Download Focus Germany: Structural improvements support exceptional position

Current Issues
Business cycle
Focus Germany
July 1, 2013
Structural improvements support exceptional position
Authors
Bernhard Gräf
+49 69 910-31738
[email protected]
Does Germany's special situation pose a risk to the euro? The findings of the
latest Pew Research Center survey paint an impressive picture of the economic
divergences within the euro area. We compare the economic development of
the euro-area member states with that of the US federal states over a longer
time horizon. While we find no significant differences between the euro-area
members and the US states in terms of growth and inflation, unemployment
rates differ considerably more in the EMU countries. This suggests that local
labour markets are more flexible in the US than in Euroland, and that labour
force mobility is higher state-side. Provided there is sufficient political will, labour
market reforms could create greater incentives for increased cross-border
labour mobility. Moreover, labour market reforms boost labour market flexibility
as a whole – with Germany's Hartz reforms representing a case in point.
Greater flexibility regarding wages and employment would in turn reduce the
need for adjustment via cross-border labour mobility and thus take some of the
pressure off migration, which is hampered by language barriers anyhow.
Jochen Möbert
+49 69 910-31727
[email protected]
Heiko Peters
+49 69 910-21548
[email protected]
Stefan Schneider
+49 69 910-31790
[email protected]
Editor
Stefan Schneider
Deutsche Bank AG
DB Research
Frankfurt am Main
Germany
E-mail: [email protected]
Fax: +49 69 910-31877
www.dbresearch.com
DB Research Management
Ralf Hoffmann | Bernhard Speyer
Content
Page
Forecast tables ...............................................2
Does Germany's special situation pose
a risk to the euro? ...........................................3
Global value chains secure competitive
advantages for German companies ................9
Has the east German housing market
turned the corner? ........................................16
Chart of the month ........................................25
Chartbook: Business cycle ............................27
Chartbook: Sectors .......................................30
Chartbook: Financial markets .......................31
Chartbook: Economic policy..........................36
Event calendar ..............................................37
Data calendar ...............................................38
Financial forecasts ........................................38
Data monitor .................................................39
Global value chains secure competitive advantages for German companies.
Global production chains are becoming increasingly important. This can be seen
in the considerable increase in the foreign value added content of exports that
has occurred worldwide since the mid-1990s – from 20% in 1995 to 25% in
2009. German companies have made particular use of the opening up of
eastern Europe and the emerging markets to establish global production chains
and thereby strengthen their competitive position. The foreign value added
share of exports was still slightly below average in the mid-1990s, whereas in
2009 it was slightly above average. The beneficiaries have been higher-skilled
workers in Germany thanks to an increased demand for labour that is less
susceptible to the business cycle. Moreover, the purchasing power of German
consumers rises as a result of lower end product prices. The adjustment costs
borne by less skilled workers are eased by a rising demand for services,
especially in the transport and logistics sector. Despite the increasing criticism
of globalisation, not least as a result of the global economic and financial crisis,
it does benefit Germany. Policymakers should therefore do their utmost to
reduce the impediments to the international division of labour.
Has the east German housing market turned the corner? We analyse and
forecast prices of existing apartments in 24 towns located in east Germany. As
we identify structural differences between growing and shrinking towns, the full
sample is divided into two subsamples to investigate both groups separately.
The main determinants of apartment prices are the disposable income and the
age dependency ratio. We find positive price-income relations in growing towns
and – somewhat surprisingly – a negative relationship in shrinking towns. Our
forecasts indicate a further differentiation among towns in east Germany in the
years ahead. The following economic reasons may explain the finding: higher
cost per capita of infrastructure in growing towns, path dependency of building
costs and domestic migration.
Focus Germany
Economic forecasts
DX
Real GDP
(% growth)
2012 2013F 2014F
Consumer Prices*
(% growth)
2012 2013F 2014F
Current Account
(% of GDP)
2012 2013F 2014F
Fiscal Balance
(% of GDP)
2012 2013F 2014F
Euroland
-0.5
-0.6
1.0
2.5
1.5
1.5
1.2
1.6
1.6
-3.7
-3.0
-2.5
Germany
0.7
0.1
1.5
2.0
1.4
1.6
7.0
7.0
6.9
0.2
-0.3
-0.1
France
0.0
-0.2
1.1
2.2
1.1
1.5
-2.3
-2.2
-1.9
-4.6
-3.9
-3.3
Italy
-2.4
-2.0
0.5
3.3
1.6
1.5
-0.5
0.6
0.9
-3.0
-3.4
-3.0
Spain
-1.4
-1.5
0.5
2.4
1.6
1.6
-1.1
0.5
0.3
-10.0
-6.2
-5.3
Netherlands
-1.3
-0.7
0.8
2.8
2.6
1.7
8.4
8.2
8.0
-4.1
-3.8
-3.0
Belgium
-0.3
-0.1
0.9
2.6
1.2
1.5
-1.4
0.5
1.0
-3.9
-3.0
-3.0
Austria
0.8
0.4
1.4
2.6
2.0
1.8
1.8
2.5
2.8
-2.5
-2.1
-1.8
Finland
-0.2
-0.7
1.1
3.2
2.3
2.1
-1.9
-1.0
-1.0
-1.9
-2.3
-1.8
Greece
-6.4
-4.5
0.5
1.0
-0.5
-0.2
-3.0
-1.0
0.0
-10.0
-4.9
-3.7
Portugal
-3.2
-2.6
0.5
2.8
0.6
1.1
-1.5
0.5
1.5
-6.4
-5.7
-4.6
0.2
0.7
1.8
1.9
0.8
1.3
4.4
4.0
4.0
-7.6
-7.6
-5.3
-6.0
Ireland
UK
0.2
1.1
1.8
2.8
2.7
2.1
-3.8
-2.8
-2.4
-5.5
-6.5
-0.5
0.4
1.5
2.4
1.1
1.8
5.8
5.0
5.0
-4.4
-2.0
-2.0
Norway
3.0
2.3
2.6
0.7
1.8
1.9
14.1
13.0
12.5
10.1
12.0
12.0
Sweden
1.1
1.5
2.0
0.9
0.2
1.4
6.9
7.0
7.0
-0.7
-1.0
-0.5
Switzerland
1.0
1.5
1.5
-0.7
-0.4
0.5
13.6
13.0
13.0
0.4
0.3
0.3
Czech Republic
-1.2
0.0
2.0
3.3
1.5
1.8
-2.4
-2.3
-2.4
-4.4
-3.1
-2.7
Hungary
-1.7
0.4
1.1
5.7
1.8
2.4
1.6
1.2
0.5
-2.0
-2.7
-2.6
Poland
1.9
0.8
2.5
3.7
1.3
2.2
-3.5
-2.3
-3.1
-3.9
-3.6
-3.3
United States
2.2
2.2
3.2
2.1
1.7
2.3
-2.8
-3.0
-3.2
-6.8
-3.9
-3.2
Japan
1.9
2.0
0.6
0.0
-0.1
2.3
1.1
1.2
2.4
-9.5
-9.3
-7.4
World
2.9
3.0
3.9
3.3
3.0
3.5
Denmark
*Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepancies compared to other DB publications.
Forecasts: German GDP growth by components, % qoq, annual data % yoy
DX
2012
2012 2013F 2014F
2013
2010
2011
Q1
Q2
Q3
Q4
Q1
Q2F
Q3F
Q4F
Real GDP
Private consumption
Gov't expenditure
Fixed investment
Investment in M&E
Construction
Inventories, pp
Exports
Imports
Net exports, pp
4.2
0.9
1.7
5.9
10.3
3.2
0.6
13.7
11.1
1.7
3.0
1.7
1.0
6.2
7.0
5.8
0.2
7.8
7.4
0.6
0.7
0.8
1.2
-2.5
-4.8
-1.5
-0.4
3.8
2.2
0.9
0.1
1.0
0.3
-1.7
-3.2
-0.2
0.0
0.7
1.1
-0.1
1.5
1.0
0.6
3.1
4.0
2.3
0.0
6.5
6.8
0.3
0.6
0.4
0.5
-0.9
-1.1
-0.6
-0.2
1.2
-0.2
0.7
0.2
0.1
-0.4
-1.9
-3.0
-1.4
-0.1
3.1
2.3
0.6
0.2
0.1
0.7
-0.4
-2.2
0.5
-0.3
1.4
0.6
0.4
-0.7
-0.3
0.1
-1.1
-2.0
-0.7
0.4
-2.4
-1.3
-0.7
0.1
0.8
-0.1
-1.5
-0.6
-2.1
-0.1
-1.8
-2.1
0.1
0.5
0.3
0.1
1.7
0.3
3.0
-0.1
2.0
2.2
0.1
0.3
0.4
0.1
0.4
0.5
0.3
-0.1
2.0
2.3
0.0
0.3
0.3
0.1
0.6
1.0
0.3
0.0
2.3
2.7
0.0
Consumer prices*
Unemployment rate, %
Budget balance, % GDP
Balance on current account, % GDP
1.1
7.7
-4.1
6.2
2.1
7.1
-0.8
6.2
2.0
6.8
0.2
7.0
1.4
6.9
-0.3
7.0
1.6
6.7
-0.1
6.9
2.1
6.8
1.9
6.8
2.0
6.8
2.0
6.9
1.5
6.9
1.3
6.8
1.4
6.8
1.5
6.8
*Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications.
2
| July 1, 2013
Current Issues
Focus Germany
Does Germany's special situation pose a risk to
the euro?
Economic condition assessment
1
% share of respondents who think that the
economic conditions are good
— The findings of the latest Pew Research Center survey paint an impressive
picture of the economic divergences within the euro area.
— We compare the economic development of the euro-area member states
with that of the US federal states over a longer time horizon. While we find
no significant differences between the euro-area members and the US
states in terms of growth and inflation, unemployment rates differ considerably more in the EMU countries.
80
60
40
20
— This suggests that local labour markets are more flexible in the US than in
Euroland, and that labour force mobility is higher state-side. Provided there
is sufficient political will, labour market reforms could create greater
incentives for increased cross-border labour mobility.
0
-20
-40
-60
ES
GB
2007
IT
CZ
2013
FR
PL
DE
Change 2007-13, pp
Source: Pew Research Center
2
Unemployment rates
%
28
24
20
16
12
8
4
0
07
08
09
10
DE
IE
EMU
11
12
ES
PT
13
GR
IT
Source: ILO
EMU: Economic growth
3
Real GDP, % yoy
4
3
2
1
0
-1
-2
-3
2011
DE
EMU ex DE
2012
FR
2013
IT
ES
NL
— Moreover, labour market reforms boost labour market flexibility as a whole with Germany's Hartz reforms representing a case in point. Greater flexibility
regarding wages and employment would in turn reduce the need for adjustment via cross-border labour mobility and thus take some of the pressure off
migration, which is hampered by language barriers anyhow.
The findings of the latest Pew Research Center survey paint an impressive
picture of the economic divergences within the euro area. The share of
respondents in Germany assessing the current situation as “good”, for instance,
has risen from 63% in 2007 to 75% currently, while this share has slumped
1
heavily in all other European countries included in the survey . A mere 3% of
respondents in Italy consider the current situation to be good (2007: 25%), while
the corresponding figures are no more than 4% in Spain after a still strong 65%
in 2007 and only 9% in France (down from 30% in 2007, see chart 1).
The special situation in Germany can probably be explained by the stable labour
market and wage developments in Germany, whereas the dramatic rise in
unemployment in some of the other euro-area states probably led to the drastic
collapse in ratings. The unemployment rate in Spain, for instance, has risen
from over 8% in 2007 to nearly 27% at last count, but – in the harmonised
International Labour Office (ILO) definition – has remained at 5.4% (chart 2) in
Germany since August 2012. The situation is even more dramatic for youth
unemployment. While the unemployment rate of persons under the age of 25
has been on the decline in Germany since about the middle of 2009 and
currently stands at approx. 7 ½% (together with Austria this is the lowest reading
in Europe), it has roughly doubled during that period in both Spain and Greece,
to over 56% and 62%, respectively.
However, economic growth in Germany is also diametrically opposed to the
trend in other euro-area countries. While the German economy grew again
slightly already in Q1 2013, after the slump in Q4 2012, many euro-area
countries have remained in recession. The French economy, for example,
shrank for the second consecutive time in Q1 2013. In Spain, economic output
was down for the fifth time in a row, and in Italy even for the sixth time. In
addition, the German economy has picked up speed noticeably in the second
quarter. Hence there is a lot to suggest that Germany will at least manage a
growth rate “just above zero” (our forecast is for +0.1% following +0.7% in
2012), while GDP in real terms in the rest of the euro area looks set to shrink by
approx. 1% once again (chart 3). Considering the difficult European environment this is a remarkable achievement for Germany. At the end of the 1990s,
Sources: Eurostat, DB Research
1
3
| July 1, 2013
Pew Research Center (2013). The New Sick Man of Europe: the European Union. May 13, 2013.
See also: Deutsche Bank Research (2013). Focus Germany: The brave new world of monetary
policy. Current Issues, June 4, 2013.
Current Issues
Focus Germany
Germany was still referred to as the “sick man of Europe” given its growth
weakness.
Economic divergences – not only in the euro area
Have there been similarly strong divergences in the euro area in the past which
could have laid the foundation for the distortions witnessed today? In order to
answer this question, we compare the economic development of the euro-area
member states with that of the US federal states. While we find no significant
differences between the euro-area members and the US states in terms of
growth and inflation, unemployment rates differ considerably more in the EMU
countries. This suggests that local labour markets are more flexible in the US
than in Euroland, and that labour force mobility is higher state-side. Empirical
research, albeit referring to the pre-2000 period, shows that labour mobility is
2
roughly two to three times as high in the US as in the euro area . To conclude,
however, that the euro area is not an optimum currency area and that failure is
inevitable – as critics claim – would be going too far. Recent immigration
numbers to Germany, for instance, show that cross-border labour mobility within
EMU has already increased slightly. Moreover, external shocks can also be
cushioned by internal adjustments, which is evident in Germany's labour market
reforms. This aspect shows that many euro-area members are on the right track
with the labour market reforms already introduced. However, German
experience with the so-called Hartz reforms, implemented between 2003 and
2005, has shown that it can take years for reforms to pay off. Empirical research
also concludes that the US is by no means an optimum currency area as
3
postulated by Mundell .
