How quickly is the economy of Germany slowing?

Until last week the consensus about the German economy was that is was the main engine of what had become called the Euro boom. Some were thinking that it might even pick up the pace on this.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

This was driven by the PMI or Purchasing Managers Index business surveys from Markit which as I pointed out on the 3rd of January were extremely upbeat.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

This was followed by the overall or Composite PMI rising to 59 in January which suggested this.

“If this level is maintained over February and March,
the PMI is indicating that first quarter GDP would rise
by approximately 1.0% quarter-on-quarter”

Actually that was for the overall Euro area which had a reading of 58,8. The catch has been that even this series has been dipping since as we now see this being reported.

The pace of growth in Germany’s private sector cooled at the end of the first quarter, with the services PMI retreating further from January’s recent peak to signal a loss of momentum in line with that seen in manufacturing.

This led to this being suggested.

it still promises to be a strong 2018 for the German economy – with IHS Markit forecasting GDP growth to pick up to 2.8%

Still upbeat but considerably more sanguine than the heady days of January. Then there was this to add into the mix.

However, unusually cold weather in March combined with continuing payback from January’s jump in activity has led to the construction PMI falling into contraction territory for the first time in over three years

Official Data on Production and Trade

The official data posted something of a warning last week.

In February 2018, production in industry was down by 1.6% from the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis)…….In February 2018, production in industry excluding energy and construction was down by 2.0%. Within industry, the production of capital goods decreased by 3.1% and the production of consumer goods by 1.5%. The production of intermediate goods showed a decrease by 0.7%. Energy production was up by 4.0% in February 2018 and the production in construction decreased by 2.2%.

As you can see the monthly fall was pretty widespread and only offset by a colder winter. Whilst this did show an annual increase of 2.6% that was a long way below the 6.3% that had been reported for January and December. So on this occasion the PMI surveys decline seems to have been backed by the official numbers as we await for the March numbers which if the relationship holds will show a further slowing on an annual basis.

Thrown into this mix is concern that the decline is related to fear over the rise in protectionism and possible trade wars.

If we move to this morning’s trade data it starts well but then hits trouble.

Germany exported goods to the value of 104.7 billion euros and imported goods to the value of 86.3 billion euros in February 2018. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 2.4% and imports by 4.7% in February 2018 year on year. After calendar and seasonal adjustment, exports fell by 3.2% and imports by 1.3% compared with January 2018.

This may well be an issue going forwards if it is repeated as last year net exports boosted the German economy and added 0.8% to GDP ( Gross Domestic Product) growth.

On a monthly basis we saw this.

Exports-3.2% on the previous month (calendar and seasonally adjusted). Imports –1.3% on the previous month (calendar and seasonally adjusted).

Of course monthly trade figures are unreliable but this time around they do fit with the production data. The export figures look like they peaked at the end of 2017 from an adjusted ( seasonally and calendar) 111.5 billion Euros to 107.5 billion on that basis in February.

What are the monetary trends?

If we look at the Euro area in general then there are signs of a reduced rate of growth.

The annual growth rate of the narrower aggregate M1, which includes currency in circulation
and overnight deposits, decreased to 8.4% in February, from 8.8% in January.

The accompanying chart shows that this series peaked at just under 10% per annum last autumn. So that surge may have brought the recorded peaks in economic activity around the turn of the year but is not heading south. If we move to the broader measure we see this.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.2% in February 2018, from
4.5% in January, averaging 4.4% in the three months up to February.

This had been over 5% last autumn and like its narrower counterpart has drifted lower. If you apply a broad money rule then one would expect a combination of lower inflation and growth which is awkward for a central bank trying to push inflation higher.  If we move to credit then the impulse is fading for households and businesses.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation
and notional cash pooling) decreased to 3.0% in February, compared with 3.3% in January.

This is more of a lagging than leading indicator of circumstances.

These are of course Euro area statistics rather than Germany but they do give us an idea of the overall state of play. A possible signal of issues closer to home are the ongoing travails of Deutsche Bank. There has been a bounce in the share price today in response to the new Chief Executive Officer or CEO as Sewing replaces Cryan but 11.8 Euros compares to over 17 Euros last May. Yet in the meantime the economy has been seeing a boom and added to that as I looked at late last month house price growth will have been boosting the asset book of the bank yet the underlying theme seems to come from Coldplay.

Oh no, what’s this?
A spider web and I’m caught in the middle
So I turned to run
And thought of all the stupid things I’d done


The heady days of the opening of 2018 have gone and in truth the business surveys did seem rather over excited as I pointed out on January 3rd.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth.

We can bring that more up to date.

 In February 2018, roughly 44.3 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with February 2017, the number of persons in employment increased by 1.4% (+621,000 people).

Thus we see that it continues to suggest steady if not spectacular growth and bypasses the excitement at the turn of the year. Looking forwards we see that the monetary impulse is slowing which is consistent with the reduction in monthly QE to 30 billion Euros a month from the ECB. We then face the issue of how Germany will follow a good first quarter? At the moment a growth slow down seems likely just in time for the ECB to end QE! So it may well be a case of watch this space…..






Germany also faces ever more unaffordable housing

The economy of Germany has been seeing good times as Chic would put it and this morning has seen an indicator of this. From Destatis.

