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1KOOTHS | German Economy at Full Steam

German Economy at Full Steam

IHS Markit | Frankfurt/Main, 6th February 2018New Year’s Briefing

Stefan KoothsForecasting Center


Environment

GDP growth in export markets» 2017: +3.0 %» 2018: +2.8 %» 2019: +2.5 %

Financing cost remain extremely low (ECB rate on MRO)» 2017: 0.0 %» 2018: 0.0 % (end of new QE-purchases)» 2019: 0.1 % (long-term government bonds rates: 1 percent)

Fiscal policy almost neutral in status quo scenario (GDP impulse)» 2017: +0.4 %» 2018: +0.2 %» 2019: +0.1 %


The big picture: Drifting towards overheating

Stretched upswing (5+ years) continues

“Chewing-gum cycle”

Diagnosis (end of 2017)» Production clearly above potential output

» Increasing bottlenecks (Labor market, construction)

» Business climate at record high levels

Output gap widens further

Temporary potential growth push (demographics) contrast to medium-term outlook

-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


Capacity utilization: Up five years in a row

-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

2012 2013 2014 2015 2016 2017

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

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

2012 2013 2014 2015 2016 2017

capacity utilization (rhs) Total

Buildings Underground

Dwellings

Quarterly data. Capacity utilization: seasonally adjusted;

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

2010=100Percent

Order stocks and capacity utilization in construction industry

Manufacturing near pre-crisis peak

Construction is booming

Services less pronounced, but above normal


Gross domestic product

Calendar adjusted

» 2017: +2.6 percent

» 2018: +2.6 percent

» 2019: +2.3 percent

Previous-year forecast (calendar adjusted)

» 2017: +2,0 Prozent

» 2018: +2,0 Prozent

» 2019: +2,3 Prozent-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

105

110

115

120

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

2015 2016 2017 2018 2019

qoq-change (rhs) level

Gross domestic product

Percent

1,7 1,9 2,3 2,5 2,2

2010 = 100

Quarterly data: Price, seasonally and calendar adjusted, qoq-change.Annual data: Price adjusted, yoy-change.


Broad-based expansion

Foreign trade NOT neutral» Favorable external environment

» Induced imports

Investment activity» Financing conditions

» Increase in capacity

» Dwellings

Consumption only slightly weaker» Private: Fading out oil-price effect

» Public: Fading impulse from refugee costs


Brighter export picture

Robust world economy, euro area recovery

Improved order inflows and stocks

High export business expectations

Export markets

» Better business climate

» Low uncertainty

-1

0

1

2

3

4

105

115

125

135

145

155


2015 2016 2017 2018 2019


Exports

Percent

5,2 2,6 4,3 5,0 4,7

2010 = 100

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


Comeback of M&E investment spending …

Global environment

Record high business climate in M&E industries

High and increasing capacity utilization

Extremely low financing cost

-6

-4

-2

0

2

4

6

100

105

110

115

120

125

130

135


2015 2016 2017 2018 2019


M&E Investments

Percent

3,9 2,2 4,1 6,4 4,3

2010 = 100



… but less pronounced cyclical pattern

Lack of skilled labor

Demographic outlook

Higher plasticity(software replaces hardware)

-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 2019

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

Investment cycles


Construction is booming

Housing as main driver

» Financial conditions

» Labor market

» Structural demand (household patterns, immigration)

Record high capacity utilization and order stocks

Strong price effects

» 2017: +3.2 %

» 2018: +3.5 %

» 2019: +3.5 %

Risk of capacity limits

-6

-4

-2

0

2

4

6

100

105

110

115

120

125

130

135


2015 2016 2017 2018 2019


Constructions

Percent

-1,4 2,7 3,6 3,5 4,4

2010 = 100



Private consumption somewhat more moderate

2017-H1: Gains in purchasing power (oil)

Wages: Gross (net)

» 2017: +4.5 (+4.3) %

» 2018: +4.6 (+4.4) %

» 2019: +4.6 (+4.5) %

Social transfers

» 2017: +3.7 %

» 2018: +3.0 %

» 2019: +3.5 %

Inflation picking up

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

102

104

106

108

110

112

114

116

118


2015 2016 2017 2018 2019


Private consumption

Percent

1,7 2,1 2,1 1,7 1,7

2010 = 100



Labor market increasingly tighter

Scarcity indicators» Longer vacancies

» Job offers/job seekers at long-time high

» Bright ifo employment barometer

Immigration/increasing participation» Still compensating aging …

» … but fading out in the medium-term

Earnings: Effective rate (standard rate)» 2017: +2.9 (+2.1) Prozent

» 2018: +3.0 (+2.4) Prozent

» 2019: +3.4 (+2.6) Prozent

-50

0

50

100

150

200

250

42

43

44

45

46


2015 2016 2017 2018 2019


Employment

1.000

398 569 653 551 495

Mn.

Quarterly dataseasonally adjusted, qoq-change.


Key indicators

https://www.ifw-kiel.de/think-tank/forecasting-center/konjunkt_e/2017/kkb_38_2017-q4_deutschland_en.pdf

https://www.ifw-kiel.de/think-tank/forecasting-center/konjunkt_e/2017/kkb_38_2017-q4_deutschland_en.pdf


GDP: Don’t be afraid of interim governments


Risks and politics

Interim government no business cycle risk (on the contrary …)

Status-quo outlook

» 2018 almost safe in terms of policy measures …

» … but structural surplus will most likely wane by 2019

Increasing output gaps:A boom might feel good, but it carries the seeds of crisis within it

Strong momentum and transitory supply-side effects (demographics) call for moderating public finances

Demographically-induced distribution conflicts on the (near) horizon

Current account mania


@kielinstitute

www.ifw-kiel.de

Prof. Dr. Stefan KoothsHead of Forecasting Center

T (Kiel) +49 431 8814-579T (Berlin) +49 30 2067-9664

[email protected]

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