When is a currency area an optimum one? 4
Exchange rates can absorb shocks and facilitate adjustment due to different
economic developments of individual countries. Hence they are an instrument of
economic policy of which many countries of today's euro area have made
frequent and intensive use in the past.
With the increasing problems of the Bretton-Woods system (fixed exchange
rates versus the US dollar, which in turn was pegged to the price of gold) at the
end of the 1950s and particularly during the 1960s, exchange rates and
currency regimes became the focus of academic research. While Milton
5
6
Friedman advocated flexible exchange rates in 1953, Robert Mundell sought
to determine if and when two or more countries could forego their own
currencies and, in 1963, developed the theory of optimum currency areas.
Roughly speaking, he found that a currency area is an optimum one if there is
sufficient factor mobility to cushion shocks, i.e. if labour markets in particular are
sufficiently flexible. Mundell also criticised the claim that a state within its
political borders already represents an optimum currency area.
2
3
4
5
6
4
| July 1, 2013
See Mongelli, F.P. (2002). "New" views on the optimum currency area theory: What is EMU
telling us? ECB Working Paper No. 138.
Cf. Kouparitsas, M.A. (2001). Is the United States an optimum currency area? An empirical
analysis of regional business cycles. Federal Reserve Bank of Chicago. Working Paper 2001-22.
For an overview of the emergence and development of the theory of optimum currency areas as
well as the findings of empirial analyses on the eurozone, see Mongellie, F.P. (2002). “New”
views on the optimum currency area theory: What is EMU telling us? ECB Working Paper No.
138.
Cf. Friedman, M. (1953). The Case for Flexible Exchange Rates. In: Essays in Positive
Economics.
Cf. Mundell, R. (1961). A Theory of Optimum Currency Areas. American Economic Review. Vol.
51.
Current Issues
Focus Germany
Adjustment to a supply-side shock occurs as follows: in the course of declining
production, unemployment in a country rises. An individual country with its own
currency now has the opportunity to boost its price competitiveness by a
devaluation of its currency. As a result, foreign demand for domestic goods
would rise, production increase and unemployment fall. In a currency union,
however, there is no such exchange-rate mechanism, so adjustment will have to
take place through factor mobility and/or factor flexibility. Workers who cannot
find employment in their home country will emigrate to a country with stable
demand and higher wages – and continue to do so until unit labour costs and
price levels in the two countries are equal. In order for this to happen, labour
mobility must be sufficiently high, and wages and prices within and between the
countries forming the monetary union must be flexible.
Other ways of absorbing shocks are based on the mobility of other production
7
factors such as capital, as proposed by James Ingram in his extension of the
theory. Stronger integration of financial markets, according to Ingram, could
markedly reduce the need for exchange-rate adjustments. For Ronald
8
McKinnon , by contrast, the openness of the member states of a currency union
was the factor responsible for its success. According to McKinnon, two countries
will be all the more suited to form an optimum currency area the more trade they
9
conduct with one another. By contrast, Peter Kenen believes that countries with
strongly diversified external trade and production structures are better equipped
to do without the exchange rate as an adjustment tool than those with one-sided
production structures. His work focuses on shocks affecting certain sectors
rather than the entire economy. Correspondingly, the effects of such a shock
would be smaller the lower the sector's share in the country's gross value
added.
The theory of optimum currency areas has triggered sometimes fierce controversy among academics and especially in political discourse. Critics of the
common currency, for instance, point out that regarding most of the criteria used
for analysis the euro area is not an optimum currency area, and as a consequence must fail or can only be kept afloat at extremely high costs. Nonetheless, experience in the US has shown that the federal states seem to be doing
fine with their common currency even though the US is not an optimum currency
area. It should be borne in mind, however, that the US is one country with the
required fiscal resources to absorb shocks while the eurozone consists of 17
individual states.
EMU-17: Economic growth
4
Real GDP, 1991-2012, % p.a.
IE
EE
SK
LU
CY
MT
ES
AT
SI
NL
FI
BE
PT
FR
GR
DE
IT
0
1
2
3
4
5
Despite well-founded theory and in-depth empirical studies, there is no simple
test to determine whether a currency area is an optimum one. Moreover, there is
an ex-post/ex-ante problem. Even if it is found that a certain alliance of states
forming a common currency area has functioned as an optimum currency area
in the past does not guarantee that this will also apply in the future. Similarly, if
optimality is not given, as found when applying Mundell's criteria of optimality to
the eurozone, it does not necessarily follow that the currency area and
consequently the euro will fail.
In the following, we analyse three important indicators for the euro area –
economic growth, inflation and unemployment. In this context, the development
of the euro area as a whole plays a subordinated role. Instead we focus on the
divergences between the 17 member states as well the differences compared
with regional developments in the US states – as a quasi-benchmark for a
functioning, albeit not optimum currency area. The underlying theory that stark
regional differences are problematic for a currency union seems plausible.
Source: European Commission
7
8
9
5
| July 1, 2013
See Ingram, J. (1969). Comment: The Currency Area Problem. In: Mundell, R., Swoboda, A.
(publisher) Monetary Problems of the International Economy.
See McKinnon, R. (1963). Optimum Currency Areas. American Economic Review. Vol. 53.
See Kenen, P. (1969). The Theory of Optimum Currency Areas: An Eclectic View. In: Mundell, R.,
Swoboda, A. (Hrsg.) Monetary Problems of the International Economy.
Current Issues
Focus Germany
EMU-17: Economic growth
5
Real GDP of EMU member countries,
standard deviation (left), % yoy (right)
4.0
15
10
3.5
However, an optimum currency in fact necessitates major adjustments – at least
temporarily – and according to Mundell particularly in the labour markets –
which lead to regional divergences and hence represent a normal reaction to
shocks within a currency union. If these divergences persist, though, there may
have been insufficient adjustment (in the sense of an optimum currency area) so
that the ongoing differences may represent a tinderbox for a monetary union.
5
3.0
0
2.5
-5
2.0
-10
1.5
-15
1.0
-20
95
97
99
01
03
05
07
09
11
Standard deviation (left)
Minimum (right)
Maximum (right)
Source: European Commission
Economic growth
6
Strong growth divergence within the eurozone ...
Over the past decade, there have been stark differences as regards national
growth rates among the member states. While the Irish economy, for instance,
expanded by just under 5% p.a. on average between 1991 and 2012, real GDP
in Italy, which brought up the rear in the eurozone's growth table, only grew by
¾% p.a. (chart 4). The growth league is dominated primarily by the smaller euro
area members such as Ireland, Estonia, Slovakia, Luxembourg, Cyprus and
Malta. Among the larger member states, Spain was the one posting the
strongest growth. Germany, by contrast, only came in second last at 1.3% p.a.
However, it should be noted that Spain's economic growth was driven strongly
by residential construction, which is now undergoing a protracted process of
consolidation, which implies that past success stories say little about future
growth prospects.
Annual growth rates for the euro-area members differ even more strongly. Over
the past years, a gap of a remarkable 9 percentage points was recorded
between the most strongly growing countries and the ones registering the
weakest growth rates.
Gap between minimum und maximum growth of
EMU member countries and US states, pp
18
16
14
12
... is even exceeded by the growth gaps between US states
10
8
6
While the gap between annual average growth rates of the US states from 1991
to 2011 was roughly in line with that registered in the euro area – Oregon
showed the strongest growth with annual average growth of more than 5%
between 1991 and 2011, while Alaska brought up the rear with 3/4% p.a. –
annual growth differences in the US exceeded those among the euro members
in almost every year. On average, the growth gap between the strongest and
the weakest-growing US state was in excess of 12 pp and thus approx. a good
3 pp wider than in the European Monetary Union (chart 6).
4
2
0
95
97
99
01
03
05
EMU-17
07
09
11
US states
Sources: BEA, European Commission
7
Economic growth
Real GDP of EMU member countries and US
States, % yoy, standard deviation
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
95
97
99
01
03
05
EMU-17
EMU-17 ex GR
Sources: BEA, European Commission
6
| July 1, 2013
07
09
US states
11
Distribution of growth more even in the US, however
However, growth is more evenly distributed in the US than in Euroland, as is
reflected in the US in almost identical median and average values of 2.4% and
2.6% p.a., respectively, while those two figures differ considerably in the euro
area, at 2.1% p.a. and 3.4% p.a. Hence, despite the strong annual divergence,
the standard deviation of annual average growth rates of the US states is
roughly the same as that of the euro area members (chart 7). Only recently has
growth in the US states been more uniform than in the euro area, which is
suggested by the divergence of the standard deviations. While the standard
deviation of growth has recently declined noticeably in the US states, it has
risen in the eurozone, which is to a large extent attributable to the dramatic
developments in Greece, though. In 2011 and 2012, the Greek economy shrank
by 7% and 6 ½%, respectively. Without this slump in Greece's economic
performance, the standard deviation of Euroland growth would have followed
the same pattern as in the US.
Current Issues
Focus Germany
A ranking of economic growth rates for the last 18 years shows that euro-area
growth has been dominated by the smaller member states. In 8 of these 18
years, Estonia ranked first, with Ireland and Slovakia both coming in as No 1
four times apiece. Four times in the last 18 years Germany brought up the rear,
followed by Greece, which for three years during that period posted the weakest
growth rate. The situation is similar in the US, with Alaska being the poorest
growth performer among the US states for five times. By contrast, there was no
obvious front-runner (chart 8) and even Alaska came in at the top in 2009.
Countries/States with fastest/slowest economic growth (1995-2012*)
Eurozone
EMU-17: Inflation
9
Inflation in EMU member countries,
Standard deviation (left), % yoy (right)
8
7
6
5
4
3
2
1
0
40
30
20
10
0
-10
95
97
99
01
03
05
07
09
Source: OECD
10
Inflation
Standard deviation
8
7
6
5
4
3
2
1
0
97
99
01
03
05
07
09
Fastest
Estonia
Ireland
Slovakia
US
No. of
years
8
4
4
Slowest
Alaska
Louisiana
Michigan
No. of
years
5
3
3
Fastest
Idaho
Nevada
North Dakota
Oregon
No. of
years
3
2
2
2
*US 1995-2011
Sources: BEA, European Commission, DB Research
Inflation rates differ only marginally in Euroland
11
Standard deviation (left)
Minimum (right)
Maximum (right)
95
Slowest
Germany
Greece
Estonia
Malta
No. of
years
4
3
3
2
8
In the run-up to and especially since the introduction of the euro, inflation rates
of the individual member states have converged noticeably. Having amounted to
almost 30 percentage points in 1995, the gap between the highest inflation rate
(Estonia, which only joined the euro in 2011, though) and the lowest rate
(Finland), only came to 10 ½ percentage points in 2000 and fell further to 2 1/2
pp by 2012 (chart 9). The convergence of inflation rates in the EMU countries
was hardly surprising, however, as price developments are a convergence
criterion and hence one of the preconditions for joining the monetary union.
According to the Maastricht Treaty, a country's inflation rate must not exceed
that of the three countries with the most stable prices by more than 1.5 percentage points.
A comparison of euro-area inflation with regional price developments in the US
is difficult as there are no consumer price data at the state level in the US. The
available US inflation data for four regions show considerably less divergence
than in the euro area. But this comparison is not particularly meaningful as local
divergences fail to be reflected in the statistical averages given the small
number and hence the large size of the regions (Northeast, Midwest, South and
West). Correspondingly, the standard deviation of 14 selected local areas in the
US is higher and the gap towards the euro members smaller (chart 10).
11
US: 14 selected local areas
EMU-17
US: 4 regions
Sources: BLS, OECD
11
EMU: Unemployment rates
%
Suboptimal Eurozone labour markets
ES
SK
GR
EE
FI
FR
IT
DE
PT
BE
IE
SI
MT
CY
NL
AT
LU
While regional divergences regarding economic growth and inflation developments in the euro area are very limited compared with the US states, there have
been pronounced differences in the development of unemployment, particularly
since the outbreak of the financial crisis.
0
5
2012
10
15
20
1995-2012
25
Only in Germany, Belgium, Finland and Estonia did average unemployment
rates in 2012 remain below the multi-year average recorded since 1995 (chart
11). In all other euro-area countries unemployment has been on the rise, in
some cases massively. As a result regional divergences – measured by the
standard deviation of unemployment rates of the 17 euro-area countries – have
widened massively since the outbreak of the financial crisis and the subsequent
deep recession, after falling appreciably between 2000 and 2007 (chart 12).
Source: ILO
7
| July 1, 2013
Current Issues
Focus Germany
EMU-17: Unemployment rates
12
Stardard deviation (left), % (right)
7
30
6
25
5
20
4
15
3
10
2
5
1
0
0
95
97
99
01
03
05
07
09
11
In the US, too, unemployment rose markedly by 5.4 percentage points after the
beginning of the financial crisis and reached its second-highest level in the postwar period in October 2009, at 10%. It has since fallen to 7.5% lately. In the
euro area, unemployment rose much more moderately, even though the slump
in economic output in 2009 was markedly steeper, at -4.4%, than in the US
(-3.1%). However, regional labour market divergences were clearly less
pronounced in the US than in the euro area, which is confirmed by the
noticeably weaker increase in the standard deviation of unemployment rates in
the US states (chart 13). This shows that adjustment to shocks occurs faster
and more intensively in the US and that factor mobility is correspondingly higher
than in the euro area. Surely, what also plays a part is the fact that US monetary
policy has no regional transmission problems and that the federal arm of fiscal
policy is considerably stronger in the US than in the eurozone.
Standard deviation (left)
Minimum (right)
Conclusion: Nothing's impossible – but a lot remains to be done!
