1 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Germany‘s Economic Outlook

Chewing gum cycle, bubble gum risks

IHS Markit | Frankfurt/Main, 25th January 2017 New Year‘s Briefing 2017

Stefan Kooths Forecasting Center

2 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Chewing gum-type business cycle

Stretched upswing, faint cyclical pattern

Migration feeds markedly into potential growth (delayed for refugees) » 2015: + 331,000

» 2016: + 511,000

» 2017: + 313,000

» 2018: + 213,000

Capacities already slightly over-utilized

-5

-4

-3

-2

-1

0

1

2

3

4

5

1900

2100

2300

2500

2700

2900

3100

1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Output gap (rhs) GDP Potential output

Annual data; GDP, Potential output: price adjusted (chained volumes, reference year 2010).

Bn. Euro Percent

Production and potential output

fore

ca

st

3 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Capacity utilization above normal and increasing

Manufacturing » Upward trend, third year of

over-utilization …

» … incoming orders exceed production capacities

Construction » Record-high capacity

utilization

Services » Lack of demand (ifo) on

record-low levels

Vibrant labor market

-10

-8

-6

-4

-2

0

2

4

6

8

10

79

80

81

82

83

84

85

86

87

88

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2011 2012 2013 2014 2015 2016

Order-capacity-index(rhs)

Capacity utilization

Quarterly data, seasonally adjusted; Capacity utilization: axes cross at normal capacity utilization level.

Percent Percent

Capacity utilization in manufacturing

4 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Data edge: High momentum

ifo climate brightened up » Situation: 4-years high

» Expectations: Pronounced improvement since August

Incoming orders on the rise

Industrial production: upward trend since 2012

2017: Dampening working-day effect (0.3 ppt)

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

102

104

106

108

110

112

114

116

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

Gross domestic product

Percent

1,6 1,7 1,9 1,7 2,0

2010 = 100

Volumes.Quarterly data: seasonally and working-day adjusted.

5 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Booming construction sector

Record-high capacity utilization

Swelling order books » Total: + 21 % (Q3, y-o-y)

» Dwellings: Second year of two-digit rates

Price pressure » Value added: > 5 percent

(two years in a row)

» Real estate transactions (vdp)

• 2014: + 3.1 %

• 2015: + 4.5 %

• 2016: + 5.8 % (Q1 to Q3)

60

62

64

66

68

70

72

74

76

78

80

75

95

115

135

155

175

195

215

235

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

2011 2012 2013 2014 2015 2016

capacity utilization (rhs) Total

Buildings Underground

Dwellings

Quarterly data. Capacity utilization: seasonally adjusted;

Order stocks: price, seasonally and w orking-day adjusted.

2010=100 Percent

Order stocks and capacity utilization in construction industry

6 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Stimulating environment for construction spending

Driving force: housing » Mortgage interest rates at

record-low levels

» Dynamic labor market

High government revenues

Growth contributions » 2016: 0.3 ppt

» 2017: 0.3 ppt

» 2018: 0.4 ppt -6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

105

107

109

111

113

115

117

119

121

123

125

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

Constructions

Percent

1,9 0,3 2,8 3,1 3,9

2010 = 100

Volumes.Quarterly data: seasonally and working-day adjusted.

7 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

GFCF: Stretched upswing, small accelerator effects

Flat cyclical pattern

Gross fixed capital formation gradually gaining momentum

-6

-4

-2

0

2

4

6

-25

-20

-15

-10

-5

0

5

10

15

20

25

1991 1995 1999 2003 2007 2011 2015

Output gap (rhs) GFCF Machinery and equipment

Annual data. GFCF, machinery and equipment: volumes, change on previous year;

Output gap: in percent of potential output.

Percent Percent

fore

ca

st

Investment cycles

8 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

-7,0

-5,0

-3,0

-1,0

1,0

3,0

5,0

100

105

110

115

120

125

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

M&E Investments

Percent

5,5 3,7 1,3 1,8 4,8

2010 = 100

Quarterly data, price, seasonally and calendar adjusted, qoq-change.