 The debt owed by the overall public budget (Federation, Länder, municipalities/associations of municipalities and social security funds, including all extra budgets) to the non-public sector amounted to 1,965.5 billion euros at the end of the fourth quarter of 2017. ……..Based on provisional results, the Federal Statistical Office (Destatis) also reports that this was a decrease in debt of 2.1%, or 41.3 billion euros, compared with the end of the fourth quarter of 2016.

We talk of Germany being a surplus economy and here is another sign of it as it applies to itself the medicine it has prescribed for others.

 Net lending of general government amounted to 36.6 billion euros in 2017…….. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

Of course all of this is much easier in a growing economy.

 For the whole year of 2017, this was an increase of 2.2% (calendar-adjusted: +2.5%),

Thus the national debt to GDP ratio will have declined and I am sure more than a few of you will have noted that the total debt is a fair bit smaller than Italy’s for a larger economy. This parsimony has of course been helped by European Central Bank purchases of German Bunds which means that even five-year bonds have a negative yield ( -0.07%). Of course there is a chicken and egg situation here but 469 billion Euros of bond purchases in a growing economy lead to yields which would lead past computer models to blow up like HAL-9000 in the Film 2001 A Space Odyssey.


Whilst we are looking at surpluses there is this ongoing saga which continued last year.

Arithmetically, the balance of exports and imports had an effect of +0.8 percentage points on GDP growth compared with the previous year.

Ironically Germany did actually boost its imports ( 4.8%) but its export performance ( 5.6%) was even better. This meant that the same old song was being played.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 257.1 billion euros in 2017.

If we allow for the inaccuracies in the data and the latest “trade wars” debate mostly raised by President Trump has highlighted the issues here with some countries thinking they are both in surplus/deficit with each other the German surplus is a constant. This poses quite a few questions as of course on one line of thinking it was a cause of the credit crunch.

The International Monetary Fund (IMF) and the European Commission have for years urged Germany to lift domestic demand and imports in order to reduce global economic imbalances and fuel global growth, including within the euro zone.

As time has passed it is hard not to wonder about how much Germany could have helped its Euro area partners via this route. Of course a catch is that it would have to want what they produce which gets forgotten. Also I find a wry humour in organisations like the IMF and EC telling Germans to “spend,spend,spend” to coin a phrase and consume more and yet also warn regularly about climate change.

Labour Market

There is another sign of success if we note this.

The adjusted unemployment rate was 3.6% again in January 2018……….Compared with January 2017, the number of persons in employment increased by 1.4% (+631,000 people). Roughly 1.6 million people were unemployed in January 2018, 160,000 fewer than a year earlier.

So we see that the quantity numbers for the labour market are very good as the unemployment rate chases that of Japan. However if we move to the quality arena things look a little different. From Bloomberg.

The scramble for qualified workers has become an existential issue for companies across Germany, which are offering enticements ranging from overseas sojourns and ski outings to subsidized housing and sausage platters.

Let us park the issue of whether the sausages are delicious and consider the cause of this.

After years of robust growth, unemployment has dropped to a record low of 5.4 percent, and the country has 1.2 million unfilled jobs—nearly equivalent to the population of Munich. Manufacturing, construction, and health care are particularly stretched, and 1 in 4 businesses may have to hold back production as a result of the labor crunch, the European Union reports.

So our HAL-9000 would predict wage growth and of course if it was in a central bank it would be flashing “output gap negative” and predicting stellar wage growth. Meanwhile back in the real world.

The corporate largesse hasn’t dramatically boosted salaries, at least so far. Compensation in Germany rose 13 percent in the last five years as unions moderated wage demands to help their companies maintain an edge in the face of growing global competition.

There is another similarity here with Japan in that the financial media have been telling us that wages are about to soar or sometimes that agreements have been signed. So they must spend their lives being disappointed as whilst the German figures are better than Japan’s they are not what has been promised.

If we look into the detail of the report we see that in spite of strong circumstances companies these days seem to prefer one-off payments rather than wage rises. Have we changed that much in response to the credit crunch as in being less certain about the future or not believing what we are told in this case about economic strength? There is some logic behind that in an era of Fake News stretching to diesel engines and indeed hybrid performance if we consider areas especially relevant to Germany, Maybe wages measures should switch to earnings per hour.

the country’s biggest union this year accepted a lower increase in salaries in exchange for the right to work fewer hours.

But America already does that and it has not changed the picture but maybe still worth a go.

House Prices

I note that in February the Bundesbank picked out house prices and told us this.

According to current estimates, price
exaggerations in urban areas overall in 2017
amounted to between 15% and 30%. In
the big cities, where considerable overvaluations
had already been measured earlier,
the price deviations are likely to have increased
further to 35%.

Price “exaggerations” is a new one but presumably is being driven by this.

According to figures based on bulwiengesa AG
data residential property prices in urban
areas in Germany continued to increase
sharply by around 9%, and hence at a
somewhat faster pace than in the three
preceding years, when the increase averaged

Indeed there may well be issues similar to the British buy to let problem.

As in 2016, the rate of inflation for rental
apartment buildings in the towns and cities
as well as in Germany as a whole was markedly
higher than for owner- occupied housing.


So we have good times in many respects as after all many would see rising house prices as that too. Of course I do not and let me now throw in the impact of easy monetary policy at a time of economic growth.