Maximum (right)
Source: ILO
Unemployment rates
13
%, standard deviation
7
6
5
4
3
2
1
0
95
97
99
01
EMU-17
Sources: ILO, BLS
03
05
07
09
US
11
Obviously, the eurozone is not an optimum currency area as it does not fulfil the
criterion of sufficiently high factor mobility. To be sure, migration to Germany
from EMU countries hit particularly hard by the financial and sovereign debt
crisis rose by 40-45% last year. However, the absolute figures still look relatively
modest: 10,000 more persons than in 2011 moved to Germany from Greece,
9,000 from Spain and 4,000 from Portugal. Increasing migration from the
southern peripheral countries to Germany over the last few years, though, is a
sign that behavioural patterns can be changed. Provided there is sufficient
political will, labour market reforms could create greater incentives for increased
cross-border labour mobility. Moreover, labour market reforms boost labour
market flexibility as a whole – with Germany's Hartz reforms representing a case
in point. Greater flexibility regarding wages and employment would in turn
reduce the need for adjustment via cross-border labour mobility and thus take
some of the pressure off migration, which is hampered by language barriers
anyhow. The existing language barriers suggest that labour mobility within the
euro area will remain low over the coming years. The US states are at an
advantage in this respect, too, as they not only form one country but also speak
the same language.
Bernhard Gräf (+49 69 910-31738, [email protected])
8
| July 1, 2013
Current Issues
Focus Germany
Global trade has grown faster than the
global economy since the early 1990s
1
Index, 1980 = 1
10
Global value chains secure competitive
advantages for German companies
— Global production chains are becoming increasingly important. This can be
seen in the considerable increase in the foreign value added content of
exports that has occurred worldwide since the mid-1990s – from 20% in
1995 to 25% in 2009.
8
6
4
2
0
80
84
88
92
96
00
GDP
04
08
12
Trade
— German companies have made particular use of the opening up of eastern
Europe and the emerging markets to establish global production chains and
thereby strengthen their competitive position. The foreign value added share
of exports was still slightly below average in the mid-1990s, whereas in
2009 it was slightly above average.
Sources: IMF, DB Research
Tariffs have fallen steadily
2
— The adjustment costs borne by less skilled workers are eased by a rising
demand for services, especially in the transport and logistics sector.
Average tariff applied to countries with most
favoured nation status
7
40
35
30
25
20
15
10
5
0
6
5
4
3
2
1
0
88
92
96
00
04
CA (left)
US (left)
CN (right)
08
JP (left)
EU (left)
Source: UNCTADstat
3
Trade costs fell
1996=100, Average trade costs for
manufactured goods
105
100
95
90
85
80
96
98
00
02
04
06
High income
Low income
Lower middle income
Upper middle income
— The beneficiaries have been higher-skilled workers in Germany thanks to an
increased demand for labour that is less susceptible to the business cycle.
Moreover, the purchasing power of German consumers rises as result of
lower end product prices.
08
— Despite the increasing criticism of globalisation – not least as a result of the
global economic and financial crisis, it does benefit Germany. Policymakers
should therefore do their utmost to reduce the impediments to the
international division of labour.
Global trade has risen much faster than the global economy (chart 1) in the past
decades – especially since the integration of the major emerging markets.
Above all, open and flexible economies benefit from this thanks to stronger
10
economic growth. This was made possible by far-reaching trade liberalisation
measures – reduction in tariffs (chart 2), dismantling of non-tariff trade barriers,
11
declining transport costs (chart 3) and the continuing improvements in
information and communications technologies (ICT). Whereas foreign trade
traditionally took the form of an exchange of finished products, the availability of
ICT since the 1990s has revolutionised company production processes,
enabling them to divide up their manufacturing into different stages across a
12
number of countries. Multinational firms optimise their production processes
using global value chains. Specialised small and medium-sized enterprises
(SMEs) are contracted as niche manufacturers for individual production stages
and benefit from economies of scale. For instance, the trade in intermediates
rose from around 54% of the global goods trade in 2000 to 58% (chart 4).
By dividing up value chains and outsourcing parts of the value chain to other
countries, either by establishing subsidiaries, acquiring stakes in foreign
companies or contracting third parties, firms can boost their competitiveness
13
considerably. Multinational firms profit from lower prices as a consequence of
more intense competition between the producers of intermediates, from a
broader range of intermediates and from more efficient production. Since
production for example is contracted out to specialised manufacturers,
10
11
Source: Arvis, J.-F. et al. (2013)
12
13
9
| July 1, 2013
See for an overview Newfarmer, R., Sztajerowska M. (2012), Trade and employment in a fastchanging world, in Lippoldt, D., Policy Priorities for International Trade and Jobs, OECD.
Arvis, J.-F. et al. (2013), Trade Costs in the Developing World 1995-2010, Policy Research
Working Paper 6309, World Bank; Novy, D. (2013), Gravity redux: Measuring international trade
costs with panel data, Economic Inquiry, 51 (1), pp. 101-121.
Baldwin, R. (2009), Integration of the North American economy and new-paradigm globalisation,
CEPR Discussion Papers 7523.
Grossman, G., Rossi-Hansberg, E. (2008), Trading Tasks: A Simple Theory of Offshoring,
American Economic Review, 98 (5), pp. 1978-1997; Cadot, O. et al. (2011), Trade Diversification:
Drivers and Impacts, in Jansen M., Peters, R., Salazar-Xirinachs, J.M., Trade and Employment:
from Myths to cts, ILO.
Current Issues
Focus Germany
Intermediate goods share in global
trade becoming more significant
4
Intermediates as % of global trade
59
58
57
56
55
54
53
52
51
50
49
90
94
Source: OECD
98
02
06
10
multinational groups can gain access to expertise that they have hitherto not
had in-house. In addition, access to foreign markets is made considerably easier
by manufacturing locally.
The volume of global trade is rising faster than average due to the growing
importance of global value chains and thus of intermediates, as the imported
intermediates and then the end product are booked as trade flows in the foreign
trade statistics. This double counting is avoided when added value streams are
14
the measurements under observation. The difference between foreign trade
statistics and the observation of added value streams is clearly illustrated using
15
a simple example: A Chinese company exports one intermediate worth EUR
2,000 to Germany, which is then used during the manufacturing of the finished
product in Germany and the finished product is exported to the US for EUR
22,000 (chart 5). In the foreign trade statistics the global trade volume would
amount to EUR 24,000, although the global added value would only be EUR
22,000. In the foreign trade statistics the US has a trade deficit of EUR 22,000
and no trade relations with China. Germany books a trade surplus of EUR
22,000 with the US and a deficit of EUR 2,000 with China. When observing the
added value streams the US trade deficit is divided up into added value
contributions. The US has a deficit of EUR 20,000 with Germany and a deficit of
EUR 2,000 with China.
Bilateral surpluses/deficits differ for goods flows in the foreign trade statistics and for international added value streams
5
Source: DB Research
The total deficit remains the same, but the global interdependence of the
companies is revealed by the bilateral items. When companies are integrated
into global value chains changes in demand in one country are not only
transmitted to a single country but to several countries. The business cycles of
different countries can thus correlate considerably, even though the supply
14
15
10 | July 1, 2013
On the basis of linked Input-Output tables of 57 countries (all OECD countries, BRIC, Indonesia
and South Africa) the OECD and the WTO have compiled a data set with international added
value streams for the years 1995, 2000, 2005, 2008 and 2009 (“Trade in Value Added – TiVA”,
data as of June 2013). Data on international added value streams are also available in the “World
Input-Output Database (WIOD)”. See Aichele, R. Felbermayr, G., Heiland, I. (2013), Der
Wertschöpfungsgehalt des Außenhandels: Neue Daten, neue Perspektiven, ifo Schnelldienst
5/2013.
For detailed illustrations with several added value steps see OECD (2013), Interconnected
Economies – Benefitting from Global Value Chains.
Current Issues
Focus Germany
Foreign value added share lower
for lager countries
6
x-axis: foreign value added content of
gross exports, y-axis: % of world GDP
In the example it also becomes clear that German exports are dependent on the
supply of Chinese intermediates. Protectionist measures on German imports
would – with a lack of options for switching to alternative intermediates – also
constrain the manufacturing of the end products and thus reduce their
competitiveness. The sensitivity of trade flows of intermediates to a change in
trading costs is much greater for global value chains than for national ones.
Tariffs and other trade barriers make imported intermediates more expensive –
especially if these go through several production steps in different countries and
thus also the exports of a country. Multilateral trade agreements, legal certainty,
the presence of specialist service providers, especially in the transport and
logistics sector, trade financing and communication are prerequisites for efficient
global value chains.
30
US 95
25
US 09
20
15
CN 09
10
DE 95
DE 09
5
0
0
20
40
2009
Linear (2009)
60
1995
Linear (1995)
Sources: OECD-WTO TiVA database, IMF, DB Research
Foreign value added share of exports
7
% of exports
MEA
Dollar bloc
Latin America
DE
Total
Asia
EU
10
1995
15
2008
20
25
30
2009
links/relations reported in the trade balance are comparatively limited. If sales in
the US declined, this would reduce demand not only in Germany but also in
China.
35
The change from a purely national to a global value chain results in imported
intermediates constituting an increasing value added share of the exports of a
16
country (bazaar economy ). This applies in particular to smaller countries,
whose integration in global production chains is frequently more advanced than
in larger countries whose domestic markets have a correspondingly high
absorption. Companies in larger countries can, by contrast, fall back on a
broader choice of domestic intermediates (chart 6). In addition, the foreign value
added share at commodities producers such as Australia is comparatively small
as mining – relative to added value – requires a small share of intermediates.
Worldwide, the imported intermediates share of exports rose from 20% in 1995
to 27% in 2008 and fell in the wake of the global economic meltdown in 2009 to
25%. As “the world's workbench” and with a rapidly expanding intra-Asian value
chain Asia has the highest share at more than 30% and the Africa, Arab
countries (commodity exporters) and Middle East region (MEA) has the lowest
at about 10% due to relatively high trading costs and a lack of legal certainty in
some cases (chart 7).
Sources: OECD-WTO TiVA database, DB Research
German companies increasingly firmly integrated in global value
chains
German companies are successfully participating in international competition
and have barely lost global trade share, despite the aspiring emerging markets
– and especially China (chart 8). In 2012 Germany had a share of about 8%,
just behind the US (8.5%) and China (11.2%). With relatively high and rigid
wages for simple work in the mid-1990s, the increasing integration of German
companies in global value chains played a decisive role in keeping them
internationally competitive. Whereas the foreign value added share of German
exports of 19% was just below the global average in the mid-1990s, the share
was slightly higher than the average in 2009 at 27% (chart 9).
16
11 | July 1, 2013
Sinn, H.-W. (2005), Die Basar-Ökonomie: Deutschland: Exportweltmeister oder Schlusslicht?,
Econ, 2nd edition. Aichele, R., Felbermayr, G. and Heiland, I. (2013), Neues aus der Basarökonomie, ifo Schnelldienst 6/2013.
Current Issues
Focus Germany
Germany with substantial share in world trade
8
Foreign value added content of German gross exports has
risen
Share in world trade, volume, %
USD bn
14
1500
1300
1100
900
700
500
300
100
-100
12
10
8
6
4
2
0
95
97
99
01
CN
JP
03
05
FR
UK
07
DE
US
09
11
IT
9
28%
27%
26%
19%
24%
80%
75%
1995
2000
Domestic value added
71%
73%
2005
Re-imported
2008
72%
2009
Foreign value added
Source: OECD-WTO TiVA database
Source: UNCTAD
By transferring parts of the production chain – mostly of simple and standardised procedures – to countries with lower wage levels or by purchasing
foreign intermediates German firms boosted their productivity and reduced their
average wage costs. Germany, by contrast, remained the location for company
head offices, research and development and activities that require highly
qualified, highly specialised and well paid staff. A shining example of this is
provided by the big automakers with their modular manufacturing. Integration in
global production chains is often the only way for Germany's SMEs with highly
specialised niche products to generate economies of scale.
Employees at companies outside
Germany in which German companies
hold a stake
10
Number of persons, million
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
96
98
00
02
04
06
08
EMU
Other EU countries
Other Europe
Africa
Americas
Oceania and the polar regions
Asia
Source: Deutsche Bundesbank
10
The functioning of global production chains requires specialised service
providers, especially in the logistics sector. In 2009 for instance the services
value added share of exports was 48% (domestic share 36% and foreign share
12%) and thus around 10 percentage points higher than in 1995.
German firms almost quadrupled their direct investments between the mid1990s and 2011 to a total of EUR 1,144 bn. The number of employees in foreign
subsidiaries or at affiliated foreign companies doubled roughly between the mid1990s and 2011 to 6.3 million (chart 10). More than half of these were
accounted for in eastern Europe and Asia. German companies used the
opening of countries in eastern Europe after the Iron Curtain fell as did the
emerging markets to strengthen their competitive position by opening up
production facilities there and tapping into new markets. With parts of the
production process increasingly being outsourced to eastern Europe and Asia,
the share of imported intermediates from these countries and thus the foreign
value added share from these regions is rising (chart 11). The foreign value
added share is particularly pronounced in sectors that require imported raw
materials, such as the chemicals industry and metal production, and that use
modular production techniques, such as the German automakers and the
manufacturers of electrical appliances, machinery and equipment (chart 12).
With increased international competitive intensity German companies have cut
their domestic production costs despite relatively high and downwardly rigid
17
wages.
17
12 | July 1, 2013
Marin, D. (2010), Germany’s super competitiveness: A helping hand from Eastern Europe, voxeu.
