DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In between the lines 26.08.2010
(firmenpresse) - Silvia Quandt&Cie. AG, Merchant&Investment Banking / Miscellaneous
26.08.2010 12:49
Dissemination of a Corporate News, transmitted by
DGAP - a company of EquityStory AG.
The issuer / publisher is solely responsible for the content of this announcement.
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Silvia Quandt Research GmbH
Bernhard Eschweiler
eschweiler(at)silviaquandt.de
+49 69 95 92 90 93 51
www.silviaquandt.de
In between the lines
- German growth: more than a quarterly surge and just exports
- Domestic demand is picking up
- A time to save and not cut taxes
Two weeks ago, Germany surprised with a stronger-than-expected Q2 GDP
figure (2.2% q/q or 9.0% annualized, Silvia Quandt expected at least 6%
annualized). The release was much celebrated, but most commentators
cautioned that the economy would cool sharply in the second half. The GDP
spending components, however, which were only released earlier this week,
show that there was more to second-quarter growth than just exports and
inventories. Silvia Quandt agrees that Q2 marks the high point in the
quarterly growth pattern, but expects underlying momentum to be sustained
in the second half of the year and into 2011.
The good news is in the detail
Three messages stand out from the spending components of the Q2 GDP report:
- First, private domestic demand (ex inventories) contributed more to
growth than net trade. Private consumption and construction both
turned positive (the latter partly helped by better weather conditions)
and machinery investment continued solidly. Exports rose strongly, but
so did imports thanks to the pickup in domestic demand.
- Second, growth relied little on government spending. Fiscal policy
remains supportive, but the big boost from the stimulus programs is
fading.
- Third, inventories contributed essentially nothing to growth. This
stands in sharp contrast to the first quarter, when stock-building was
the main source of growth, and the global trend, which showed a strong
inventory buildup in Q2. Stock-building is only a residual item in the
GDP statistics and, thus, less accurate. Indeed, anecdotal evidence
from major industries suggests that inventories declined in the second
quarter due to the sharp rise in demand.
All in all, the Q2 GDP report paints an encouraging picture of the recovery
spilling from the rebound in exports and the reversal in the inventory
cycle to all sectors of the economy. This is enforced by the improvement
in labor market conditions and corporate profitability.
Momentum carries into Q3
Very strong quarterly growth often leads to negative growth (payback) in
the subsequent quarter. The case of German Q2 GDP, however, is set to be
different. The size of the second-quarter surge will not be repeated, but
the rebound has probably more legs than widely expected. Irrespective of
the underlying demand trend, technical factors alone point to further
growth in Q3.
- Many industries, most notably car producers, face order backlogs and
are having to run extra shifts to catch up with demand. In June,
manufacturing orders were already close to 3% above the second-quarter
average, which ensures further production increases in Q3 even if
orders stagnate.
- Many companies report low inventories. Thus, while excess inventories
are likely to depress production in many other parts of the world,
German producers will probably make more efforts to rebuild their
stocks.
Strong evidence that growth remained positive in Q3 comes from the Ifo
survey. The current conditions component rose again in August after a
record increase in July. The expectations component of the Ifo survey
inched slightly lower in August, which is no surprise given global market
sentiment, but remains at a level consistent with positive growth over the
next six months. All put together, Silvia Quandt forecasts 2%-to-3%
annualized growth in Q3 and also positive growth for Q4. This would bring
annual growth to 3% or slightly higher (up significantly from the already
bullish forecast of 2.4%).
More balanced growth in 2011
The bigger question is what growth will do in 2011? Germany cannot
completely decouple from the rest of the world, but there are good reasons
to be more optimistic than what the current market consensus reflects.
A positive and mutually supportive cycle has started. Better business
conditions lead to more employment and investment, which leads to more
sales. Germans are unlikely to go on a buying binge, but a shift from
negative consumption growth to modestly positive consumption growth makes a
big difference. Pieces of leading evidence come from the July PMI, which
shows an increase in service activity, and the retail component of the Ifo
survey, which rose strongly in July and August.
Fiscal consolidation, which is scheduled to start next year, is unlikely to
break this cycle. The planned tightening in 2011 accounts for less than
0.5% of GDP and will probably not get fully implemented. On the other
hand, monetary policy will remain very accommodative on account of weak
conditions in much of the rest of Europe. Thus, Silvia Quandt expects no
official rate hike from the ECB in 2011. Indeed, chances are probably
higher that the ECB will resort to more special measures to support weak
economies and the financial sector. Corporates will probably not take full
advantage of the low interest rate environment, but demand for residential
property loans is poised to pick up, as indicated in the latest banking
survey by the Bundesbank.