The average mortgage rate, which had already hit
an all- time low in the preceding year, settled
at 1.7%, which was slightly above its
2016 level.

Interestingly the cost of housing is soaring relative to wages however you try to play it.

The continuing sharp price rises for housing
in urban centres were accompanied by a
significant increase of 7¼% in rents in new
contracts, which are chiefl y the outcome of
rent adjustments in the case of repeat occupancies.

This poses a question for what would happen if later in 2018 we see an economic slowing as suggested by weaker monetary data and some lower commodity prices? We will have to see about that but much further ahead is the issue of Germany’s demographics which combine a low birth rate, rising life expectancy ( economics is clearly the dismal science here) and an aging population. This leaves the intriguing thought that travelling towards it just like in Japan leads to negative interest-rates, low wage growth and a trade surplus…….Yet the public finances are very different.

Cash is King

Something else that Germany shares with the UK. From the Bundesbank March report via Google Translate.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Yet we keep being told that cash is so yesterday whereas we may still be in the adventures of Stevie V

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, oho
Money talks, money talks
Dirty cash I want you, dirty cash I need you, oho


What is happening with fiscal policy?

A feature of the credit crunch era has been the way that monetary policy has taken so much of the strain of the active response. I say active because there was a passive fiscal response as deficits soared caused on one side by lower tax revenues as recession hit and on the other by higher social payments and bank bailout costs. Once this was over the general response was what has been badged as austerity where governments raised taxes and cut spending to reduce fiscal deficits. Some care is needed with this as the language has shifted and often ignores the fact that there was a stimulus via ongoing deficits albeit smaller ones.

Cheap debt

Something then happened which manages to be both an intended and unintended consequence. What I mean by that is that the continued expansion of monetary policy via interest-rate reductions and bond buying or QE was something which governments were happy to sign off because it was likely to make funding their spending promises less expensive. Just for clarity national treasuries need to approve QE type policies because of the large financial risk. But I do not think that it was appreciated what would happen next in the way that bond yields dropped like a stone. So much so that whilst many countries were able to issue debt at historically low-levels some were in fact paid to issue debt as we entered an era of negative interest-rate.

This era peaked with around US $13 trillion of negative yielding bonds around the world with particular areas of negativity if I may put it like that to be found in Germany and Switzerland. At one point it looked like every Swiss sovereign bond might have a negative yield. So what did they do with it?


This morning has brought us solid economic growth data out of Germany with its economy growing by 0.6% in the last quarter of 2017. But it has also brought us this.

Net lending of general government amounted to 36.6 billion euros in 2017 according to updated results of the Federal Statistical Office (Destatis). In absolute terms, this was the highest surplus achieved by general government since German reunification. When measured as a percentage of gross domestic product at current prices (3,263.4 billion euros), the surplus ratio of general government was +1.1%.

So Germany chose to take advantage of being paid to issue debt to bring its public finances into surplus which might be considered a very Germanic thing to do. There is of course effects from one to the other because their economic behaviour is one of the reasons why their bonds saw so much demand.

But one day they may regret not taking more advantage of an extraordinary opportunity which was to be able to be paid to borrow. There must be worthy projects in Germany that could have used the cash. Also one of the key arguments of the credit crunch was that surplus countries like Germany needed to trim them whereas we see it running a budget surplus and ever larger trade surpluses.

In the detail there is a section which we might highlight as “Thanks Mario”

 Due to the continuing very low-interest rates and lower debt, interest payments decreased again (–6.4%).


The Swiss situation has been similar but more extreme. Membership of the Euro protected Germany to some extent as the Swiss Franc soared leading to an interest-rate of -0.75% and “unlimited” – for a time anyway – currency intervention. This led to the Swiss National Bank becoming an international hedge fund as it bought equities with its new foreign currency reserves and Switzerland becoming a country that was paid to borrow. What did it do with it? From its Finance Ministry.

A deficit of approximately 13 million is expected in the ordinary budget for 2018.

So fiscal neutrality in all but name and the national debt will decline.

 It is expected that gross debt will post a year-on-year decline of 3.3 billion to 100.8 billion in 2018 (estimate for 2017). This reduction will be driven primarily by the redemption of a 6.8 billion bond maturing combined with a low-level of new issues of only 4 billion.

The UK

Briefly even the UK had some negative yielding Gilts ( bonds) in what was for those who have followed it quite a change on the days of say 15% long yields. This was caused by Mark Carney instructing the Bank of England’s bond buyers to rush like headless chickens into the market to spend his £60 billion of QE and make all-time highs for prices as existing Gilt owners saw a free lunch arriving. Perhaps the Governor’s legacy will be to have set records for the Gilt market that generations to come will marvel at.

Yet the path of fiscal policy changed little as indicated by this.

Or at least it would do if something like “on an annual basis” was added. Oh and to complete the problems we are still borrowing which increases the burden on future generations. The advice should be do not get a job involving numbers! Which of course are likely to be in short supply at a treasury………..

But the principle reinforces this from our public finances report on Wednesday.

Public sector net borrowing (excluding public sector banks) decreased by £7.2 billion to £37.7 billion in the current financial year-to-date (April 2017 to January 2018), compared with the same period in the previous financial year; this is the lowest year-to-date net borrowing since the financial year-to-date ending January 2008.

