German economy in triple spin
ON Tuesday, Germany’s ZEW index sharply fell to 56.1 from 77.4 last month, much lower than the expected 73 or thereabouts. The 400 analysts and institutional investors consulted each month concerning the ZEW have conversely become more optimistic about the outlook for the German economy, which is quite interesting.
I disagree with the ZEW survey-based belief of improved prospects for the German economy. I don’t think its momentum is upward, like a perfect triple- spin jump. In fact, the economy’s risk of going into a downward spin intensifies for three reasons.
I agree with the survey respondents that a “hard” Brexit represents a certain challenge and risk. If it is indeed hard, a tariff increase of 10 percent to 15 percent on trade between the European Union and United Kingdom should be expected, though it is not the biggest shock German exporters could anticipate.
A very interesting report from Deloitte in Germany also gives the impression that German companies are no longer deeply concerned about future prospects in relation to the UK. Several firms have simply turned their attention to other markets, but among the 190 German export companies with a minimum of 100 employees in the UK that Deloitte surveyed, the UK, as an export market, seems to be in a status quo situation.
In terms of turnover, German exports to the UK have declined since the Brexit referendum in June 2016, but this corresponds to approximately the decline in the pound exchange rate in the corresponding period. This has been absorbed by German export companies, which I see as an indication that German exporters would cope with the 10- to 15-percent tariff over time. This is one reason I do not fear a hard Brexit as much as the ZEW survey respondents do.
I argue that the strongest and most basic risk originated from before the Covid-19 crisis. We will never know what kind of gross domestic product (GDP) growth Germany would have this year without Covid- 19, but it already looked sluggish at the beginning of the year. In my view, growth would have ended at a very low level this year, as the Bundesbank’s WEI index ( an early indicator of GDP growth) indicated that at the start of the year, according to the completely flat development. Although the start of the year might feel like a decade ago, some may remember January 29th, the day German Economy Minister Peter Altmaier presented the country’s annual economic forecast.
It is, by no means, meant to be looked at in hindsight, but the expectation of a GDP growth of 1.1 percent for 2020, even before the Covid-19 crisis struck Europe, was far too optimistic for the vast majority of the financial market. My argument in this connection was that the seriousness of the situation was emphasized by the fact Germany had a historically low unemployment rate and an economic growth rate that was dangerously heading toward zero, or just a small plus.
I go back to this view as I argue that the positive momentum already left the German economy last year. My basic assessment of the effect of Covid19 is that, among other things, the developments that existed even before the crisis began have been amplified. I also argue that the biggest risk to Germany’s economy is an ongoing declining momentum from 2019 that is now flaring up again and even intensified by the crisis. The WEI index has provided a clear picture of how growth has been in decline since mid-September.
One might be surprised at how the classically strong German economy could lose so much momentum, but even a strong economy must be nurtured with reforms and initiatives. German Chancellor Angela Merkel is not exactly a warrantor for this, which was made obvious during the coronavirus crisis. Obviously, the plan is just to get through with well-known tools and support schemes, but the result seems more paralyzed than what those in many Asian countries, for example. I fully understand the ZEW survey respondents’ concern about the surge in new Covid-19 cases, simply because many European countries obviously have a harder time dealing with the crisis than many Asian countries have.
It has also long been clear that China would end this year with a positive GDP growth rate, and a number of countries in the region are now also showing progress, confirming once more the economic world order is constantly changing faster or more differently than expected. Peter Lundgreen is the founding chief executive officer of Lundgreen’s Capital. He is a professional investment advisorwithover30yearsofexperience and a power entrepreneur ininvestmentandfinance.Heis alsoaninternationalcolumnist andspeakerontopicsaboutthe global financial markets.