Dampened dynamics in M&E spending

2017 (yoy) » Carry-over effect (- 0.5 ppt) » Working-day effect (- 0.8 ppt)

2018 » Topping pre-crisis level

Weak dynamics compared to historical standards

Financing conditions » Record-low credit costs » Hardly any credit hurdles

Low market uncertainty, but increased policy uncertainty

Harbinger of demographics?

Pre-crisis peak

9 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Exports back on track

Recovered incoming orders

German export markets » Lower uncertainty

» Improved business climate

Export market growth » 2016: + 2.1 percent

» 2017: + 2.2 percent

» 2018: + 2.4 percent

Risks » Brexit

» Neo-protectionism (US: micro-interventionism?)

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

100

105

110

115

120

125

130

135

140

145

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

Exports

Percent

4,1 5,2 2,5 3,6 5,2

2010 = 100

Volumes.Quarterly data: seasonally and working-day adjusted.

10 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Brexit: Impact on German growth

Country-specific export function » UK-GDP

» Exchange rate GBP/EUR

UK-GDP [autumn forecast] » 2016: + 2.0 % [+ 1.6 %]

» 2017: + 1.2 % [+ 0.6 %]

» 2018: + 1.6 % [+ 1.6 %]

More pronounced devaluation of the British pound: 8 + 3.5 percent

Impact on exports in the UK (cumulated)

» 2016: 2.2 %

» 2017: 8.2 %

» 2018: 10.0 %

Impact on GDP (cumulated): < 0.5 %

11 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Higher oil prices weigh on purchasing power

-0,8

-0,3

0,2

0,7

1,2

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

Private consumption

Percent

0,9 2,0 1,9 1,5 1,5

2010 = 100

Volumes.Quarterly data: seasonally and working-day adjusted.

-2

-1

0

1

2

3

4

2015 2016 2017 2018

-2

-1

0

1

2

3

4

Savings rate Deflator

Disposable income Private consumption (rhs)

Percentage pts.

Contributions to change in private consumption

Annual data.Disposable income including change in pension entitlements.

12 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Internal and external driving forces

2015/2016: strongest increase in consumption in 15 years

Gradually growing investment pillar

Exports recovering

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

2014 2015 2016 2017 2018

Consumption GFCF External trade Inventories

Annual data; price-adjusted, Lundberg components.

forecast

Percentage pts.

Expenditure-side components to GDP-growth

13 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Labor market regains momentum

Supportive effective wages (hourly) » 2016: + 2.6 %

» 2017: + 3.1 %

» 2018: + 3.0 %

Registered unemployment [vs. ILO rate] » 2016: 6.1 % [4.0 %]

» 2017: 5.9 % [3.7 %]

» 2018: 5.6 % [3.1 %]

-50

0

50

100

150

200

41,0

41,5

42,0

42,5

43,0

43,5

44,0

44,5

45,0

I II III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2018

qoq-change (rhs) level

Employment

1.000

334 394 438 386 510

Mn.

Quarterly data: seasonally adjusted.Annual data: yoy differences in 1,000 persons.

14 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Refugees gradually showing up on the labor market

15 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Key figures

2015 2016 2017 2018

GDP (%) + 1.7 + 1.9 + 1.7 + 2.0

GDP deflator (%) + 2.0 + 1.4 + 1.3 + 1.9

Consumer prices (%) + 0.2 + 0.5 + 1.5 + 1.8

Unit labor cost, hourly (%) + 1.5 + 1.2 + 1.6 + 1.8

Employment (1000 persons) 43,058 43,495 43,881 44,390

Unemployment (1000 persons) 2,793 2,691 2,643 2,547

Public net lending (% of GDP) 0.7 0.5 0.4 0.5

Current account balance (% of GDP) 8.4 8.7 8.2 8.2

16 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks

Stability risks

Ultra-expansionary monetary policy: Time matters! » Distortion of price and production structures

• Capital stock

• Exchange rate

» Financial stability

• Depressed risk premia (too few insolvencies, delayed structural change)

• Overstretched maturity transformation

Over-estimating potential output growth » Data edge problem (procyclical distortion)

» Demographics: interim relief (integration of refugees?)

Hardly any vigor in terms of growth policies

Call for stimulus programs within the EMU context

Neo-protectionist tendencies in the world economy

17 KOOTHS | Germany‘s Economic Outlook: Chewing gum cycle, bubble gum risks