So we too have pretty much turned our blind eye to a period where we could have borrowed very cheaply. If there was a change in UK fiscal policy it was around 2012 which preceded the main yield falls.

Bond yields

There have been one or two false dawns on this front, partly at least created by the enthusiasm of the Bank of Japan and ECB to in bond-buying terms sing along with the Kaiser Chiefs.

Knock me down I’ll get right back up again
I’ll come back stronger than a powered up Pac-Man

This may not be entirely over as this suggests.

“Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds,” Koichi Hamada, an emeritus professor of economics at Yale University, told Reuters in an interview on Thursday.

However we have heard this before and unless they act on it rises in US interest-rates are feeding albeit slowly into bond yields. This has been symbolised this week by the attention on the US ten-year yield approaching 3% although typically it has dipped away to 2.9% as the attention peaked. But the underlying trend has been for rises even in places like Germany.


Will we one day regret a once in a lifetime opportunity to borrow to invest? This is a complex issue as there is a problem with giving politicians money to spend which was highlighted in Japan as “pork barrel politics” during the first term of Prime Minister Abe. In the UK it is highlighted by the frankly woeful state of our efforts on the infrastructure front. We are spending a lot of money for very few people to be able to travel North by train, £7 billion or so on Smart Meters to achieve what exactly? That is before we get to the Hinkley Point nuclear power plans that seem to only achieve an extraordinarily high price for the electricity.

One example of fiscal pump priming is currently coming from the US where Donald Trump seems to be applying a similar business model to that he has used personally. Or the early days of Abenomics. Next comes the issue of monetary policy where we could of course in the future see news waves of QE style bond buying to drive yields lower but as so much has been bought has limits. This in a way is highlighted by the Japanese proposal to buy foreign bonds which will have as one of its triggers the way that the number of Japanese ones available is shrinking.

What are the economic prospects for Germany?

After looking at the strength of the Euro yesterday it is an interesting counterpoint to look at an economy which would otherwise have a much stronger exchange rate. Whilst the Euro may be in a stronger phase and overall pretty much back to where it began in trade-weighted terms ( 99.26%) it is way lower than where a Deutsche Mark would be. For Germany the Euro has ended up providing quite a competitive advantage as who knows to what level it would have soared as we suspect it would have been as attractive as the Swiss Franc. Rather than an exchange rate of around 1.20 to the US Dollar the equivalent rate would no doubt have been somewhere north of 1.50.

That means that the German economic experience of the credit crunch has seen quite a monetary stimulus if we combine a lower than otherwise exchange rate with the negative interest rate of the ECB ( European Central Bank) and of course the Quantitative Easing purchases of German sovereign bonds. If we look at the latter directly then the purchase of 449 billion Euros of German government bonds must have contributed to the German government being able to borrow more cheaply as we note that the ten-year yield is only 0.46% and that Germany is actually paid to borrow out to the 6 year maturity. This is a factor in Germany running a small but consistent budget surplus in recent times and a national debt which is declining both in absolute terms and in relative terms as at the half-way point of 2017 it had fallen to 66% of annual economic output or GDP. So it may not be too long before it passes the Growth and Stability Pact rules albeit over 20 years late! But let us move on noting a combination of monetary expansionism and fiscal conservatism.

The Euro area

Unlike some of the countries we look at and Greece and Italy come to mind particularly the Euro era has been good for the German economy. It opened in 1999 with GDP of 87.7 ( 2010 = 100)  which rose to a peak of 102.6 at the opening of 2008. Like so many countries there was a sharp fall ( 4.5% in the opening quarter of 2009) but the difference is that the economy then recovered strongly to 113.8 in the third quarter of last year. You can add on a bit for the last quarter of 2017 if you like. But the message here is that Germany has recovered pretty strongly from the effect of the credit crunch. Indeed once you start to allow for the fact that some of the economic output in 2008 was false in the sense that otherwise how did we have a bust? You could argue that it has done as well as it did before and maybe better in absolute terms although of course that depends on where you count from. In relative terms the doubt disappears.

Looking Ahead

Yesterday’s Markit PMI business survey could hardly have been much more bullish.

“2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs. Moving back to the report we see that the German trade surplus seems set to increase further if this is any guide.

Notably, the level of new business received from abroad
rose at the joint-fastest rate in the survey history,
with anecdotal evidence highlighting Asia, the US
and fellow European countries as strong sources of
new orders for German manufacturers.

This morning we saw official data on something that has proved fairly reliable as a leading indicator in the credit crunch era. From Destatis.

In November 2017, roughly 44.7 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). Compared with November 2016, the number of persons in employment increased by 617,000 or 1.4%.

The rise in employment has been pretty consistent over the past year signalling a “steady as she goes” rate of economic growth. It has also led to a further fall in unemployment which is also welcome.

 Adjusted for seasonal and irregular effects, the number of unemployed stood at 1.57 million. It was down by roughly 14,000 people on the previous month. The adjusted unemployment rate was 3.6% in November 2017.

Much better than the Euro area average and better than the UK and US but not Japan which is the leader of this particular pack.


The next issue is to look at wage growth which as we see so often these days seems to be stuck somewhere around 2% per annum even in countries recording a good economic performance. We have seen plenty of reports of wage growth picking up and maybe you could make a case for it rising from 2% to 2.9% over the past year or so but the catch comes if we look back a quarter as it was 2.9% then!