Current Issues
Focus Germany
EMU becoming less important for foreign
value added share of German exports
11
Foreign value added share particularly pronounced in sectors with modular
manufacturing and heavy use of commodities
% of foreign value added
%, 2009
100
Basic metals, fabricated metal products
Chemicals, non-metallic mineral products
Transport equipment
Textiles, leather, footwear
Total
Electrical and optical equipment
Machinery and equipment
Food, beverages, tobacco
Manufacturing, recycling
Wood, paper, printing, publishing
Transport and storage, post and telecommunication
Agriculture
Electricity, gas and water supply
Mining and quarrying
Construction
Wholesale and retail trade, Hotels and restaurants
Business services
Financial intermediation
Other services
90
80
70
60
50
40
30
20
10
0
1995
2000
2005
2008
2009
EMU
EU ex EMU
Other Europe
Asia
Dollar bloc
Latin America
MEA
Other
0
13
% of exports and of added value, 2009
12
10
8
6
4
2
0
FR US
IT
GB CN CH AT NL ES BE
Export share
Added value share
Source: OECD-WTO TiVA database
US most important country of origin for
added value imports
20
14
Bilateral German surpluses
15
Bilateral German deficits
% of exports and of added value, 2009
2009, USD bn
12
35
10
30
8
25
6
20
4
15
2
10
0
-2
-4
-6
-8
-10
-12
-14
-16
5
0
Import share
IT
GB AT CH PL ES
Added value share
40
Looking at the added value streams the aggregate German surplus does not
deviate from that of the goods flows, but the bilateral items change considerably
in some cases (see further up in chart 5). While France is the most important
destination country for exports and imports in the foreign trade statistics, for the
added value streams in both cases it is the US, since in the case of the US the
intermediates from German companies are mainly included in imports from third
countries and the linkage with the US via production chains is relatively low
(charts 13 and 14). The German surplus with the US increases the added value
streams as a result. Relative to France the surplus narrows due to the relatively
close ties between the two economies (chart 15). There are major changes also
in the deficits with the Netherlands and Ireland (chart 16). Imports from the
Netherlands contain a relatively high added value share of German intermediates and imports from Ireland have a relatively low Irish added value
content.
2009, USD bn
FR US CN NL
30
Source: OECD-WTO TiVA database
Source: OECD-WTO TiVA database
US most important destination country
for added value exports
10
12
0
US FR GB CH IT
Trade
AU SA MX ES SE
Added value
16
ID HU SK JP NO PL CN CZ IE
Trade
NL
Added value
Source: OECD-WTO TiVA database
Source: OECD-WTO TiVA database
13 | July 1, 2013
Source: OECD-WTO TiVA database
Current Issues
Focus Germany
Germany's hourly compensation costs
are the highest among the G7 countries
17
Hourly compensation costs (EUR) 2011
The reorganisation of production processes across borders triggers
redistribution effects for domestic workers. With company headquarters and
activities that require inputs from highly qualified and highly specialised
personnel remaining in the home market and simple and standardised tasks
moving abroad the demand for labour shifts from lower skilled personnel to the
higher skilled. This demand shift is intensified by the skill-biased technological
18
change. Workers who perform simple and standardised tasks are thus
exposed to considerable negative wage pressure. With wages that are much
higher than the world market prices and are downwardly inflexible there is a risk
that jobs disappear in these segments due to outsourcing of production steps
abroad or alternatively via imports of similar products. Employees may, in the
worst case, have to write off all the human capital they have acquired to date
and take up a new occupation. This effect is softened, though, by the higher
demand for services, especially in the transport and logistics sector.
35
30
25
20
15
10
5
0
DE
JP
FR
GB
IT
BR
CA
CN
US
IN
Data for CN (2009) and IN (2007) are not directly
comparable to each other or with the data for other
countries.
Sources: BLS, DB Research
Stabilisation of the employment share
in manufacturing sector
18
% of the entire workforce
100
90
80
70
60
50
40
30
20
10
0
70 74 78 82 86 90 94 98 02 06 10
Agriculture, forestry and fisheries
Manufacturing ex construction
Construction
Services
Before 1991 only west Germany
Source: Federal Statistical Office
Share of people without vocational
qualifications is rising again among
younger cohorts
Minimising the adjustment costs borne by less skilled workers via
labour market and education policies
19
% of the respective age group, 2011
35
International wage pressure together with the then difficult situation in the
domestic German labour market resulted in the implementation of comprehensive labour market reforms in the mid-2000s as well as employers and unions
embarking on a common, employment-friendly course. It is mainly in manufacturing that companies have since then had the possibility of reacting to temporary slumps in demand by making downward adjustments in labour inputs via
working time reductions. Such adjustments cushioned the impact of the slump in
global demand in 2009 and kept employment impressively stable. Real wages
also climbed only moderately, but labour costs were still the highest of all the G7
countries (chart 17). As a result the manufacturing employment share of total
employment stabilised in recent years at just under 19% and has currently
halted the downtrend (chart 18). The comparatively moderate wage settlements
– even after unemployment fell – are probably due in part to the additional
potential labour market competition from abroad.
These structural changes in the labour market brought about a huge decline in
the jobless rate from its peak of nearly 12% in 2005 to under 7% in 2012.
However, whereas there is full employment among university graduates with a
reading of less than 3%, the jobless rate for people without vocational training is
roughly 20%. The situation for less skilled workers is likely to remain acute.
Labour market policy therefore needs to improve employability via for example
occupational integration measures, training and mobility support. It is worrying
that the share of people without vocational qualifications and without a general
school-leaving certificate is rising again among younger birth cohorts (chart 19).
Education policy needs to lay the foundations for successful lifelong learning at
an early stage – especially via early learning.
Higher skilled workers benefit from higher and less cyclically
sensitive labour demand
30
25
20
More highly qualified workers are, by contrast, in greater demand and
19
employment is becoming more steady over the business cycle. In addition,
foreign companies are optimising their production chains and relocating
activities of higher skilled personnel such as research and development or
15
10
5
0
3035
3540
4045
4550
5055
Source: Federal Statistical Office
5560
60- >65 Total
65
18
19
14 | July 1, 2013
See Acemoglu, D. (2002), Technical Change, Inequality and the Labor Market, Journal of
Economic Literature 40(1), pp. 7-72
Peters, H.; Weigert, B. (2013), Beschäftigungsentwicklung innerhalb multinationaler Unternehmen während der globalen Rezession 2008/2009, Jahrbücher für Nationalökonomie und
Statistik, 4/2013, to be published soon.
Current Issues
Focus Germany
Employees at companies in Germany in
which foreign companies hold a stake
20
Number of persons, million
3.0
regional company head offices. Employment in German companies that are
partly foreign owned rose by 1.5 times since the mid-1990s to 2.8 million in 2011
(chart 20). Around 60% work in companies that are partly owned by companies
from other EMU states – in the mid-1990s the figure was only about 40%.
2.5
Boosting the international competitiveness of German firms by
optimising global production chains should not be impeded
2.0
1.5
1.0
0.5
0.0
96
98
00
02
04
06
EMU
Other EU countries
Other Europe
Africa
Americas
Oceania and the polar regions
Asia
Source: Deutsche Bundesbank
08
10
By constantly optimising the global value chain German companies can
strengthen their competitive position on the international stage. The overall
effect probably benefits not only companies but also the domestic workforce
overall. The clear beneficiaries are higher skilled workers whose share has risen
steadily for decades – from 8.8% in 1991 to 13.2% in 2011 (university
graduates). In addition, employment is currently at record levels. The number of
employees obliged to make social security contributions has risen since the mid2000s by about 3 million, a larger increase than in the number of persons in the
workforce. The negative impact on less skilled workers is being reduced by
higher labour demand from service providers especially in the transport and
logistics sector and should be further diminished via education and labour
market policies.
In order to continue benefiting from the positive overall effects of the expansion
of global production chains, trade barriers should be dismantled and the
20
liberalisation of services accelerated further.
Heiko Peters (+49 69 910-21548, [email protected])
20
15 | July 1, 2013
OECD (2013), Trade Policy Implications of Global Value Chains.
Current Issues
Focus Germany
Has the east German housing market turned the
corner?
— We analyze supply and demand on east German housing markets on the
city level. Subsequently, we estimate determinants of the market equilibrium
and predict the price development of existing dwellings until 2030.
— In our analysis disposable income is the most robust variable with a high
explanatory power. Accordingly, the price of existing dwellings increases by
EUR 80 per square meter when disposable income increases by EUR 1,000
in growing cities.
— Using external predictions for the age ratio as well as our own trend
projections for disposable income in the future we estimate a further
differentiation of the price development in east German cities. While prices
will increase in some cities they will decline further in others. Therefore the
question posed in the title “Is the trend reversal in the east German housing
market already accomplished?” cannot be answered uniformly.
1. The latest developments
Prices trending up since 2009
In east Germany, the housing market has experienced a resurgence of interest.
The mid-1990s had seen a phase of overheating that subsided over time on
account of years of stagnating or falling nominal prices. Over the past few years
the prices of existing houses have even started to increase again, in fact
dynamically in some cities. These include Erfurt, Jena, Potsdam, Rostock and
Weimar, in particular. But lately prices have started to stabilise even in the
structurally weaker cities of east Germany (charts 1 and 2).
1
Residential property prices in east Germany
Existing homes (ex Berlin & Potsdam)
2
EUR/sqm
1990=100
175
2,000
150
1,500
125
100
1,000
75
90
94
98
02
06
10
500
Apartment, new
Single-family dwelling
Terraced house, existing stock
Sources: BulwienGesa, DB Research
Apartment, existing stock
Terraced house, new
90
94
0.8
98
Max
02
Median
06
0.2
10
Min
Sources: BulwienGesa, DB Research
Slight improvement in permits and completions
In tandem with the rising prices, building permit issuance has also increased in
large cities as well as in small cities of east Germany in recent years. However,
permits continue to fall far short of the levels of earlier years (chart 3). Housing
completions have recovered only a bit so far and continue to lag behind new
permits (chart 4).
16 | July 1, 2013
Current Issues
Focus Germany
Building permits in east German cities
3
Residential buildings in east Germany
Number
Number (’000)
5,000
16
4
14
4,000
12
3,000
10
8
2,000
6
1,000
4
2
0
93
95
97
99
01
03
05
07
09
11
0
93
B-cities
C-cities
95
97
D-cities
99
01
03
05
Permits
Sources: BulwienGesa, DB Research
07
09
11
Completions
Sources: BulwienGesa, DB Research
2. Which market powers are at play?
Our objective is to analyse supply and demand in the east German housing
markets at the city level. Subsequently, we shall derive determinants from this
analysis that influence market equilibrium and forecast the price trends for
existing houses up to 2030.
Demand factor 1: Population growth – several cities are growing again
Over the past 20 years the population numbers in east German cities have
declined by roughly 13%, while in west Germany there has been roughly 6.5%
growth. The population of Berlin is up 2% (chart 5). Relative to 1990, nearly all
of east Germany's cities have posted declines. Only Dresden, Jena, Potsdam
and Weimar have more inhabitants today than they did then. All of the 24 cities
we analysed initially shrank directly following German unification. However,
Dresden, Erfurt, Greifswald, Jena, Magdeburg, Leipzig, Potsdam, Rostock and
Weimar already started to post growing population figures around the year
2000. Since then, these cities have continued to grow fairly steadily. Over the
past few years, the populations of Chemnitz, Cottbus and Halle have also
picked up, although the increase may be only temporary as it is due to a higher
number of students. In 12 other cities that we analysed, though, the population
readings have fallen nearly constantly (chart 6).
Population
5
Population growth in ...
6
% yoy
1990=100
+6.5%
110
+2.0%
1.5
1.0
0.5
100
0.0
-13.2%
90
-0.5
-1.0
-1.5
80
-2.0
90
93
96
East Germany (ex Berlin)
99
02
05
West Germany (ex Berlin)
08
11
Berlin
-2.5
91
93
95
97
99
01
... cities starting to grow again
03
05
07
09
11
... still shrinking cities
N.B.: Chart does not include latest microcensus data.
Sources: Federal Statistical Office, DB Research
17 | July 1, 2013
Sources: Federal Statistical Office, DB Research
Current Issues
Focus Germany
Demand factor 2: Increasing heterogeneity in age structure
After 1990, it was mainly younger inhabitants who moved away from the east
German cities. The old-age dependency ratio quickly rose accordingly. It is
defined here as the ratio of those over 60 years of age to those aged 20-60
(chart 7). As in the case of population growth, the old-age dependency ratios in
the cities of east Germany are also diverging more and more (chart 8). Since
2005, the ratio in Brandenburg an der Havel, Eisenach, Erfurt, Greifswald, Jena,
Magdeburg, Potsdam, Rostock, Stralsund and Weimar has only edged up a bit,
and in Dresden and Leipzig it has even declined in some years.
Old-age dependency ratio in east Germany:
60-plus age cohort to 20-60 cohort
7
Average old-age dependency ratios in east German cities ...
70%
80%
55%
60%
40%
40%
25%
20%
10%
8
0%
90
92
94
96
98
Max
00
02
04
06
Min
08
10
12
90 91 92 93 94 95 96 97 98 99 00 1 02 3 04 5 06 7 08 9 10 11 12
Median
... with trend reversal
Sources: Federal Statistical Office, BBSR, DB Research
... without trend reversal
Sources: Federal Statistical Office, BBSR, DB Research
Demand factor 3: Positive growth of disposable income
Incomes have picked up considerably over the past few years. While they are
growing in east Germany, they are still failing to keep pace with incomes in west
Germany. However, the 2008 financial crisis caused disposable incomes to
slump more in west Germany than in east Germany. East Germany's economy
is not as dependent on global trends as say that of Germany's major cities or
the manufacturing sector in southern Germany. Given the income development
and correspondingly more stable demand, real estate investments in several
east German cities could generally help to minimise risk in Germany portfolios
(chart 9). Not very surprisingly, incomes rose faster in cities posting population
growth than in those posting a decline (chart 10).
Disposable income
9
% yoy
Disposable income in east Germany’s ...
10
% yoy
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
96
98
00
02
04
West Germany
06
08
10
East Germany excl. Berlin
12
96
98
00
02
04
... shrinking cities
N.B.: Based on 124 cities
N.B.: Based on 24 east German cities
Sources: Statistisches Bundesamt, DB Research
Sources: Federal Statistical Office, DB Research
18 | July 1, 2013
06
08
10
12
... growing cities
Current Issues
Focus Germany
How elastic is the supply?
The large number of vacancies in east Germany (chart 11) suggests that the
housing supply is pretty elastic. However, the high vacancy rate has existed for
years and presumably it is always the same homes that have remained unoccupied for years. In the same breath, one may ask to what extent these
houses are still on the market at all if there is no demand for them. The actual
urban housing supply in east Germany might thus be more or less as inelastic
as in west Germany. This argumentation is underpinned by the fact that related
building activity differs only little between east and west Germany. If the existing
housing stock in east Germany were more elastic, there would likely be less
building activity (chart 12).
