DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines - Bernhard Eschweiler
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Key word(s): Miscellaneous
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines - Bernhard Eschweiler
21.04.2011 / 16:50
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- Germany had a good start into 2011
- Yet, the ZEW survey predicts a marked slowdown ahead,
- while the IFO index says the good times will continue
- Business optimism is more likely to prevail than analyst skepticism
While most industrial countries are wrestling with the legacy of their past
excesses, Germany is on a roll. The data is still coming in, but the
balance of figures so far points to robust growth in the first quarter,
after some weather-related softness in the fourth quarter of last year.
Unemployment continued to fall, retail sales recovered the setback in
December and the averages of industrial production and manufacturing orders
in January and February rose annualized 11% and 19% respectively from the
fourth quarter. Putting the data together, Silvia Quandt Research predicts
at least 3% annualized real GDP growth in the first quarter.
So far so good, but the going may get tougher from here. That is what the
expectation component of the April ZEW survey is predicting. The ZEW
survey has had softer readings for some time. The global impact of events
in Japan, especially on the US and China, higher oil prices, the Euro-debt
crisis and ECB tightening are expected to dampen growth prospects further.
The cautious tone of the ZEW survey contrasts sharply with the upbeat
outlook of the IFO survey. The outlook of the just released April IFO
survey was also softer, but that had less to do with external factors and
the overall level of optimism remained much higher than in the ZEW survey.
A tale of two surveys
The difference between the two surveys lies in their sources. The ZEW is
an economic sentiment indicator, based on a survey of 350 financial
analysts. Participants are asked to evaluate economic prospects over the
next six months. The IFO is a business climate indicator, based on a
monthly survey of 7000 German companies
across all sectors and different sizes. Companies are asked to rate their
own business prospects over the next six months. In short, the ZEW is a
top-down macro indicator, while the IFO is a bottom-up micro indicator.
The ZEW is more volatile, but in the past anticipated business cycles
swings about a month earlier than the IFO. Despite these differences, IFO
and ZEW usually move in the same direction. This changed in the middle of
last year, when the ZEW started to cool down, while the IFO continued to
move up. The ZEW has been below its past cyclical average for the last ten
months, which implies growth of 1% or less. The IFO has been above its
past cyclical average, which is consistent with growth of at least
2%-to-3%. The actual data since the middle of last year has so far
validated the more upbeat business expectations of the IFO and we think
this is likely to continue going forward.
As we have outlined before, Germany is not only experiencing a cyclical
upswing, but is moving to a higher growth trajectory. Germany has hit a
sweet spot, harvesting the dividends of past reforms, enjoying a favorable
reversal in Euro-area monetary conditions and benefitting more than most
other industrialized economies from the boom in Emerging Markets. In our
view, most financial analysts surveyed by the ZEW are too preoccupied with
near-term risks and fail to see the underlying structural change. Business
managers seem to see the uptrend better because they are part of it.
Optimism leads to business expansion
The elevated business optimism has a powerful effect: it leads to more
spending, especially as the economy has finished the recovery and is moving
into a new expansion. Companies are in a good position to spend more,
thanks to the competitive edge they have gained after earlier reforms. The
most telling indicator is rising employment (falling unemployment).
Companies are also raising capital spending and are willing to share the
restructuring dividend with their employees in form of higher wage
settlements. Business expansion gives the economy more momentum and
reinforces the uptrend. Thus, despite the risks identified by the ZEW
survey, we feel encouraged that the economy has enough momentum to stay on
course to at least 3% growth in 2011.
Growth to recede a bit in 2012
Underlying growth should stay strong beyond 2011 as well. We estimated
earlier this year that Germany's growth potential has moved up to at least
2% thanks to the restructuring efforts and the favorable reversal of
Euro-area monetary conditions. A drop below the growth potential cannot be
ruled out, but is not very likely as the cycle is still young. To throw
the economy off track a severe shock would have to occur. Such potential
shock could be sharp monetary or fiscal tightening. The ECB has made its
first move and will probably raise the policy rate to 2% by the first
quarter of 2012, but that is
hardly enough to rock the German economy. More aggressive tightening
cannot be ruled out, but seems less likely, given weak conditions in most
of Europe, not just the three crisis countries. That leaves fiscal policy.
The fiscal consolidation plan, announced by the government last year, will
have a modestly dampening impact on growth, but not much more. Indeed,
more fiscal consolidation would be desirable to dampen inflationary
pressures that the ECB cannot contain and generate savings for future
needs, such as the cost of the aging population. Unfortunately, nobody in
Berlin is thinking that way. In sum, growth will most likely moderate a
bit in 2012 to about 2.5%. A spike in oil prices to $150 per barrel or
higher would force a downward revision, but will probably not result in a
sharp downturn.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 21 April 2011, 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.
Publication according to article 5 (4) no. 3 of the German Regulation
concerning the analysis of financial instruments (Finanzanalyseverordnung):
Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2011 the preceding twelve months
Buys: 92 35
Neutral: 41 1
Avoid: 4 0
Company disclosures
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in combination with the German regulation concerning the analysis of
financial instruments (Finanzanalyseverordnung) requires an enterprise
preparing a securities analysis to point out possible conflicts of interest
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analysis. A conflict of interest is presumed to exist, in particular, if an
enterprise preparing a security analysis:
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analysed;
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121202 21.04.2011
Datum: 21.04.2011 - 16:50 Uhr
Sprache: Deutsch
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