Germany’s economy seems to get stronger by the month – falling unemployment, rising GDP, governmental surplus, you name it. So, is really everything glossy and any other view merely a doomsday-sayer’s paranoia? Let’s check:
First, last month’s preliminary figures regarding German GDP were confirmed in the meantime, hence, the GDP indeed increased by 1.9% in 2016. However, in a very interesting piece, the Handelsblatt concluded that the GDP-growth rather feels like „chewing-gum“ and is mainly to be attributed to real estate and migration while investments in the industry-sectors remain low. This estimate is corroborated by declining figures in industrial output at the end of 2016.
Second, the economic growth of Germany goes hand in hand with a seemingly healthy budget surplus of Euro 23bn! So, the government does everything right? However, a closer look reveals that Mr. Schäuble is already on a spending frenzy again: The overall budget for 2017 is Euro 328bn, coming from roughly Euro 317bn in 2016! And already that budget contained around Euro 20bn for the costs of the refugee-crisis. And during the current legislative period, the budget share for „social costs“ in the overall budget increased from Euro 140bn to 170bn. This can hardly be called a „healty“ development!
Third, in February 2017, the German DAX, again, reached new hights: After ending January with 11,535 points, it ended with 11,834 points on 28 February 2017. Since the Dow also closed close to 21,000 points at the end of February, the question at the end of last month, whether the „Trump rally“ continues, can now be answered in the affirmative. Let’s look at it again next month…
Fourth, again, German exports set a new record (the third year in a row) with exports increasing by 1.2% in 2016. This new record will surely set the stage for new discussions on trade imbalances. However, one should not overlook that parallel to German exports the so-called „Target-2-balance“ has also reached a new record high with Euro 796 bn in January 2017! Hence, Germany(’s taxpayer for that purpose) is crediting the world for its industry to be able to export.
Fifh, German unemployment-rate, after a slight increase in January 2017 remained steady at 6.3%. Again, on a YoY basis, unemployment fell by another 149,000 (January: -143,000 already!) thereby (again) reaching unemployment figures not seen since 1991. Spiegel-Online in a conclusive article shows that even when taking into account various „cosmetic measures“, the Bundesagentur für Arbeit is using to „improve“ figures, actual unemployment even according to stricter standards does not surpass 4m people – a very low figure compared with the rest of Europe.
Sixth, the German (Industrial) Purchasing Managers‘ Index (PMI) further rose – though only moderately – from 56.5 points in January to 56.8 points in February 2017 – thereby marking a 36-months high. After weakening in January, the Ifo business climate index rose from 109.8 points in January to 111.0 points in February 2017, thereby reaching exactly the same value as in December 2016 and, again containing the best outlook since 2011. The ZEW Indicator for the current economic sentiment, on the other hand, slightly decreased from 77.3 points in January to 76.4 points in February 2017. A closer look into this indicator reveals that the expectations for the further economic development are rather modest – with currently 10.4 points, they are well below the long-term average of 23.9 points!
And that small deviating figure leads to the real cracks in this glossy picture: Again, the German inflation-rate rose, this time from 1.9% in January to 2.2% in February 2017. This is the highest level for the last four or so years and beyond the point the ECB regards as „stable“. Accordingly, already minutes after the inflation rate was announced, the yield for German Bunds rose – i.e. the prices dropped. So, the fuse for rising interest rates might be set now, the coming months will show.
All the more since Germany seems to be an Island of (debt-)stability within a (debt-)tsunami covering the most important countries: While in Europe, banks in general try to create „in-bailable“ bonds, Italy in the meantime avoids a crash of its bankings system with at least questionable means (cf. here and here) only and Spain trying to do the same (cf. here), the USA is nearing the deadline for the suspension of the so-called „debt-ceiling“ on 15 March 2017. Given that the previous fights for a rise of the ceiling were before the background of a democratic President versus a Republican Congress, its seems quite probable that the necessary raise will be rather unspectecular – but, who knows, with Trump it might become another stand-off… in the end, if resolved, only in order to create more debt. Also, China does indeed seem to get serious about debt – it takes on even more.
So, it should come as no surprise that in Q3 2016 global debt hit 325% of world GDP and rose to a record USD 217 Trillion! Given these astronomical figures, it boils down to the fact that nobody can and will “outgrow” this debt. Everything done now is in fact done to prolong the existing structures – which are not sustainable. Already in various posts during the last year I (and many others!) have warned that re-starting inflation will eventually lead to rising interest-rates – even against Central Banks. To my mind, this process started already in the summer of last year.
Concluding this post, I would summarise that Germany’s economy is faring quite well for the time being, but sits on a (debt-)time-bomb and will be hit hard, once it explodes. Even if German debt is not growing, its position as a creditor (not only within the target-2-balance) will create problems once debtors get into distress in the wake of rising interest-rates. When this will happen, I do not know (and therewith I am in good company with all those who predicted the last 200 out of 2 crisis as one commentator laconically noticed). But, to give you a perspective: Do you remember what you did on 9th August 2007? No? Neither do I. However, this is a remarkable day – since it marks the „official“ beginning of the last financial crises (cf. here and in more detail on Wikipedia)! Still, only weeks before the „Lehman-moment“ on 15 September 2008 (so thirteen (13!) months later), the then German finance-minister, Peer Steinbrück, „prohibited“ to speak of a recession. So, the financial crisis was in full blossom (to spin it positively) when German politicians still denied it. And, given the coming general elections in Germany, I would not bet on a better sense of reality…