Vacancy rates in east Germany vs west Germany
11
Completions in 2011
%
Per 100,000 homes
10
700
12
600
500
8
400
300
6
200
100
4
0
Min
2
2007
2008
WG
2009
BB
2010
MV
SA
Sources: CBRE, Empirica, DB Research
2011
ST
TH
20%
West Germany
Median
80%
Max
East Germany
N.B.: Evalulation covering 125 cities
Sources: BulwienGesa, Statistisches Bundesamt, DB Research
Greater elasticity of supply in expensive cities
East German cities: Building
output in 2011 and affordability
(existing stock)
13
Y-axis: completions / 100,000 homes
X-axis: affordability index
400
In the east German cities, the mean ratio of housing completions to existing
housing stock has ranged around 120 completions per 100,000 houses, with the
maximum number of completions totalling close to 400. As to be expected,
completions rose particularly rapidly in areas with particularly high affordability
indices, that is mainly in large cities and growing ones (chart 13).
300
3. What influences market equilibrium?
200
100
The interplay of supply and demand
0
2
3
4
Sources: BulwienGesa, Federal
Statistical Office, DB Research
5
6
Finding causal relationships between real estate prices and potential
explanatory variables is a very complex undertaking. Assuming supply is
inelastic, it is possible to identify the influence of demand variables on the price
using standard procedures. One key analytical step in this regard, however, is to
examine the data on shrinking cities separately from the data on growing cities.
After all, the population of a city not only has an influence per se on the price of
existing houses, but also impacts the explanatory structure (chart 16).
Chief determinant: Disposable income
The most robust variable with high explanatory power in our analysis is
disposable income. In the growing cities we found that the price of existing stock
increases by roughly EUR 80 per square metre if households' disposable
income increases by EUR 1,000 (chart 16, model 1). In the shrinking cities, too,
disposable income has a significant influence; surprisingly, however, the polarity
19 | July 1, 2013
Current Issues
Focus Germany
Income coefficients in partial samples
14
Increase of existing stock when disp. income
rises by EUR 1,000
140
120
100
80
60
40
20
0
-20
-40
-60
sign is negative. This produces the result that when disposable income
increases by EUR 1,000, house prices fall by around EUR 50 per square metre.
Do house prices really decline as incomes increase in shrinking cities?
-45
45-50
50-55
55-60
60+
Partial samples based on old-age dependency
ratio
To analyse the robustness of the negative income coefficient more closely, we
split the overall sample into five partial samples on the basis of the old-age
dependency ratio. We looked at all the cities in the following groups: ratio of less
than 45, 45-50, 50-55, 55-60 and over 60. Regressions for the partial samples
show that the income coefficient is significant across the board and declines
successively from over EUR 100 to minus EUR 40 on a EUR 1,000 increase in
income. In the last two partial samples, the cities with a relatively old population
structure, the coefficient is indeed negative. So the result appears to be valid
(chart 14 and 15). Furthermore, the result is generally also confirmed if the price
is regressed to the old-age coefficient (chart 16, models 2 and 3).
Source: DB Research
Total sample by age cohort
Old age
dependency
-45
45-50
50-55
55-60
60+
15
Coefficient
t-Statistic
Observations
within
R2
117.9
48.3
33.1
-38.1
-42.3
4.78
1.3
2.31
-2.35
-2.89
17
25
18
15
21
0.700
0.09
0.34
0.44
0.41
N.B.: Fixed-effects estimation
Source: DB Research
An economic explanation for the negative price-income ratio
The increasing average age of the population in shrinking cities could reduce
the propensity to invest in housing as well as the propensity to consume
“housing” as an economic good. A more restrictive approach to credit demand
and issuance as people grow older also reduces transaction volumes in the
housing market. Any additional income in the shrinking cities is then more likely
to flow into modernisation and maintenance, and our market data only capture
real estate purchases.
Are numbers of overnight stays and centrality further explanatory variables?
In the debate over important determinants of housing prices one continually
hears reference to variables such as the number of overnight stays or the
centrality of retail trade, defined as retail turnover relative to retail-relevant
purchasing power. In pooled regressions these are significant variables (chart
16, model 6), both in the overall sample as well as in the partial samples.
However, in panel estimates all of these variables are insignificant (model 3).
This implies that these variables are not the cause of the price hikes, but instead
are merely correlated with an unobserved variable, the actual price driver.
Does a larger proportion of students boost prices?
Contrary to the widespread hypothesis that a large share of students in a city
increases the price of local housing, there is no indication of this in our data
collection. The student share is only significant in the pooled regression (chart
16, model 5) and only for the overall sample. In the partial samples and in model
6 the student variable is insignificant, though, and in the panel estimates the
variable is insignificant and has a negative polarity sign across the board. Our
data only has the student share on record up to 2010, however. The explanatory
power of the student share might increase on more recent observations.
20 | July 1, 2013
Current Issues
Focus Germany
Regressions
Dependent variable: Prices of existing stock
Model
Total sample (N=24)
Disposable income
EUR ('000)
16
1
Fixed-effects specifications
Pooled specifications
2
3
4
5
6
7
8
Coefficients - *significant at 5% - t-Statistics in parenthesis
12.8
(1.02)
Old-age dep. ratio (BBSR)
60+ per hundred aged 20-60
46.1*
(2.20)
-9.3*
(-3.27)
12.0
(0.56)
10.1
(0.44)
-24.6
(-1.10)
-26.3
(0.27)
-10.7
(-0.81)
39.9
(-1.21)
72.1*
(3.50)
5.3*
(2.21)
0.8
(0.42)
-16.8*
(-3.83)
Student share
(%)
Overnight stays
(million)
-139.5
(0.45)
100.1*
(3.66)
Centrality index
-2.28
(-0.62)
-11.3*
(-4.82)
Constant
676.5
(1.77)
1556.5*
(9.81)
533.7
(1.12)
1020.8
(1.66)
1454.5
(1.55)
1391.6*
(3.59)
-155.8
(-0.16)
242.5
(0.45)
(within) R2
0.36
0.00
0.08
0.14
0.15
0.14
0.15
0.56
104.0*
(6.45)
57.4
(1.84)
58.6
(1.68)
66.4*
(2.12)
69.8
-1.97
97.8*
(5.82)
-28.1
(-1.00)
-25.6
(-0.81)
2.1
(0.96)
0.96
(0.56)
Sample: Growing cities (N=12)
Disposable income
EUR ('000)
77.8*
(4.41)
Old-age dep. ratio (BBSR)
60+ per hundred aged 20-60
-3.7
(-0.36)
-21.7*
(-2.12)
Student share
(%)
Overnight stays
(million)
-82.3
(-0.37)
67.5*
(2.39)
Centrality index
0.4
-0.07
-12.6*
(-4.25)
Constant
-1109.0*
(-2.11)
1382.2*
(2.99)
-882.7
(-1.63)
-24.9
(-0.03)
-68.3
(-0.04)
-769.7
(-0.85)
910.4
(-0.89)
-321
(-0.52)
(within) R2
0.36
0.11
0.33
0.14
0.15
0.14
0.15
0.56
-24.1*
(-2.32)
-43.8
(-1.88)
-50.1
(-1.67)
-23.7*
(-3.46)
-53.1*
(2.70)
20.5
(0.85)
-20.5
(-0.65)
-16.3
(-0.48)
-5.2
(-0.58)
3.75
(0.39)
Sample: Shrinking cities (N=12)
Disposable income
EUR ('000)
-48.6*
(-4.76)
Old-age dep. ratio (BBSR)
60+ per hundred aged 20-60
-8.0*
(-3.41)
-4.1
(-1.89)
Student share
(%)
Overnight stays
(million)
32.7
(0.07)
1096.6*
(4.42)
Centrality index
-4.0
-0.72
-2.67*
(-1.29)
Constant
2436.6*
(7.68)
1387.1*
(10.95)
1909.6*
(6.67)
2336.5*
(3.56)
3012.6*
(2.45)
1664.0*
(7.35)
2552.0*
(4.27)
449.4
(0.55)
(within) R2
0.39
0.31
0.41
0.27
0.30
0.16
0.18
0.51
Source: DB Research
21 | July 1, 2013
Current Issues
Focus Germany
4. Projections of existing stock prices up to 2030
First model projection on the basis of a population forecast
Simple models are in most cases incomplete. Here, too, unobserved variables
or ones unknown to us presumably have an influence on the prices of existing
stock. Sparingly parameterised models often deliver better forecasts because of
their robustness.
Price forecasts on the basis of population forecasts
In this case we take the regression model covering old-age dependency ratios
(chart 16, model 2) and feed it with the findings for old-age dependency ratios
as forecast by Germany's Federal Institute for Research on Building, Urban
Affairs and Spatial Development (BBSR) up to the year 2030. This enables us to
forecast existing stock prices. Charts 17 and 18 show the square metre price for
the particularly expensive cities and the average annual increase for the cities
where prices are rising particularly rapidly in the period up to 2030.
City ranking 2030: Prices
17
EUR/sqm
% p.a.
2,400
4
2,000
3
1,600
2
1,200
1
800
18
City ranking 2030: Price change
0
P
CB
DD HRO
J
EF
GW
WE
L
HAL
MD
C
C
CB
MD
HAL
GW
EF
HRO WE
L
DD
P
N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz,
Cottbus and Halle.
N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz,
Cottbus and Halle.
Source: DB Research
Source: DB Research
J
Alternative model: Extrapolation of income trend
As the basis of calculations for a second model, we assume that disposable
income will continue to grow until 2030 as extrapolated from the trend observed
over the past few years. Here, too, we divide the sample into shrinking and
growing cities in accordance with the calculations discussed above. Charts 19
and 20 show the forecasts of this approach in comparison with those of the
baseline scenario, with the two approaches delivering similar results.
City ranking 2030: Prices estimated by ...
19
EUR/sqm
City ranking 2030: Prices change estimated by ...
20
% p.a.
2,800
4
2,400
3
2,000
2
1,600
1
1,200
800
0
P
J
EF
DD
... disposable income
CB
WE
L
HRO GW
C
MD
HAL
... old-age dependency ratio
C
CB
MD
EF
WE
... disposable income
J
L
HAL
DD
P
HRO GW
... old-age dependency ratio
N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz,
Cottbus and Halle.
N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz,
Cottbus and Halle.
Source: DB Research
Source: DB Research
22 | July 1, 2013
Current Issues
Focus Germany
Abbreviations
21
Chemnitz
Cottbus
Magdeburg
Erfurt
Weimar
Jena
Leipzig
Halle
Dresden
Potsdam
Rostock
Greifswald
C
CB
MD
EF
WE
J
L
HAL
DD
P
HRO
GW
Price deterioration in structurally weak cities
Both models also deliver forecasts for a host of cities in which prices are set to
decline sharply up to 2030. This is likely to go hand in hand with a decline in the
standard of living, inducing the government to launch counteraction as
prescribed by Germany's Basic Law, which requires the establishment of
equivalent living conditions across the country. However, some cities were
unable to stop the price and population declines of the past 20 years despite
intensive promotion of urban development in east Germany (chart 22), and
especially not in the income-poorer cities (chart 23). This raises the question
why that should change by 2030, particularly if the solidarity surcharge is
eliminated or reduced.
Source: DB Research
Urban development promotion
22
EUR/inhabitant
Urban development promotion by regional planning unit
23
Y-axis: EUR per inhabitant
X-axis: 2010 median income in EUR ’000
400
400
300
200
350
100
300
0
Long-term
Short-term
1996 to 2010
250
2005 to 2010
200
East Germany
West Germany
Sources: INKAR, DB Research
21
22
23
24
25
26
Sources: INKAR, DB Research
A raft of economic reasons would seem to lend plausibility to the strong
divergence of real estate prices:
1. Costs of infrastructure
East Germany excl. Berlin and
Potsdam: Building costs vs
market prices (newbuild)
24
EUR/sqm
The per capita costs of maintaining the infrastructure are growing disproportionately rapidly in the face of a declining population. The willingness of
households to invest their money will probably also decline as they grow older.
Both arguments suggest that the number of cities in which it is worthwhile to
invest in infrastructure is on the decrease.
2. Path dependency of building cost trend
2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
Average building costs in east Germany currently outstrip market prices in
structurally weak regions (chart 24) and building costs vary only little over the
years (chart 25). This means that new investments are loss-makers and real
estate loses its investment quality in the structurally weak regions, which could
trigger a rapid decline in newbuild numbers.
3. Increased internal migration
91 93 95 97 99 01 03 05 07 09 11
Building costs
Max
80%
Median
20%
Min
Sources: Federal Statistical Office, DB Research
23 | July 1, 2013
i.
The trends depicted could unleash further migration trends, since owners in
shrinking cities have incentives to sell their property early. Otherwise, they
expose themselves to the risk of attaining an even lower selling price at a
later juncture.
Current Issues
Focus Germany
Building costs: Residential buildings
25
EUR/sqm
1,200
1,100
1,000
ii.
One variable that our projections do not capture is population development
in the rather rural areas of east Germany. Only around 3 ½ million of east
Germany's 16 million inhabitants live in the cities we analysed. The question
is where the people who now live in rural areas will go if the outlook for the
labour market and the quality of the infrastructure continues to decline in
rural areas? A certain share could move to the cities in the vicinity and thus
curb the population decline in some cities. However, it is to be presumed
that many will head for the growing cities and thus intensify the existing
divergence.
Couldn't shrinking cities develop a new phase of economic growth?
900
BB
MV
2008
SA
ST
2011
Sources: Federal Statistical Office, DB Research
TH
Our findings are without doubt only rough estimates based on the underlying
economic conditions at present. Over the coming decades a few cities might
succeed in re-attracting lost industries, benefiting especially from low real estate
prices and wage levels. Successful, dynamically expanding companies could
also significantly improve the prospects for some cities. However, it is to be
expected that such developments will improve the growth of certain cities but
not the overall picture in east Germany.
Are both forecasts too optimistic?
The demographics could have a more negative impact than assumed in the
forecasts above. In this event, the urban populations will age more rapidly and,
given a lower trend growth rate, incomes will increase more slowly than
assumed. However, the two effects – ageing and feeble income growth – might
in turn boost the pace of internal migration, since structurally weak regions will
then experience difficulties in maintaining their infrastructure at an even earlier
stage. As the migrants are expected to head for the growing cities, these should
benefit all the same. So even in this negative scenario it could be of interest to
target housing investment opportunities in the cities that have been expanding
to date.
