Teaser: Just before Christmas, the German central bank published its monthly report with a bright outlook for the German economy several years ahead – but that was not enough to reassure the financial markets.
On Monday, the 17th December, the German central bank, Bundesbank, issued its monthly economic report. For a somewhat depressed financial market, the analysis from the central bank should have served as an optimistic Christmas gift. The particularly interesting feature in the December monthly report is that Bundesbank projects a solid GDP growth in Germany until 2021. Should the central bank be right, then it is time to buy European stocks, and in general, upgrade the trust in the Eurozone’s economic future.
As graphic one shows, Bundesbank predicts rising GDP growth rates until 2020, followed by a lower growth rate in 2021. This is an incredibly interesting forecast when one considers that a recession in the US in 2020 is an increasing fear in the financial markets. In addition, Italy is struggling just to stay at a zero-growth level, France is getting closer to a stalemate situation, and the Spanish economy is less buoyant than for a year ago. The predictions from the Bundesbank therefore seems particularly optimistic. Though I always include analysis from the Bundesbank in my own considerations because it is absolutely insightful, and because of the skilled people who work in the central bank’s economic department.
The Bundesbank estimates that the growth in the second half of 2018 would accelerate again due to higher activity in the automotive industry. Last summer, the production fell due to uncertainty about emission limitations for diesel-powered cars in Germany. Bundesbank had an expectation about a clarification concerning the diesel cars’ emission and possible bans on driving diesel cars in major German cities. Though Bundesbank notes that only demand from abroad increased, whereas domestic purchases of new cars lagged, also into Q4. Those who follow the German news may have noticed that the battle for, or against, diesel cars has evolved into a kind of warfare scene, thus far from the clarification that the Bundesbank presupposes.
Another challenge for the Bundesbank’s expectation of a solid GDP growth is the downward momentum in the economy during 2018. In the second half of 2018, all German economic think-tanks lowered the growth estimate for Germany, the Bundesbank itself also lowered expectations for the 2018 GDP growth from previously 2.0 pct. to 1.5 pct. At the same time, there is no doubt that currently is the headwind for the global economy increasing. For the same reason, 2019 opens-up with several headwinds, confirming the instant decreasing momentum in growth rates.
But as the Bundesbank emphasizes, a new positive element for growth in 2019 is the increasing expansionary fiscal policy that the government coalition originally agreed upon when they formed the government two years ago. I totally agree that this is going to act as a stabilising growth factor, but overall, I argue that the economic activity in Germany will be at a lower level than what the Bundesbank expects.
The expectation of rising growth rates this year and next year is exciting, and the Bundesbank even uses the phrase “continued economic boom”, which sounds appealing in these times. In the argumentation there is referred to a global stable economic situation, where I believe the problems are mounting, especially among Germany’s Eurozone bodies Italy, France and Spain.
On the long horizon, Bundesbank also believes that the fiscal policy can contribute positively to growth. I agree that Germany still has fiscal power to release, if growth becomes too low.
Graphic two shows an increasing rise in net wages after tax and social contributions in Germany, this means that the household consumption still can grow. The labour market is so robust, that this will last for some time to come. Whether this still is the situation in three years is a good question, but it for sure remains as a positive GDP growth effect right now.
Looking at the components of Bundesbank’s expectations for the future GDP growth, the figure for 2020 contains a so-called base effect of 0.4 percentage points (like a calendar effect). One can argue that the growth has taken place, but most people will probably perceive the growth as stable, instead of increasing – I agree that that several small growth engines will contribute positively, but again, at a more modest level than how the central bank rates the future.
I wish that the Bundesbank will be right in their assessment, but as indicated a few times, I remain less optimistic than the highly respectable German central bank. I do not disagree with the arguments in the monthly report, but I weigh them differently, and moreover, I give more weight to the immediate headwinds and the European challenges.
My own assessment of the global economy, though especially the Eurozone economy, has long been more modest than what the financial markets have priced in. However, since my assessment is relatively unchanged, it now suddenly seems almost optimistic, but it is not the Bundesbank’s optimism I share. I argue that the United States will continue to show a reasonable GDP growth, and the recent 2020 recession debate as exaggerated, but the current growth rate will slow down at some point.
The Eurozone I’m considerably more sceptical about. To keep the momentum the future GDP growth in Germany must be increasingly generated by domestic economic growth. It is not the first time in history that Germany will act as the stabilizing economic factor in Europe, now distinctly in the Eurozone. Overall, Germany’s growth contribution to the Eurozone will assure the economic zone against a recession, which is good, and can keep-up the mood of an optimist. But the growth in Germany will not be strong enough to hinder the Eurozone to fade into a low growth situation that feels like stagnation for a number of years ahead.
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