So real wage growth has been solid for these times in Germany since the opening of 2014 but the truth is that it has been driven by lower inflation rather than any trend to higher wages. In what we consider to be the first world wage growth these days seems to be singing along with Bob Seeger and his Silver Bullet Band.

You’re still the same
Moving game to game
Some things never change
You’re still the same

We therefore find ourselves in another quandary for economics 101 which is that economic improvement no longer seems to be accompanied by any meaningful increase in wage growth. A paradigm shift so far anyway. The official data is only up to the half-way point of last year but according to the Bundesbank “Wage growth remained moderate in the third quarter of 2017” so a good 2017 was accompanied by lower real wage growth as far as we know and this from last week will hardly help.

The inflation rate in Germany as measured by the consumer price index is expected to be 1.7% in December 2017. Compared with November 2017, consumer prices are expected to increase by 0.6%. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that, on an annual average, the inflation rate is expected to stand at 1.8% in 2017.

On this road expansionary monetary policy has a contractionary consequence via its impact on real wages and inflation targets should be lowered. Meanwhile it will be party time at the Bundesbank towers as this is quite close to the perfect level of inflation or just below 2%.


Let us welcome the economic good news from 2017 and the apparent immediate prospects for 2018. We can throw in that the Euro era has turned out to be good for Germany overall as the lower exchange rate cushioned the effect of the credit crunch and helped it continue this.

The foreign trade balance showed a surplus of 18.9 billion euros in October 2017. In October 2016, the surplus amounted to 18.8 billion euros.

For everyone else there are two problems here. Whilst there are gains from Germany being efficient and producing products which are in worldwide demand a persistent surplus of this kind does drain demand from other countries especially if helped by an exchange rate depreciation of the sort provided by Euro area membership. It was one of the imbalances which fed into the credit crunch and which the establishment told us needed dealing with urgently. So urgent in fact that nothing has happened.

So it looks like Germany will have a good opening to 2017 and first half to the year. But that is as far as we can reasonably see these days and is an answer to those on social media who asked why I did not join the annual forecasts published ( for the UK as it happens) yesterday. If there is to be a cloud in the silver lining then it seems set to come from this.

In the third quarter of 2017, the perceptible expansion
in the broad monetary aggregate M3
continued; the annual growth rate at the end
of the quarter came to 5.1%, remaining at the
level observed over the last two and a half
years ( Bundesbank )

The old rules of thumb may not apply but where is the inflation suggested? Also there is this.

Consumer credit likewise continued to expand
substantially during the period under review,
with its annual growth rate climbing to 6.7%
by the end of September

Those are Euro area figures and the consumer credit growth seems light weight compared to the UK but that is perhaps only because we are an extreme. Moving onto German data there is some specific which seems rather Anglicised.

Once again, loans for house purchase were a
decisive driver of growth in lending to households.
However, their quarterly net increase has
already been relatively constant for several
quarters, meaning that at 3.9%, their annual
growth rate remained unchanged on the year.

The old theories of overheating risks cannot be fully applied because so far at least the wages element has disappeared but that does not mean that some of the other parts have done so. After all procyclical monetary policy usually ends in tears for someone.

The future

With the caveats expressed above this does make one stop and think.


What is austerity and how much of it have we seen?

The subject of austerity is something which has accompanied the lifespan of this blog so 7 years now. The cause of its rise to prominence was of course the onset of the credit crunch which led to higher fiscal deficits and then national debts via two routes. The first was the economic recession ( for example in the UK GDP fell by approximately 6% as an initial response) leading to a fall in tax revenue and a rise in social security payments. The next factor was the banking bailouts which added to national debts of which the extreme case was Ireland where the national debt to GDP ratio rose from as low as 24% in 2006 to 120% in 2012.  It was a rarely challenged feature of the time that the banks had to be bailed out as they were treated like “the precious” in the Lord of the Rings and there was no Frodo to throw them into the fires of Mount Doom.

It was considered that there had to be a change in economic policy in response to the weaker economic situation and higher public-sector deficits and debts. This was supported on the theoretical side by this summarised by the LSE.

The Reinhart-Rogoff research is best known for its result that, across a broad range of countries and historical periods, economic growth declines dramatically when a country’s level of public debt exceeds 90% of gross domestic product……… they report that average (i.e. the mean figure in formal statistical terms) annual GDP growth ranges between about 3% and 4% when the ratio of public debt to GDP is below 90%. But they claimed that average growth collapses to -0.1% when the ratio rises above a 90% threshold.

The work of Reinhart and Rogoff was later pulled apart due to mistakes in it but by then it was too late to initial policy. It was also apparently too late to reverse the perception amongst some that Kenneth Rogoff who these days spend much of his time trying to get cash money banned is a genius. That moniker seems to have arrived via telling the establishment what it wants to hear.

The current situation

The UK Shadow Chancellor John McDonnell wrote an op-ed in the Financial Times ahead of Wednesday’s UK Budget stating this.

The chancellor should use this moment to lift his sights, address the immediate crisis in Britain’s public services that his party created, and change course from the past seven disastrous years of austerity.

If we ignore the politics the issue of austerity is in the headlines again but what it is has changed over time. Before I move on it seems that both our Chancellor who seemed to think there were no unemployed at one point over the weekend and the Shadow Chancellor was seems to be unaware the UK economy has been growing for around 5 years seem equally out of touch.