5. Conclusion
As we have discussed, the east German market presents a very mixed picture.
So there is no simple answer to the question asked at the outset: “Has the east
German housing market turned the corner?” Based on the BBSR population
forecasts and extrapolation of household income trends it is possible to
determine a marked divergence between further growing and further shrinking
cities. Some of the growing and already prospering cities appear likely to offer
solid potential returns also in future. As they are less dependent on the global
economy – a factor which affects major west German cities, for instance – they
could help to reduce risk in a Germany portfolio. In our opinion, investments in
the currently shrinking cities will be rewarded only in isolated cases.
Jochen Möbert (+49 69 910-31727, [email protected])
24 | July 1, 2013
Current Issues
Focus Germany
Chart of the month
Germany: Household debt relative to GDP on the decline...
DX
Germany, liabilities of private households
1800
1600
1400
1200
1000
800
600
400
200
0
95
99
bn EUR (left)
DX
Liabilities of private households, % GDP
80
75
70
65
60
55
50
45
40
35
30
91
...and low by international standards
03
07
% GDP (right)
11
140
120
100
80
60
40
20
0
95
97
DE
IT
99
01
03
05
FR
PT
07
09
GR
ES
11
IE
EMU
Source: Deutsche Bundesbank
Sources: Deutsche Bundesbank, Eurostat, Banco de Espana, National Authorities
Germany: Household debt continues to decline
Private household debt rose only marginally by EUR 15 bn to just under EUR
1.6 tr last year, according to recently published Bundesbank data. In relation to
GDP – the common definition – household debt even fell slightly from 59.8% to
59.2%. This represented a continuation of the downward trend witnessed since
2003 (73.1%), albeit at a markedly slower pace. Household debt is now back at
levels last seen in the mid-1990s. This is a result of very weak growth (relative
to GDP) of mortgage and consumer loans as well as the decline in other
lending. The period until the end of the 1990s had still been characterised
primarily by the post-unification boom in the property and construction sectors,
which pushed up mortgage lending considerably.
Compared with the situation of households in other EMU member states, those
in Germany are less deeply indebted. Household debt in EMU stood at 69.1% of
GDP at end-2011 (latest available data), which is almost 10 percentage points
higher than in Germany. Coming in considerably above the EMU average were
Spain (2012: 86%), Portugal (100%) and Ireland (112%), i.e. current crisis
countries, but also the Netherlands (139%), for instance. These are mostly
countries that experienced a major bubble in the real estate sector before the
outbreak of the financial crisis, which in the case of Ireland resulted in household debt more than doubling (compared with 2001). Household debt in Greece
and France recently stood at approximately the euro-area average, with Greek
households more than trebling their debt levels from a low level, however. But
there is a lot to suggest that private indebtedness has peaked, especially in
countries with above-average debt levels. In Portugal and Ireland, for instance,
debt levels have come down noticeably over the last three years and in Spain in
the last two years.
The strong increase in private debt in the years prior to the crisis has allowed
these crisis countries to markedly expand domestic demand (residential
construction investment and consumption). But the level reached could not be
sustained over a longer period given the countries' economic performance.
Hence there is further need for adjustment despite the reduction in debt ratios
witnessed already. This will dampen domestic demand in these countries also
over the coming years, as households will hardly (be able to) take up new debt
and are likely to spend larger parts of their disposable income on debt
redemption rather than consumption.
25 | July 1, 2013
Current Issues
Focus Germany
By contrast, the situation in Germany is exactly the opposite. In light of the
historic and – by international standards – relatively low indebtedness of
German households, there is little call for further reduction. Moreover, in recent
issues of “Focus Germany” we have repeatedly pointed out that disposable
incomes look set to rise appreciably in 2013 as employment will likely rise
21
moderately and wages noticeably again. This argument supports our forecast
of considerably stronger consumption more than offsetting the weakness of
investment and export activity in the current year, so that the (meagre) GDP
growth rate of 0.1% in Germany is likely to be driven entirely by domestic
demand.
Oliver Rakau (+49 69 910-31875, [email protected])
21
26 | July 1, 2013
See “The 2013 pay round: Major increase in real terms” in Focus Germany of June 4, 2013 and
“Sentiment indicators – another setback in spring” in the April 2, 2013 edition for a discussion of
wage and income developments.
Current Issues
Focus Germany
Chartbook: Business cycle (1)
Real GDP growth
3.0
6
2.5
5
2.0
4
1.5
3
1.0
2
0.5
1
0.0
0
-0.5
-1
-1.0
-2
10
11
12
% qoq (left)
13
% yoy (right)
— In Q1 GDP expanded by a lower than expected 0.1%
qoq. Still, following -0.7% in Q4 this should have marked
the trough. The negative yoy rate in Q1 was due to a
working day effect. We expect an acceleration of GDP
growth in the course of the year, but due to the statistical
underhang our GDP forecast for 2013 is only +0.1%.
— GDP growth will probably accelerate relatively strongly to
0.5% qoq in Q2 thanks to a weather-related rebound of
construction investments and robust consumption.
— Economic growth in 2013 is likely to be supported by
consumption. Net exports and investment in machinery
& equipment will weigh on growth.
Sources: Federal Statistical Office, DB Research
— Despite weakening GDP growth during 2012 the
German economy fared fairly well compared to other
EMU countries which experienced stagnation or even
recession.
GDP growth: DE vs EMU
% qoq
2.5
2.0
— Considering the remaining adjustment needs in several
EMU countries the EMU economy should remain in
recession in H1 2013 and set out on a very low growth
trajectory thereafter. Despite the recovery in H2 EMU
GDP should decline by 0.6% in 2013 compared to -0.5%
last year while marked downside risks persist.
1.5
1.0
0.5
0.0
-0.5
-1.0
10
11
12
13
EMU ex DE
14
DE
Source: Eurostat
— In June the ifo business climate recorded its second
consecutive rise, but has not recovered to the high levels
seen earlier this year, which were driven by optimistic
expectations. Still, the index is above its long term
average. At its current level it points to a GDP growth
rate of about ½% qoq in Q2.
Ifo index - total economy
2005=100
130
120
110
100
90
80
70
08
09
Expectations
10
11
Business situation
12
13
Business climate
— The index increased in June mainly due to higher
(export) expectations in the manufacturing sector, while
the domestic sectors (construction and retail) showed a
modest decline in sentiment. However, the two subindices are markedly above their long-term averages,
which points to robust domestic demand growth.
Source: ifo
— The Composite Purchasing Manager Indices (PMI), like
the ifo index, rose slightly in May and June, but remained
below its Q1 average. The better overall results were
driven by the higher services PMI (51.3 vs 49.7 prev.),
while the manufacturing PMI got somewhat more
negative (48.7 vs 49.4 prev.).
Purchasing Manager Index
PMI, index
65
60
55
50
45
40
35
30
08
09
Composite
10
11
Manufacturing
12
13
— The composite PMI is barely above the 50-growththreshold, which gives a much more pessimistic picture
than the ifo index. Our preferred indicator is the ifo index
since it seems much more in line with hard economic
data (e.g. GDP and industrial production).
Services
Source: Markit
27 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Business cycle (2)
— Growing by 2.2% mom each month in February and
March new orders fell by 2.3% mom in April bringing he
order level back to its Q1 average. April’s decline was
strongly influenced by the volatile airplane orders, which
enjoyed big increases in the previous months. Compared
to the previous year orders remained slightly in the red.
New manufacturing orders
% yoy
30
25
20
15
10
5
0
-5
-10
-15
-20
— Business surveys (ifo, PMI) point to further moderate
order increases. However, especially the PMIs painted a
too rosy picture lately. Therefore, we expect that the
increase will be more muted.
11
12
Total
Domestic
13
Foreign - EMU
Foreign - Non-EMU
Source: Federal Statistical Office
Industrial production and ifo expectations
% yoy (left), 2005=100 (right)
20
15
10
5
0
-5
-10
-15
-20
-25
117
112
107
102
97
92
87
82
77
08
09
10
11
Industrial production (left)
12
13
ifo expectations (4M lag, right)
Sources: ifo, Federal Statistical Office
— Industrial production rose by 1.8% mom in April boosted
by a weather related surge in construction (+6.7%).
However, manufacturing also recorded a solid increase
of 1.2% due to the strong output of investment goods
(+4.0%).
— The third consecutive monthly plus in industrial output
has brought the production index above its previous
year’s level for the first time since June 2012. This adds
to hopes of a recovery of the industrial sector.
— However, the order level remains negative yoy and
ifo/PMI only point to a temporary acceleration in Q2,
followed by a more modest activity thereafter.
— The weak economic development in the winter half (GDP
growth Q4 -0.7% qoq; Q1 +0.1% qoq) currently weighs
on the labour market since it is lagging economic activity.
Employment and ifo employment baromter
% yoy (left), 2005=100 (right)
2.0
120
1.5
115
110
1.0
105
0.5
100
0.0
— While employment grew by 1.2% yoy in May 2012, there
was only an increase of 0.6% in May 2013. The level of
employees subject to social security payments is up
1.3% yoy.
— With 41.8 m employment marks a record high.
95
-0.5
90
08
09
10
Employment (left)
11
12
13
ifo employment barometer (6M lag, right)
Unemployment
% of total civilian labour force (left); mom, '000 (right)
10
200
9
150
8
100
7
50
6
0
5
-50
4
-100
08
09
10
11
Change in unemployment (right)
12
13
Unemployment rate (left)
— In June the number of unemployed persons fell by 12k
after having increased by 11k on average in the previous
three months. Despite the small increase over the past
months the unemployment rate stood at 6.8% in May
and June compared to 6.9% before. The decline was
due to the annual update of the labour force (the basis of
the rate) resulting in an increase of 580k on a year ago.
— Leading indicators were mixed in June, more or less
pointing to a sideways trend in the coming months. We
expect the labour market to improve in autumn 2013.
Still, the unemployment rate should increase slightly to
6.9% in 2013 after 6.8% in 2012.
Sources: Federal Employment Agency, DB Research
28 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Business cycle (3)
— Inflation rose to 1.8% yoy in June from 1.5% in May,
which is well above the low of only 1.2% in April. The
increase in June came on back of energy inflation
picking up from 1.6% to 3.0%. That increase was due to
a base effect, though, as oil as well as energy prices
actually fell in June compared to May. Food price
inflation stayed at the previous month’s high rate of
5.4%. Contrary to that core inflation (excl. energy and
food) likely remained low at 1.2%.
Inflation rate and core inflation rate
% yoy (core inflation only available since 2011 due to alteration in statistical
collection)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
08
10
12
Inflation
Core inflation
Source: Federal Statistical Office
Merchandise trade
% yoy (left), EUR bn (right)
40
40
35
30
25
20
15
10
5
0
30
20
10
0
-10
-20
-30
08
09
10
Trade balance (right)
11
12
— Given the moderate growth and the stabilisation of oil
prices, consumer price inflation will probably be muted
over the coming month. We expect an average inflation
rate of 1.4% yoy in 2013.
— In April imports rose by 2.2% mom and exports by 1.9%
– the second consecutive increase for both numbers.
The trade balance surplus was nearly unchanged at
EUR 17.7 bn. Both exports and imports are barely above
previous year’s levels.
— The weakness in imports in Q1 (-1.4% qoq) was likely in
part due to lower commodity prices and a drawdown of
inventories as suggested by the PMI survey. Export
growth (+0.4% qoq) was hampered by low global trade
growth (Q1: +0.7% qoq).
13
Exports (left)
Imports (left)
Source: Deutsche Bundesbank
— In the wake of the euro crisis and the recession in
several EMU countries exports to EMU have fallen below
their pre-year level, which has reduced Germany’s trade
surplus with these countries.
German merchandise exports by destination
Merchandise exports, % yoy, 3M moving average
40
30
— So far, exports to Asia and the US – automobiles in
particular – have managed to compensate for the
declining exports to EMU. However, especially US
exports have slowed down strongly lately.
20
10
0
-10
-20
— Since the onset of the euro crisis EMU’s share in
German exports has dropped by almost 10 percentage
points to around 37% (Asia 16% and the US 8%).
-30
-40
08
09
10
Total
11
Asia
12
EMU
13
USA
Source: Deutsche Bundesbank
Exports & ifo export expectations
% yoy (left), index (right)
30
115
110
105
100
95
90
85
80
75
20
10
0
-10
-20
-30
08
09
10
Merch. exports (left)
Sources: Deutsche Bundesbank, ifo
29 | July 1, 2013
11
12
13
ifo export expectations (lagged by 3M, right)
— In June ifo export expectations recovered some of the
previous losses. Still, they only point to a subdued export
dynamic over the coming months. Furthermore the
global manufacturing PMI, which is only slightly above
the 50 does not herald a strong rebound in global trade.
— Import growth might be slightly higher than export growth
due to the stabilisation of commodity prices, the end of
destocking, the high level of employment and increases
in real income fuelling private consumption.
— The growth contribution from net exports was just above
zero in Q1 (+0.1pp; prev. -0.8pp), but is still likely to turn
negative in 2013.
Current Issues
Focus Germany
Chartbook: Sectors
— Industrial production in Germany increased in March and
April. Output was 0.8% higher in the first four months of
2013 compared to the average level of the last four
months of 2012. The order intake was 1.1% higher than
in the previous period.
Manufacturing: Output and order intake
2010=100, sa
115
110
105
— German industry should receive some stimulus from
non-European demand. However, orders from the EU
have stabilised of late.
100
95
90
10
11
12
Orders
— We still believe that industrial output is likely to stagnate
in 2013 (2012: -1%), not least due to the weak results of
Q4 2012, when production was well below the average
of full year (resulting in a statistical underhang).
13
Production
Source: Federal Statistical Office
— Production in the automotive industry has risen in the
last three months including an increase by +6.4% mom
in April.
Car industry: Output and capacity utilisation
2010=100, sa (left), capacity utilisation % (right)
130
100
120
90
110
80
100
70
90
60
80
50
10
11
Capacity utilisation (right)
12
13
Production (left)
— Business expectations have shown a mixed development recently: they declined in March and April after
having improved for three months in a row. However,
they turned up again in May and June. Capacity
utilisation has stabilised in Q1 2013.