Economic conditions in the US and much of the rest of Europe are not
favorable. However, Silvia Quandt believes that Emerging Markets will
maintain their strong underlying momentum. In China, the government has
had some success in cooling the boom in property and capital spending and
is now trying to stimulate consumer demand. German exporters also benefit
from the favorable exchange rate environment, their stronger competitive
position, which is the product of several years of restructuring, and the
fact that they produce the goods that are currently most in demand.
Putting it all together, the Silvia Quandt forecast calls for slightly
above 2% growth in 2011. This is about a percentage point lower than the
growth estimate for 2010, but solid given the strength in the year before
and well above consensus forecasts.
A golden opportunity to restore fiscal health
The better economic environment had a visible impact on the government's
financial balance. The Fiscal deficit in the first half of the year
nearly doubled, thanks to previous stimulus programs, but falls short of
earlier estimates. The federal government now expects to undercut its
EUR80 billion deficit forecast for 2010 by at least EUR15 billion. As soon
as the better fiscal news became public, the opposition called for more
spending (or less spending cuts) and parts of the governing coalition
revived their demand for tax cuts. Giving in to such demands would be a
mistake.
- First, while lower than expected, the deficit remains large; above the
Maastricht criteria and far away from the constitutional requirement to
balance the structural deficit by 2016.
- Second, the improvement in fiscal conditions is due to better cyclical
conditions, not reforms. In otherwords, the structural deficit
remains unchanged.
- Third, since monetary policy is probably too supportive for the
economic environment in Germany, but has to stay that way due to weak
conditions in the rest of Europe, fiscal policy has to step in to
restore the necessary balance.
Indeed, Germany's strong recovery creates a golden opportunity for the
government to bring its fiscal house in order. Saving now while it hurts
less allows the government to build the fiscal buffer to deal with future
challenges. These could be another recession in a few years time or the
costs of unfavorable demographics and healthcare reform. In addition, it
would restore the appropriate balance between fiscal and monetary policy.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 26. August 2010, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439
Frankfurt.
Company disclosures
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In this respective analysis the following of the above-mentioned conflicts
of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt&Cie. AG, and its affiliated
companies regularly hold shares of the analysed company or companies in
their trading portfolios. The views expressed in this analysis reflect the
personal views of the analyst about the subject securities or issuers. No
part of the analyst's compensation was, is or will be directly or
indirectly tied to the specific recommendations or views expressed in this
analysis. It has not been determined in advance whether and at what
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the shares of the companies they cover on an absolute basis using a 6 -
12-month target price. 'Buys' assume an upside of more than 20 % from the
current price during the following 6 - 12-months. These securities are
expected to out-perform their respective sector indices. Securities with an
expected under-performance to their respective sector index are rated
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the sector performance are rated 'neutral'. Securities prices used in this
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used based on various important broker sources (OTC-Market).
Disclaimer This publication has been prepared and published by Silvia
Quandt Research GmbH, a subsidiary of Silvia Quandt&Cie. AG. This
publication is intended solely for distribution to professional and
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distributed to private investors or private customers. Any information in
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and sources considered to be reliable, but no representations or guarantees
are made by Silvia Quandt Research GmbH with regard to the accuracy or
completeness of the data or information contained in this report. The
opinions and estimates contained herein constitute our best judgement at
this date and time, and are subject to change without notice. Prior to this
publication, the analysis has not
been communicated to the analysed companies and changed subsequently. This
report is for information purposes only; it is not intended to be and
should not be construed as a recommendation, offer or solicitation to
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compliance with statutory and regulatory provisions, Silvia Quandt&Cie.
AG and Silvia Quandt Research GmbH have set up effective organisational and
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and/or clients may conduct or may have conducted transactions for their own
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performance is not indicative of future results. Investors should make
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transmitted into the United States of America or distributed, directly or
indirectly, in the United States of America.
Frankfurt am Main, 26.08.2010
Silvia Quandt Research GmbH26.08.2010 12:49 Ad hoc announcement, Financial News and Press Release distributed by DGAP. Medienarchiv atwww.dgap-medientreff.deandwww.dgap.de---------------------------------------------------------------------------Unternehmensinformation / Kurzprofil:
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Datum: 26.08.2010 - 12:49 Uhr
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