German ZEW index adds to recent growth worries

The third drop in a row for the German ZEW index marks a turning point for the worse as any growth optimism from the start of the year evaporates

All bad things come in threes. The ZEW index, which measures financial analysts’ assessment and expectations of economic and financial developments, signals a turn of the German economy for the worse. In May, the ZEW index decreased to -10.7 from 4.1 in April, the third consecutive drop. At the same time, the current assessment component also weakened, dropping to -34.8 from -32.5 in April.

Weak German macro data in recent weeks, as well as the US debt ceiling debate, banking turmoil and expectations of further rate hikes, seem to have dented analysts’ optimism.

Earlier optimism has disappeared for now

The ZEW index is definitely one of the worst-performing leading indicators in Germany when it comes to predicting GDP growth. However, it has a decent track record in predicting turning points in the economy. With this in mind, today’s ZEW sends a worrisome message: three consecutive drops are a new trend, a trend in the wrong direction.

To some extent, today’s index numbers are both backward and forward-looking. It’s both a reflection of recent weak macro data but also, once again, of a downscaling of growth expectations. The optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic change and the current energy transition will structurally weigh on the German economy in the coming years.

All of this doesn’t mean that the German economy will be stuck in recession for the next couple of years. But it does mean that growth will remain subdued at best and that the flirtation with stagnation will continue.

source: ing

Leave a Reply

German industrial orders surged in February

Industrial orders have now rebounded sharply since November, brightening the outlook for German industry. However, the US slowdown and the longer-term fallout from recent financial turmoil, as well as the broader impact of monetary policy tightening, could still spoil the party

German industrial orders surged in February, brightening the outlook for German industry. Industrial orders increased by 4.8% month-on-month, from 0.5% MoM in January. On the year, orders are still down by almost 6%. After the sharp fall since last summer, industrial orders have recovered in recent months. Compared with November last year, industrial orders have increased by more than 7%.

These strong industrial orders data fuel recent optimism in German industry. Interestingly, production expectations had just started to weaken again after the initial enthusiasm over the Chinese reopening at the start of the year. Looking ahead, the outlook for German industry has clearly brightened, even if the high inventory build-up since last summer is still likely to weigh on production in the short run. Beyond the short term, however, the question will be whether today’s boost in new orders is the start of an industrial revival or whether the expected slowdown of the US economy, the fallout from recent financial market turmoil and the broader impact of monetary policy tightening will spoil the party again.

source: ING

Eurozone inflation is expected to decrease

Inflation is expected to fall sharply in March due to lower energy prices, according to preliminary estimate data from Germany’s six economic states on Wednesday.

The inflation rate in the state of Brandenburg and Baden-Württemberg fell to 7.8 percent year-on-year. Also, in Bavaria, Hesse, and North-Rhine Westphalia, the inflation rate decreased to 7.2, 7.1, and 6.9 percent, respectively, and in the eastern state of Saxony, the inflation rate decreased to 8.3 percent. In February, the inflation rate in these six states was between 8.3 percent and 9.2 percent. According to economists at ING, inflation in Germany and the eurozone is no longer the result of a supply shock, but a demand-side issue. Economists of this financial institution said that not only the price of energy and primary goods are passed on to consumers, but also the increase in profit margins in some companies has also added to the inflationary pressures. Given the developing growth-price and wage-price spirals in Germany, core inflation will remain stubbornly high.

The European Central Bank will continue to raise interest rates, at least through the summer, before entering a long period of higher interest rates. Labor forces are increasing their demands and wages and gaining bargaining power in a very tight labor market. Germany’s public sector wage talks failed to reach an agreement this week, although employers offered wage growth of roughly 6 percent a year for 2023 and 2024. Unions are in a stronger position, so we continue to assume that final wage growth will be higher than forecasts, said Christian Schulz, an economist at Citigroup Investment Bank. This directly increases inflation; Because local authorities have to increase administrative costs and health insurers donate higher contribution rates to pay for higher costs. While headline inflation is easing, core inflation is expected to remain elevated.

German inflation

German inflation drops but there’s no sign of broader downward trends

German headline inflation dropped in March to the lowest level since last summer. However, there are still no signs of any broader disinflationary trend outside energy and commodity prices

Has the disinflationary process started? We don’t think so. German March headline inflation came in at 7.4% Year-on-Year, from 8.7% YoY in February. The HICP measure came in at 7.8% YoY, from 9.3% in February. The sharp drop in headline inflation is mainly the result of negative base effects from energy prices, which surged in March last year when the war in Ukraine started. Underlying inflationary pressures, however, remain high and the fact that the month-on-month change in headline inflation was clearly above historical averages for March, there are no reasons to cheer. 

No signs of broader disinflationary process, yet

Today’s sharp drop in headline inflation will support all those who have always been advocating that the inflation surge in the entire eurozone is mainly a long but transitory energy price shock. If you believe this argument, today’s drop in headline inflation is the start of a longer disinflationary trend. As much as we sympathised with this view one or two years ago, inflation has, in the meantime, also become a demand-side issue, which has spread across the entire economy. The pass-through of higher input prices, though cooling in recent months, is still in full swing. Widening profit margins and wage increases are also fueling underlying inflationary pressure, not only in Germany but in the entire eurozone.

Available German regional components suggest that core inflation remains high. While energy price inflation continued to come down and was even negative for heating oil and fuel, food price inflation continued to increase. Inflation in most other components remained broadly unchanged. Given that energy consumption is more sensitive to price changes than food consumption, it currently makes more sense for the European Central Bank to only look at headline inflation that excludes energy but includes food prices when assessing underlying inflationary pressure.

All this means is that just looking at the headline number is currently misleading; there are still few if any signs of any disinflationary process outside of energy and commodity prices.

Headline inflation to come down further but core will remain high

Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the ECB to take this data at face value. Government intervention and interference, whether that’s temporary or permanent or has taken place this year or last, will blur the picture. In Germany, for example, the Bundesbank estimated that energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year. And there is more. Negative base effects from last year’s energy relief package for the summer months should automatically push up headline inflation between June and August.

Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather could are likely to push down headline inflation faster than recent forecasts suggest. On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through and increasingly widening corporate profit margins and higher wages.

Even if the pass-through slows down, core inflation will remain stubbornly high this year.

ECB has entered final phase of tightening

As long as the current banking crisis remains contained, the ECB will stick to the widely communicated distinction between using interest rates in the fight against inflation and liquidity measures plus other tools to tackle any financial instability. The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode.

The turmoil of the last few weeks has been a clear reminder for the ECB that hiking interest rates, and particularly the most aggressive tightening cycle since the start of monetary union, comes at a cost. In fact, with any further rate hike, the risk that something breaks increases. This is why we expect the ECB to tread more carefully in the coming months. In fact, the ECB has probably already entered the final phase of its tightening cycle. It’s a phase that will be characterised by a genuine meeting-by-meeting approach and a slowdown in the pace, size and number of any further rate hikes.

We’re sticking to our view that the ECB will hike twice more – by 25bp each before the summer – and then move to a longer wait-and-see stance.

source: ING

Privacy Settings
We use cookies to enhance your experience while using our website. If you are using our Services via a browser you can restrict, block or remove cookies through your web browser settings. We also use content and scripts from third parties that may use tracking technologies. You can selectively provide your consent below to allow such third-party embeds. For complete information about the cookies we use, data we collect, and how we process them, please check our Privacy Policy
Consent to display content from - Youtube
Consent to display content from - Vimeo
Google Maps
Consent to display content from - Google