— Also on account of the statistical underhang we expect
output in the automotive industry to fall by 2% in real
terms in 2013. An upward revision has become more
likely, though.
Sources: Federal Statistical Office, ifo
— Order intakes in the mechanical engineering industry
have sent mixed signals over the last few months. A
gradual stabilisation of the euro area and accelerating
growth in Asia could support foreign demand in 2013.
Mechanical engineering: Order intake and output
2010=100, sa
130
120
110
100
90
80
10
11
12
Production
13
— However, for 2013 as a whole we expect mechanical
engineering output to decline by roughly 1% (2012:
+1.3%), with output trending upwards in the course of
the year. A gradual improvement could already be
monitored in the last three months.
Order intake
Source: Federal Statistical Office
— The early-cycle sectors currently show only restrained
signs of a growth rebound in 2013.
Production: Early cycle sectors
2010=100, sa
— In the first four months of 2013, plastics production
exceeded the level of the previous period by 1.4%.
Business expectations increased again of late.
110
105
100
— Output in the metal industry could post a marginal
increase in 2013 (2012: -3.8%). Production tended
upwards at the latest reading.
95
90
10
11
Chemicals
Source: Federal Statistical Office
30 | July 1, 2013
12
Plastics
13
Metal products and processing
— Production in the chemical industry is expected to
increase by 1% in 2013 (2012: -2.6%). Output declined
again in April, though.
Current Issues
Focus Germany
Chartbook: Financial markets (1)
— Although the ECB lowered its EMU growth forecast
modestly to -0.6% for 2013, the ECB did not change its
th
key rate at its meeting on June, 6 , thanks to improved
EMU sentiment indicators. Additionally, Draghi
dampened imminent prospects of further unconventional
measures – e.g. revitalisation of the ABS-market for
SME credit.
EMU: Refi rate & 3M Interest
%
6
5
4
3
2
1
0
08
09
10
11
ECB refi rate
12
13
3M interest
— Based on EURIBOR contracts the market expects the
ECB to keep its ultra-loose policy for an extended period
of time. 3mth rates are expected to rise to 0.6% by end
2014 and to around 1% by end 2015.
Sources: ECB, Global Insight
— Hints by Chairman Ben Bernanke that the Fed might
start slowing down its monthly purchases of USD 85 bn
of treasuries and MBS in the coming months (“tapering”)
and that it might stop the program altogether by mid2014 have spooked markets. 10y treasury yields have
risen from 1.6% at the beginning of May to 2.5%
recently.
German government bonds: 10Y yields
%
3.5
3.0
2.5
2.0
— German bund yields have also been pulled higher by the
US sell off. Since early May yields increased from 1.2%
to 1 ¾%, during the same time the US/German yield
spread has more or less doubled to stand at around
80 bp.
1.5
1.0
11
12
13
Source: Global Insight
— Concerns about the turn of the global interest rate cycle,
triggered by the Fed’s tapering debate, have also
resulted in higher yields for other European countries.
EMU: Bond yield spreads
Versus German govt. bond yield, basis points
180
160
140
120
100
80
60
40
20
0
— Since the beginning of May yields of the EMU core
countries have increased by 50 to 60 bp.
— Also intra-EMU bond yield spreads between the core
countries have widened. Compared to Germany the
spreads of the other core countries were up by 2
(Austria) to 9 bp (France).
12
Netherlands
Finland
13
France
Austria
Source: Global Insight
— 10y yields for Italy, Spain and Ireland have increased by
around 70 bp since early May, causing spreads over
German bunds to widen by 10 to 20 bps.
EMU: Bond yield spreads
Versus German govt. bond yield, basis points
700
— Portugal was hardest hit. In early May the country
successfully tapped markets with a 10y bond issue, the
first for over 2 years. In the following days yields even
continued to fall. However, since their low of 5.2% (May
st
21 ) yields have risen by 150 bps, with the country’s
dismal economic outlook and renewed strikes weighing
on market sentiment.
600
500
400
300
200
12
Spain
13
Italy
Source: Global Insight
31 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Financial markets (2)
— Currently, the DAX stands at around 8,000 points. The
DAX is holding up well lately, not least because of a lack
of investment alternatives in the German bond market
due to partly negative real interest rates. The difference
between dividend and bond yields is currently at a high
level.
Equity indices
8000
7000
6000
5000
4000
3000
06
07
08
09
10
Dax 30
11
12
13
EuroStoxx 50 (normalised)
Sources: Global Insight, DB Research
— Raw material prices – in particular metals such as
aluminium and copper – have dropped strongly given
concerns about Chinese growth and the debate about
Fed tapering, based on the perceived link between QE
and inflows into commodities. Since we expect China
and the global economy to pick up somewhat in H2 raw
material prices could see a modest increase again.
Raw material prices
HWWI index, 2010=100, based on EUR
160
140
120
100
80
60
40
20
0
08
09
Food
— We expect the downgrade cycle for earnings that has
lasted for more than two years to come to an end at the
end of 2013. However, any disappointment regarding the
recovery of the world economy will hit German
companies relatively stronger. Thus, the DAX will
probably underperform. Our equity strategists have a
2013 year-end target of 8000 for the DAX and 315 for
the Stoxx600.
10
11
Energy
12
Total
13
— Food prices increased markedly in Q3 2012 due to
droughts (in the US and Eastern Europe for example)
and fell markedly again, recently. In May prices are 20%
below the last year’s peak.
Industrial
Source: HWWI
— In H2 2013 oil demand should increase in H2 2013
thanks to the recovery of the global economy.
Additionally, supply-side factors (e.g. geopolitical risks,
Iran) provide some upside risks.
Oil price
Brent Blent, USD or EUR per barrel
160
140
120
100
80
60
40
20
0
— Due to the strong increase of oil supply thanks to the
expansion of production of shale oil in the US our
commodities analysts lowered their oil price forecast
from USD 115 to USD 107 per barrel Brent at Q4 2013.
Currently, the oil price amounts to about USD 100 per
barrel Brent.
02
06
USD per barrel
10
EUR per barrel
Sources: Global Insight, Reuters, DB Research
— Currently, the gold price stands at around USD 1,200 per
fine ounce or more than 30% below the peak value of
2012 (Oct, 4, 2012). This subdued development is being
triggered by the announcement of the Fed to taper off
QE3 in the course of 2013, the increase of real interest
rates and a stronger USD.
Gold price
USD or EUR per fine ounce
2000
1800
1600
1400
1200
1000
800
600
400
200
0
02
03
04
05
06
USD per fine ounce
07
08
09
10
11
12
— Our commodities analysts cut their gold price forecast
from USD 1,525 to USD 1,300 per fine ounce at Q4
2013. Nevertheless, the gold price is expected to decline
yoy (eop) by the fastest pace since 1997.
EUR per fine ounce
Sources: Global Insight, Reuters, DB Research
32 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Financial markets (3)
Inflation expectations Eurozone
% yoy (left), balance of pos. and neg. responses (right)
3.0
35
30
25
20
15
10
5
0
-5
-10
-15
2.5
2.0
1.5
1.0
0.5
0.0
07
08
09
10
11
12
13
Implicit inflation expectation (left)
Two years ahead* (left)
Longer term* (left)
Price trends over next 12 months** (right)
— Contrary to lingering inflation concerns in the general
public the private forecasters of the ECB survey expect
no increase of the EMU inflation rate. Recently, the
expectations for the inflation rate in 2 years and in 5
years remained stable at 1.8% and 2.0%, respectively.
— The implied inflation rate for the next 10 years –
calculated as the difference between the yield of 10Y
German government bonds and the yield of inflationprotected bonds – hovers between 2 and 2 ½% since the
beginning of 2011.
— However, the “implicit inflation expectation” may be
biased. On the one hand the current real interest rates
close to zero earned on an inflation protected bond is
hard to reconcile with economic considerations. On the
other hand nominal bond yields are depressed by
massive purchases of several major central banks and
still persistent flight to quality.
* ECB Survey of Professional Forecasters, ** EC Consumer Survey
Sources: ECB, EU Commission, Bloomberg
Exchange rate development for the EUR
1999Q1=100 (left), USD per EUR (right)
130
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
120
110
100
90
80
02
03
04
05
06
07
08
09
10
Nom. eff. EUR-exchange rate (lhs)
Real eff. EUR-exchange rate (lhs)
USD per EUR (rhs)
11
12
— After peaking at 1.37 in February EUR/USD has moved
in a narrow 1.28-1.34 range during Q2, with improving
US real economic data and no further shocks regarding
the euro sovereign crisis cancelling each other more or
less out.
— The USD should strengthen in H2 2013 due to the higher
growth rate of the US economy of around 3% and Fed
tapering later this year. According to our FX strategists
the USD will probably appreciate to EUR/USD 1.23 in 6
months (1.26 in 3 months). They see the current strength
of the USD as the beginning of a multiyear uptrend.
Sources: ECB, Reuters
33 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Financial markets (4)
— Following a weak first quarter, growth in lending to
German corporates has remained restrained in April as
well ( -0.2% yoy).
Loans to companies
% yoy
— While Germany’s growth remains clearly above the euro
area average, the slowdown in investment activity takes
its toll on lending volumes (EUR -2.1 bn yoy in April). In
addition, borrowings are partly substituted by corporate
bond issuance.
16
12
8
4
0
-4
-8
06
07
08
09
Euro area
10
11
12
Germany
13
Sources: ECB, DB Research
— Contraction of corporate lending in the euro area
continues unabatedly (-4.6% yoy in April) – mainly
reflecting the bleak macroeconomic situation and
ongoing deleveraging process in countries strongly
affected by the crisis.
— Increase in mortgage lending growth in Germany has
further accelerated in April: mortgage growth at 2.4%
yoy, i.e. comparable to pre-crisis period.
Mortgage volumes
% yoy
14
12
10
8
6
4
2
0
-2
— Low interest rate levels and a buoyant housing market in
some parts of Germany have so far had a limited effect
on credit demand in Germany as real estate purchases
are in part financed through a reallocation of existing
capital.
— German mortgage growth is above the euro area
average (1.2% yoy in April).
06
07
08
09
Euro area
10
11
12
Germany
13
Sources: ECB, DB Research
— The ECB lowered its main refi-rate to 0.5% in May.
Interest rates
— Interest rates for mortgages and loans to corporates
have remained at historic low: 2.9% for mortgage loans
in April and 3% for loans to companies.
%
7
6
5
4
3
2
1
0
— The generally low interest rate environment has allowed
banks to refinance themselves at relatively low cost,
which they partly pass on to clients.
06
07
08
09
10
11
12
13
ECB main refi-rate
Ø-interest rate for mortgage loans (private sector, new loans)
Ø-interest rate for loans to companies (new loans, smaller than 1m)
Sources: ECB, Bundesbank
— Corporates on average saw no problem with credit
supply.
Lending standards
Share of companies that consider lending policies "restrictive" (in %)
— Share of corporates from manufacturing industries that
consider lending policies restrictive remains low despite
a slight increase in May (+0.3 ppt compared to previous
month). More pronounced decrease for corporates from
construction industries continues (-1.2 ppt).
60
50
40
30
20
10
0
09
10
11
Manufacturing industries
12
13
Construction sector
Source: ifo
34 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Financial markets (5)
— Issuance of debt securities by German public sector has
remained subdued compared to the previous two years.
Germany’s Länder and the federal government issued
around EUR 44 bn in April 2013.
Gross issuance of public debt securities
Cumulative issuance volume, EUR bn
700
600
— The figures lagged last two year’s pace, amounting to
EUR 163 bn in the first four months of 2013.
500
400
300
— German public sector still enjoys the safe heaven effect
resulting in all time low interest rates for long-term
government bonds (1.2% in April).
200
100
0
Jan
Feb
Mar
Apr
May
2007
2011
Jun
Jul
2008
2012
Aug
Sep
Oct
2009
2013
Nov
Dec
2010
Sources: Bundesbank, DB Research
— Banks issued EUR 83 bn in April, the highest issuance in
a month since June 2010.
Gross bank debt issuance
Cumulative issuance volume, EUR bn
— Issuance of bank debt securities picked up strongly in
the first four months of 2013 by reaching the secondhighest four-month total on record (EUR 304 bn).
1,200
1,000
800
— Banks in Germany continued to improve their capital
structure and liquidity by tapping the debt capital markets
for funding.
600
400
200
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
2007
2008
2009
2011
2012
2013
Oct
Nov
Dec
2010
Sources: Bundesbank, DB Research
— Corporate bond issuance peaked in April with EUR 4.1
bn by reaching the highest issuance observed in April to
date.
Gross non-bank corporate debt issuance
Cumulative issuance volume, EUR bn
40
35
30
25
20
15
10
5
0
— After a lull during the first quarter of 2013, corporate debt
security issuance gained momentum.
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
2007
2008
2009
2011
2012
2013
Oct
Nov
Dec
— Pulling down the financing costs for corporations, search
for yield in ultra-low interest rate environment seem to
bring back the corporate bond issuance to the long term
average of the last four years.
2010
Sources: Bundesbank, DB Research
— Slight increase in issuance activity in April, with a value
of EUR 93 m compared to the pre-year value of 66 m.
Gross equity issuance
Cumulative issuance volume, EUR bn
— Up to date amount raised by companies from equity
capital markets remained contracted and was the lowest
four-month total since 2006 with EUR 1.2 bn.
30
25
20
15
10
5
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
2007
2008
2009
2011
2012
2013
Oct
Nov
Dec
2010
Sources: Bundesbank, DB Research
35 | July 1, 2013
Current Issues
Focus Germany
Chartbook: Economic policy
— The EATR measures the combined effect of the nominal
tax rate and the way the basis of assessment (taxable
income) is calculated (as well as additional charges on
investment) on the tax load for investments at the
corporate level.w
Effective Agerage Tax Rates (EATR)
in %, corporates non financial sector
42.0
37.0
— The effective tax load on the corporate level is around
28% in Germany and thus higher than in many other
European countries.