Original Austerity

This involved cutting back government expenditure and raising taxation to reduce the fiscal deficits which has risen for the reasons explained earlier. Furthermore it was claimed that such policies would stop rises in the national debt and in some extreme examples reduce it. The extreme hardcore example of this was the Euro area austerity imposed on Greece as summarised in May 2010 by the IMF.

First, the government’s finances must be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory……With the budget deficit at 13.6 percent of GDP and public debt at 115 percent in 2009, adjustment is a matter of extreme urgency to avoid the debt spiraling further out of control.

A savage version of austerity was begun which frankly looked more like a punishment beating than an economic policy.

The authorities have already begun fiscal consolidation equivalent to 5 percent of GDP.

But the Managing Director of the IMF Dominique Strauss-Khan was apparently confident that austerity in this form would lead to economic growth.

we are confident that the economy will emerge more dynamic and robust from this crisis—and able to deliver the growth, jobs and prosperity that the country needs for the future.

Maybe one day it will but so far there has been very little recovery from the economic depression inflicted on Greece by the policy prescription. This has meant that the national debt to GDP ratio has risen to 175% in spite of the fact that there was the “PSI” partial default in 2012. It is hard to think of a clearer case of an economic policy disaster than this form of disaster as for example my suggestion that you needed  a currency devaluation to kick-start growth in such a situation was ignored.

A gentler variation

This came from the UK where the coalition government announced this in the summer of 2010.

a policy decision to reduce total spending by an additional £32 billion a year by 2014-15, including debt interest savings;

In addition there were tax rises of which the headline was the rise in the expenditure tax VAT from 17.5% to 20%. These were supposed to lead to this.

Public sector net borrowing falls from 11.0 per cent of GDP in 2009-10 to 1.1 per cent in 2015-16. Public sector net debt is forecast to rise to a peak of 70.3 per cent of GDP in 2013-14, before falling to 67.4 per cent in 2015-16.

As Fleetwood Mac would put it “Oh Well”. In fact the deficit was 3.8% of GDP in the year in question and the national debt continued to rise to 83.8% of GDP. So we have a mixed scorecard where the idea of a surplus was a mirage but the deficit did fall but not fast enough to prevent the national debt from rising. Much of the positive news though comes from the fact that the UK economy began a period of sustained economic growth in 2012.

Economic growth

We have already seen the impact of economic growth via having some (  UK) and seeing none and indeed continued contractions ( Greece). But the classic case of the impact of it on the public finances is Ireland where the national debt to GDP ratio os now reported as being 72.8%.

Sadly the Irish figures rely on you believing that nominal GDP rose by 68 billion Euros or 36.8% in 2015 which frankly brings the numbers into disrepute.


The textbook definitions of austerity used to involved bringing public sector deficits into surplus and cutting the national debt. These days this has been watered down and may for example involve reducing expenditure as a percentage of the economy which may mean it still grows as long as the economy grows faster! The FT defines it thus.

Austerity measures refer to official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rises.

So are we always in “adverse economic conditions” in the UK now? After all we still have austerity after 5 years of official economic growth.

What we have discovered is that expenditure cuts are hard to achieve and in fact have often been transfers. For example benefits have been squeezed but the basic state pension has benefited from the triple lock. Also if last years shambles over National Insurance is any guide we are finding it increasingly hard to raise taxes. Not impossible as Stamp Duty receipts have surged for example but they may well be eroded on Wednesday.

Also something unexpected, indeed for governments “something wonderful” happened which was the general reduction in the cost of debt via lower bond yields. Some of that was a result of long-term planning as the rise of “independent” central banks allowed them to indulge in bond buying on an extraordinary scale and some as Prince would say is a Sign O’The Times. As we stand the new lower bond yield environment has shifted the goal posts to some extent in my opinion. The only issue is whether we will take advantage of it or blow it? Also if we had the bond yields we might have expected with the current situation would public finances have improved much?

Meanwhile let me wonder if a subsection of austerity was always a bad idea? This is from DW in August.

Germany’s federal budget  surplus hit a record 18.3 billion euros ($21.6 billion) for the first half of 2017.

With its role in the Euro area should a country with its trade surpluses be aiming at a fiscal surplus too or should it be more expansionary to help reduce both and thus help others?



Germany the currency manipulator?

Today gives us an opportunity to look again at the German economy. As we do so we see yet another situation where conventional analysis and media reporting is flawed. So often we read that Germany has in some way been defeated in its efforts to direct the policies of the ECB ( European Central Bank). The evidence for that are the regular bursts of rhetoric from the German Bundesbank against the policies of negative interest-rates and a balance sheet of the order of 4.5 trillion Euros. However this to my mind ignores a much larger victory Germany gained when it joined the Euro because it has achieved for itself a much lower and therefore more competitive exchange rate. It did so in a way which has avoided the barrage of “currency manipulator” allegations that have been fired at others because it was a type of stealth effort.

Also the impact of this move has been heightened by the credit crunch era. We find evidence for this if we look at Switzerland and the Swiss Franc which of the currencies we have is the most similar. How is it doing? Well let me hand you over to the Swiss National Bank. From Reuters yesterday.

