoq, German GDP growth in the first quarter of 2018 slowed markedly compared with 2017, when GDP rose by an average of 0.7% per quarter. Whilst this was partially attributable to temporary factors, the large number of vacancies is gradually becoming a stumbling block for the German economy. Manufacturing, in particular, has been hard hit of late, with the number of job openings in the first quarter of 2018 up by 38% on the same period a year earlier. [more]

The major European banks have seen their revenues stabilise in 2017, and through further cost-cutting and improvements in asset quality, their profitability rebounded strongly to the second-best figure in the past decade. However, banks continued to shrink, and both total assets and risk-weighted assets fell substantially. This helped capital and leverage ratios to reach new record highs, finally laying questions about the sector’s capitalisation levels to rest, at least on aggregate. Large European banks lost ground versus smaller competitors and also remained far behind their US peers, although they were able to catch up somewhat on this front. [more]

Nitrogen oxides emissions (NOx) in Germany plunged by 44% between 1995 and 2016. Road traffic recorded the sharpest decline (-62%). After the decision of the Federal Administrative Court in Leipzig, however, certain diesel vehicles can be banned from inner cities. Apparently, there is a conflict of interests between the human right to clean ambient air and the protection of diesel car owners against an erosion of their vehicles‘ value. In our view, this conflict could be resolved over time. To this end, policymakers could, for instance, introduce a Blue Badge for low-emission diesel passenger cars, which is tied to a transitional period for older vehicles. [more]

German manufacturing industry ought to be at the peak in the current cycle. Domestic production in 2017 edged up by 3% in price-adjusted terms, which marks the strongest increase since 2011. At the same time, producer prices (+2.3%) also recorded the sharpest increase since 2011. Although industrial order intake continues to be very dynamic, several factors, including the strong euro and the recent slight dip in business expectations, suggest that growth momentum is likely to slow in the course of 2018. Against this backdrop, German industrial production looks set to rise by 2.5% in 2018. In the face of high wage settlements and plans to lower the limit on fixed-term contracts, German companies are likely to create fewer new jobs. [more]

House prices and rents have risen considerably during the current house price cycle. Rents are the component of the consumer price basket which has the biggest impact on overall inflation. While recent newspaper reports and market figures reflect the uptrend in rents, the official statistics are suspiciously free of it. This holds especially for Berlin. Consequently, official figures for the capital – and probably for Germany as a whole, if to a smaller extent – probably underestimate actual inflation. [more]

The EU Commission proposed new mandatory CO₂ targets for passenger cars. These targets cannot be achieved with combustion engines alone. Stricter regulation thus enforces the electrification of the power train. However, the average car buyer currently does not play to the tune of regulatory policy and turns a cold shoulder on most alternative fuels. There are other climate policy instruments that outperform the CO₂ targets for passenger cars in terms of meeting the environmental targets and economic efficiency. [more]

The euro’s second place among the world’s most important reserve currencies has remained so far undisputed. The single currency’s share of allocated foreign exchange reserves stabilised at 19.9% in Q2, according to IMF data. The US dollar easily defended its position as the dominant currency in the international monetary system. But both the euro and the dollar gradually gave some way to other reserve currencies. Regardless of whether this observation reflects structural developments or rather (temporary) shifts in reserve allocation - it certainly fuels the discussion about the 21st century’s leading reserve currency (or currencies). [more]