32.0
27.0
22.0
17.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
DE
PT
FR
GR
IT
EU-27
— The proposed changes of the opposition parties will
burden Germany with the second highest tax load in the
EU (after France). The positive impact of tax reforms
would be reversed in just one step.
ES
Sources: ZEW, Eurostat
— Tax policy is not the main issue for the electorate. More
important are redistribution issues (73%, see left). But
the redistribution debate, although being fuelled by the
opposition parties, it is not nearly as important as in past
years. Many voters consider improving the fortunes of
the lower strata of society to be more important than
increasing the burden on the upper strata. Only 4 out of
10 people would like to see a higher peak income tax
rate or the reintroduction of wealth tax. But 7 out of 10
people would like to see reduced burdens on low and
medium incomes.
Agenda of the electorate: What should the new government focus
on in particular?
%, multiple responses possible
Slowing the increase in energy prices
81
Securing pensions
81
Reducing Germany's burdens in the
euro bailout
Eliminating disparities between rich
and poor
Reducing burdens on low and medium
incomes
73
Introducing a statutory minimum wage
72
76
73
Stepping up fight against tax evasion
68
Cutting public debt
67
0
20
40
60
80
100
Sources: FAZ, Ifd Allensbach
— Recent poll results do not show many changes. The CDU
is still far ahead of the SPD. The FDP is fluctuating
around the 5% hurdle. The AfD, which was founded in
March and whose main topic is the reorganisation of
the eurozone, is not able to increase its share of votes.
— Chancellor Angela Merkel is still more popular than her
SPD challenger Peer Steinbrück.
Deutscher Bundestag, if elections were held tomorrow
2009 election results, from 2011 onwards survey results, %
45
40
38
Election
2009
35
30
25
26
14
20
15
7
10
5
0
Sep
2009
— The results of tax policy surveys particularly hinge on
how the questions are worded. It emerges that the
degree of approval for a higher peak tax rate declines
rapidly when the threshold at which the rate is to kick in
(42% from an income level of EUR 53,000, excluding
“tax on the rich”) is included in the question. In that case
only 17% of voters (rather than 40%) think a further
increase is necessary
5
3
Feb
2012
Apr
Jun
Aug
Oct
Dec
Feb
Apr
Christian Democrats (CDU/CSU)
Social Democrats (SPD)
Liberals (FDP)
Greens
The Left
AfD
Jun
Source: IFD Allensbach
36 | July 1, 2013
Current Issues
Focus Germany
Contact persons for our chartbooks:
Business cycle and financial markets:
Heiko Peters (+49 69 910-21548, [email protected])
Oliver Rakau (+49 69 910-31875, [email protected])
Jan Schildbach (+49 69 910-31717, [email protected])
Sectors:
Antje Stobbe (+49 69 910-31847, [email protected])
Economic policy:
Dieter Bräuninger (+49 69 910-31708, [email protected])
Frank Zipfel (+49 69 910-31890, [email protected])
Germany: Events of economic-, fiscal- and euro-politics
DX
Date
4 July
Event
Meeting of the ECB Council, press conference
Remarks
Review of the monetary policy stance.
4/5 July
Meeting of the federal electoral committee
19/20 July
Meeting of the G20 Finance Ministers and Central Bank
Governors in Moscow
Decision on the admission of new/smaller parties to the federal election on
Sept. 22. Among others the AfD will most likely be registered.
Debates on the state of the global economy and on financial market
regulation. Preparation of the Leaders’ Summit on September 5/6.
1 Aug
Meeting of the ECB Council, press conference
Review of the monetary policy stance.
5 Sep
Meeting of the ECB Council, press conference
Review of the monetary policy stance.
5/6 Sep
G20 summit Saint Petersburg
15 Sep
State election in Bavaria
22 Sep
State election in Hesse
Priorities of Russia's presidency: growth and job creation through investment
and effective regulation among others. This includes public debt sustainability and financial market regulation.
Horst Seehofer will most likely remain prime minister, but whether the CSU
will reach a majority in the state parliament is still questionable.
Even a possible change in the state government would not have a major
impact on the majority in the Bundesrat (upper house).
22 Sep
Federal election
See chart 'Deutscher Bundestag …' in the chartbook Economic policy for
results of recent surveys.
Source: DB Research
Dieter Bräuninger (+49 69 910-31708, [email protected])
Nicolaus Heinen (+49 69 910-31713, [email protected])
37 | July 1, 2013
Current Issues
Focus Germany
Germany: Data calendar
DX
Date
5 Jul 2013
8 Jul 2013
8 Jul 2013
8 Jul 2013
8 Jul 2013
24 Jul 2013
24 Jul 2013
25 Jul 2013
31 Jul 2013
30 Jul 2013
29 Jul 2013
Time
12:00
12:00
8:00
8:00
8:00
9:30
9:30
10:30
10:00
14:00
8:00
Data
New orders manufacturing (Index, sa), pch mom
Industrial production (Index, sa), pch mom
Trade balance (EUR bn, sa)
Merchandise exports (EUR bn, sa), pch mom (yoy)
Merchandise imports (EUR bn, sa), pch mom (yoy)
Manufacturing PMI (Flash)
Services PMI (Flash)
ifo business climate (Index, sa)
Unemployment rate (%, sa)
Consumer prices preliminary (Index, sa), pch mom (yoy)
Import prices (Index, sa) pch mom (yoy)
Reporting period
May
May
May
May
May
July
July
July
July
July
June
31 Jul 2013
14 Aug 2013
8:00
8:00
Retail sales (Index, sa), pch mom
Real GDP (Index, sa), % qoq
June
Q2 2013
DB forecast
2.0
0.5
17.6
3.9 (4.1)
4.9 (1.9)
49.5
51.8
106.5
6.8
0.3 (1.7)
-0.6 (-2.0)
Last value
-2.3
1.8
17.6
1.7 (3.2)
2.2 (1.9)
48.7
51.3
105.9
6.8
0.1 (1.8)
-0.4 (-2.9)
-0.2
0.5
0.8
0.1
Sources: DB Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit
Financial forecasts
DX
US
JP
EMU
GB
CH
SE
DK
NO
PL
HU
CZ
Key interest rate, %
Current
Jun 13
Sep 13
Mar 14
0.100
0.100
0.100
0.100
0.10
0.08
0.08
0.08
0.50
0.50
0.50
0.50
0.50
0.51
0.51
0.60
0.00
0.00
0.00
0.00
1.00
1.00
1.00
1.00
0.20
0.10
0.10
0.10
1.50
1.50
1.50
1.50
2.75
2.50
2.50
2.50
4.25
3.50
3.50
3.50
0.05
0.05
0.05
0.05
3M interest rates, %
Current
Jun 13
Sep 13
Mar 14
0.27
0.10
0.10
0.10
0.23
0.30
0.30
0.30
0.22
0.50
0.50
0.50
0.51
0.51
0.51
0.60
Yields, %
0.84
0.90
1.00
0.80
1.61
1.55
1.75
2.00
2.46
2.25
2.50
2.80
Spreads vs. EMU, pp
0.45
0.15
0.25
0.25
0.20
0.30
0.20
0.30
0.85
0.65
0.70
0.75
10J government bonds yields
Current
Jun 13
Sep 13
Mar 14
2.54
2.50
2.50
3.00
-0.71
-0.70
-0.65
-0.65
Exchange rates
Current
Jun 13
Sep 13
Mar 14
EUR/USD USD/JPY EUR/GBP GBP/USD
1.30
97.75
0.85
1.52
1.26
102.00
0.86
1.61
1.20
110.00
0.85
1.56
1.18
113.00
0.84
1.49
EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK
1.23
8.78
7.46
7.88
4.33
294.98
25.89
1.25
8.45
7.46
7.35
4.13
288.57
25.41
1.25
8.25
7.46
7.25
4.00
282.14
25.20
1.24
8.00
7.46
7.15
4.00
280.00
24.85
Heiko Peters (+49 69 910-21548, [email protected])
Oliver Rakau (+49 69 910-31875, [email protected])
38 | July 1, 2013
Current Issues
Focus Germany
German data monitor
Business surveys and output
Aggregate
Ifo business climate
Ifo business expectations
PMI composite
Industry
Ifo manufacturing
PMI manufacturing
Headline IP (% pop)
Orders (% pop)
Capacity Utilisation
Construction
Output (% pop)
Orders (% pop)
Ifo construction
Services
PMI services
Consumer demand
EC consumer survey
Retail sales (% pop)
New car reg. (% yoy)
Foreign sector
Foreign orders (% pop)
Exports (% pop)
Imports (% pop)
Net trade (sa EUR bn)
Labour market
Unemployment rate (%)
Change in unemployment (k)
Employment (% yoy)
Ifo employment barometer
Prices, wages and costs
Prices
Harmonised CPI (% yoy)
Core HICP (% yoy)
Harmonised PPI (% yoy)
Commodities, ex. energy (% yoy)
Oil price (USD)
Inflation expectations
EC household survey
EC industrial survey
Unit labour cost (% yoy)
Unit labour cost
Compensation
Hourly labour costs
Money (% yoy)
M3
M3 trend (3m cma)
Credit - private
Credit - public
DX
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Jan
2013
Feb
2013
Mar
2013
Apr
2013
May
2013
Jun
2013
107.1
100.1
49.3
102.3
94.3
47.9
101.4
95.6
49.1
106.1
103.0
52.8
105.3
101.9
50.1
104.3
100.7
54.4
107.4
104.6
53.3
106.7
103.6
50.6
104.4
101.6
49.2
105.7
101.6
50.2
105.9
102.5
50.9
102.4
45.5
0.0
-0.4
84.9
96.4
45.0
0.2
-1.7
83.7
95.1
46.3
-2.6
1.0
82.1
101.1
49.7
0.2
0.5
83.2
100.5
48.7
99.1
49.8
-0.6
-1.6
102.4
50.3
0.6
2.2
101.9
49.0
1.2
2.3
99.3
48.1
1.8
-2.3
100.7
49.4
101.5
48.7
2.6
-5.2
120.0
0.5
-1.3
118.0
-2.3
2.1
117.7
-6.6
2.6
125.6
123.9
-0.5
9.5
122.7
-0.3
4.4
127.0
-5.8
-5.5
127.2
16.8
1.0
124.5
123.6
123.5
51.3
49.4
50.0
53.8
50.2
55.7
54.7
50.9
49.6
49.7
51.3
-1.1
0.9
0.2
-7.9
-0.7
-7.0
-10.0
-0.6
-6.2
-6.5
1.8
-10.5
-4.2
0.0
-7.6
3.3
0.0
-6.4
-0.7
-10.5
-5.4
-0.1
-17.1
-4.9
-0.1
3.8
-4.5
0.8
-9.9
-3.2
0.1
1.2
-0.2
47.8
-1.0
1.2
0.2
50.6
2.2
-2.0
-0.8
46.9
-1.0
0.4
-1.4
51.2
-2.7
1.6
3.4
15.8
2.1
-1.2
-3.9
17.7
2.7
0.5
0.7
17.6
-1.5
1.7
2.2
17.6
6.8
12.7
1.2
107.4
6.8
26.3
1.0
105.9
6.9
28.7
0.9
106.3
6.9
-8.7
0.7
106.2
6.9
-13.0
0.6
105.8
6.9
-1.0
0.8
106.5
6.9
13.0
0.7
106.4
6.9
4.0
0.7
104.7
6.8
17.0
0.6
105.5
6.8
-12.0
2.1
1.4
2.0
-7.8
108.2
2.1
1.2
1.4
-4.5
109.7
2.0
1.3
1.5
0.7
110.1
1.8
1.4
1.1
-3.5
112.6
1.5
1.9
1.1
1.7
-3.7
113.1
1.8
1.2
1.2
-3.2
116.3
1.8
1.8
0.4
-3.7
108.4
1.1
0.6
0.1
-6.2
102.0
1.6
1.1
0.2
-6.7
102.6
1.9
25.0
6.4
27.0
0.8
31.2
2.9
26.6
3.7
22.5
-0.6
27.6
5.4
26.5
3.2
25.6
2.5
25.4
-0.4
21.6
-1.8
20.6
0.5
2.8
2.4
3.2
3.3
2.5
3.5
3.2
2.8
3.8
4.1
2.4
4.3
7.0
6.8
6.0
5.3
0.6
10.4
-0.4
13.5
-0.2
-18.7
5.8
5.7
-0.2
-13.0
5.3
5.6
-0.2
-18.7
5.6
5.2
-0.2
-13.2
4.7
0.7
22.0
6.1
6.0
-0.3
-5.4
82.7
6.8
19.7
104.9
104.4
% pop = % change this period over previous period.
Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HWWI, ifo, Markit
39 | July 1, 2013
Current Issues
Focus Germany
Focus Germany is part of the Current Issues series and deals with
macroeconomic and economic policy issues in Germany. Each issue also
contains a timetable of financial and economic policy events as well as a
detailed data monitor of German economic indicators. Focus Germany is a
monthly publication.
 The brave new world of monetary policy ........................... June 4, 2013
 GDP forecast: Uptick in Q1, slippage in Q2 ......................April 30, 2013
 Sentiment indicators – another setback in spring ...............April 2, 2013
 The worst is (probably) over............................................. March 1, 2013
 Gradual improvement in 2013 ..................................... January 28, 2013
 German business cycle at the turning point? ............ December 3, 2012
 Euro crisis brings economy to a
standstill in the winter half ......................................... November 2, 2012
 A giant leap or the “Hopping procession
of Echternach”? ............................................................. October 1, 2012
 Euro crisis tightening its grip .........................................August 24, 2012
Our publications can be accessed, free of
charge, on our website www.dbresearch.com
You can also register there to receive our
publications regularly by E-mail.
Ordering address for the print version:
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Fax: +49 69 910-31877
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Available faster by E-mail:
[email protected]
 Global economy hurts - no quick fix .................................. July 25, 2012
 How do you feel about the euro?
Tell me, pray .................................................................... June 17, 2012
 The austerity versus growth debate –
what can be learned from Germany .................................... May 9, 2012
 Cautious GDP call maintained,
despite some upside risks .................................................April 11, 2012
 Recession risk has receded –
2012 GDP forecast now 0.5% ........................................ March 13, 2012
 Flatlining ...................................................................... February 7, 2012
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