The Swiss National Bank’s (SNB) policy of negative interest rates is not ideal but is nevertheless necessary in order to weaken Switzerland’s “significantly overvalued” currency, Chairman Thomas Jordan said on Thursday…………Jordan said negative interest rates, along with the central bank’s willingness to intervene in the currency were absolutely necessary in order to protect exporters from a stronger Swiss franc, which is a safe-haven currency in times of market stress.

So if the Swiss Franc is a safe haven currency what would a German Deutschmark be if it existed? I think we can be sure that its value would have soared in recent times which leads me back to the competitive advantage point. There is also an irony as we note that on Switzerland’s road Germany would have had negative interest-rates anyway and maybe more negative than now. Ouch! We find ourselves in some strange places these days. Also would it now be a hedge fund manager as it tried to find somewhere to put its currency reserves? This week raised a wry smile as Apple passed the US $150 mark as I thought that the Swiss National Bank would be one of those most pleased via its holdings. I guess if you have 695.9 billion Swiss Francs they burn a hole in your pocket or something like that.

The trade surplus

The opening paragraph of Tuesday’s trade figures hammer home a consequence of this.

Germany exported goods to the value of 118.2 billion euros and imported goods to the value of 92.9 billion euros in March 2017. These are the highest monthly figures ever reported for both exports and imports. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 10.8% and imports by 14.7% in March 2017 year on year.

So if you are looking for evidence of a lower currency leading to trade advantages it is hard to miss the persistent surpluses of Germany.

The foreign trade balance showed a surplus of 25.4 billion euros in March 2017. In March 2016, the surplus amounted to 25.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.6 billion euros in March 2017.

Indeed the statistics agency has an in focus highlight which rams this home.

According to Eurostat data, Germany had the highest export surplus among EU countries (257 billion euros) in 2016, as was the case in the previous years. Germany exported goods totalling 1,210 billion euros while the value of imports was 953 billion euros. Compared with the previous year, the export surplus rose by roughly 3% – in 2015, it had been 248 billion euros.

Interestingly we see that the idea of the Euro area having a large trade  surplus is true but that the vast majority of it is Germany as it was 257 billion out of 272 billion Euros in 2016.

Bond yields

The other gain for Germany from a combination of ECB policy and the credit crunch era is the extraordinary low level of interest it has to pay to issue new debt. Indeed this has frequently been negative in recent times meaning that Germany has been paid to issue its debt.  Some of that is still true as for example the yield on its five-year benchmark bond is -0.31% as I type this.

Even if it were to borrow for ten years then Germany would only have to pay 0.41% which I cannot say often enough is extraordinarily low. So it has clearly benefited from the 368 billion Euros of purchases of German debt by the ECB as we mull if there was a country which needed them less?

The catch is that it is mostly the German government that has benefited as it looks to run a fiscal surplus. As to the ordinary German well as I pointed out earlier this week first-time buyers will be much less keen as the easy monetary policy of recent years has led to something of a house price boom in Germany.

GDP and economic output

This morning’s official GDP data had a familiar drumbeat to it.

In addition, the development of foreign trade was more dynamic and contributed to growth as exports increased more than imports, according to provisional results.

The quarterly number was good and this impression was reinforced by the breakdown of the numbers.

. In the first quarter of 2017, the gross domestic product (GDP) rose 0.6% on the fourth quarter of 2016 after adjustment for price, seasonal and calendar variations……. Capital formation increased substantially. Due to the mild weather, fixed capital formation especially in construction, but also in machinery and equipment was markedly up compared with the fourth quarter of 2016.

Is the weather allowed to be a positive influence? Only in Germany perhaps as elsewhere its role invariably is to take the blame. There is an undercut to this though as we mull the individual experience and note that economic growth over the past year was 1.7%.

The economic performance in the first quarter of 2017 was achieved by 43.7 million persons in employment, which was an increase of 638,000 or 1.5% on a year earlier.

So whilst the employment rise is welcome we see that it very nearly matches the level of economic growth. Also if we look back to the data we are left wondering if the construction investment boom is related to the house price boom and the UK economic model is being copied to some extent.


The economic outlook remains bright for Germany if the Markit business or PMI surveys are any guide.

IHS Markit expects German economic growth to strengthen to 0.7% qr/qr in the first quarter, and the April PMI provides an early signal that expansion will remain strong in the second quarter.

So something along the lines of more of the same is expected although of course that was only one month of this quarter. If we look at the overall situation let us use a type of Good Germany: Bad Germany type of analysis that mimics Italy.

The good sees that the reforms of the past have enabled Germany to expand its economy post credit crunch such that GDP  reached 110. 02 last year compared to 101.66 in 2008. It has a substantial trade surplus and these days has an internationally rare fiscal surplus.

The trouble is that some of the latter points are also part of Bad Germany as we see how its adoption of the Euro has helped feed its trade surplus via a more competitive exchange rate. Also there is the issue that one of the problems pre credit crunch was world imbalances and the German trade surplus was one of them. Within the Euro area some will wonder if it would be helped by less fiscal austerity. Then we get to the issue of comparing the rise in employment with GDP growth, is Germany like the rest of us struggling for productivity growth with its implications for wages? Also as I pointed out earlier this week the rise in house prices will make first-time buyers wonder if they are indeed better off?

Negative interest-rates and QE have created a house price boom in Germany

A feature of these times is that is called easy monetary policy and this is particularly true in the Euro area. There the European Central Bank has a deposit rate of -0.4% and is undertaking asset or bond purchases of 60 billion Euros a month as well. This means that as of last week over 1.8 trillion Euros of bonds have been bought including some 216 billion Euros of covered bonds which support banks and then mortgage lending. Last week we discovered that some countries “have been more equal than others” in terms of where this 1.8 trillion Euros has ended up. From the ECB.

Excess liquidity has been persistently concentrated within a group of banks located in a limited number of higher-rated countries, i.e. around 80-90 % of excess liquidity is being held in Germany, France, the Netherlands, Finland and Luxembourg (see Chart 1) and even their country shares have been fairly stable across time.

It is fascinating that a country geographically as small as Luxembourg merits a mention. But Reuters updates us on the two main beneficiaries.

The study shows that 60 percent of the money spent by the ECB and national central banks on buying bonds ends up in Germany, where sellers, mainly UK banks, have their accounts. France accounts for a further 20 percent.

Okay and the consequence of this is?

But the fact that the money keeps accumulating in the bloc’s richest countries rather than flowing where it is needed the most risks undoing some of the ECB’s efforts and shows the European Union’s objective to create a banking union is still far from reached.

This makes me wonder about asset prices in the main beneficiary Germany as after all these QE ( Quantitative Easing) policies are claimed to have “wealth effects”.

House Prices in Germany

Let us step into the TARDIS of Dr.Who and go back to February of 2014 when the Financial Times reported this.

House prices in Germany’s biggest cities are overvalued as much as 25 per cent, the Bundesbank warned on Monday, adding to fears that international investment has helped to fuel a property bubble in the eurozone’s largest economy. The German central bank said that residential real estate prices in 125 cities rose by 6.25 per cent on average last year. In October, it reported that property prices in the biggest German cities were 20 per cent overvalued, suggesting the problem is getting worse.

If we move forwards to March 2016 then this from Bloomberg is eye-catching.

German house prices went nowhere for years. Recently they’ve grown faster than the UK.

So what had they done?

House prices have increased 5.6 percent a year over the past five years, according to UBS, which is double the average annual rate of increase since 1970.

As we see in so many other places the rises were concentrated in the major urban areas.

Prices are rising particularly fast in urban areas, where young people increasingly want to live. A gauge of advertised apartment prices in seven major cities including Frankfurt and Berlin rose 14.5 percent in 2015, the most since 2000, according to Empirica, a research institute.

As to “wealth effects” there was something else which is somewhat familiar to say the least.

So far the biggest beneficiaries have been Germany’s listed residential landlords. Cheap debt has enabled them to snap up housing portfolios and smaller rivals, thereby achieving cost savings through scale

What about now?

The Bundesbank calculates its own house price index which covers 127 cities and it rose by 8.3% in 2016 following 7.6% in 2015 and 5.7% in 2014. So according to its own index then prices must be very overvalued now if they were already overvalued back in 2014. Putting it another way the index which was set at 100 in 2011 was at 141.4 at the end of 2016. So quite a rise especially for a nation which has little experience of this as for example the period from 2004 to 2007 which saw such booms in the UK,Spain and Ireland saw no change in house prices in Germany.

In January my old employer Deutsche Bank looked forwards and told us this.

In 2017, we therefore expect rents and property prices in the major German cities, and across the country as a whole, to rise substantially once again…….Munich remains the most dynamic German city when it comes to property, with its fast-rising population and historically low vacancy rate likely to lead to further price increases for many years to come.

There is an element of cheerleading here which of course is a moral hazard issue for banks reporting on property prices which will not be shared by first time buyers in Germany. Those in Berlin will have particular food for thought.

Property prices in Berlin are now twice as high as they were in 2005 and have reached the level of some of the major cities in western Germany.

As of the latest news Europace have constructed an hedonic (quality adjusted) index which rose by 7.6% in the year to March.

What about rents?

These have risen but not by much if the official data is any guide. The rent section of the official Euro area CPI measure rose at an annual rate of 1.6% in March. Although Frankfurt seems to be something of an exception as Bloomberg reports.

The monthly cost of a mid-range two-bedroom apartment in Germany’s financial capital rose 20 percent in 2017 from a year earlier, while the cost of an equivalent living space in London fell by 8 percent, according to a Deutsche Bank study.

Frankfurt rent rises will of course be particularly painful for Deutsche Bank employees.


There is a fair bit to consider here but what is unarguable is that the easy monetary policy of the ECB has been associated with house price rises. These are noticeable in international terms but are particularly noticeable in a country which escaped any pre credit crunch boom. Also if we use the Bundesbank data above house prices rose by 41.4% in the period 2011-16 whereas real wages only rose by 6.6% ( Destatis) which is quite a gap! I think we know how first- time buyers must feel and yes there is a fair number as whilst Germany has fewer owner occupiers in proportionate terms than the UK they still comprise 51.9% of the housing market.

It is hard to avoid the thought that this house price boom is what central bankers would call a “wealth effect” from their policies, especially if we note that the liquidity seems to have mostly headed to Germany. Of course some of that will be the equivalent of a company name plate on the door but some will be genuine. Meanwhile as we note wealth transfers and inflation there is of course the near record high bond prices and the highs in the Dax 30 equity index seen last week.