Economy

“Business sentiment is fluctuating between muted optimism and deep concern. Fears that the economy could slip into recession again are justified. Although the federal government is working flat out to replace Russian natural gas supplies, it is already clear that only less and above all more expensive gas will be available. In addition, there are increasing reports of the new, highly contagious COVID variant spreading rapidly. Should higher wage demands set off a wage-price spiral, Germany could face a multi-year period of stagflation. Notwithstanding the risky outlook, many companies are desperately seeking skilled workers. This shows how keen they are to secure qualified staff. If the German economy remains unaffected by a complete Russian natural gas supply freeze, the number of people in employment will probably continue to increase at a slower pace in the course of the year. But the growing shortage will mean that many jobs remain vacant or unfilled for a long time. On average, it now takes half a year to fill a vacancy. There are currently a high number of vacancies in health and social services, construction, hospitality, mechanical engineering, power engineering and education, among others. More than half of the jobs registered with the job centres are advertised for skilled workers with vocational training, one fifth for higher qualified experts and specialists. This is a vulnerability of the German economy that has been building for a long time. Now is the time to tackle it vigorously and mobilise all the labour force already in Germany, as well as make targeted immigration into the labour market attractive.”

“Producer prices climbed 33.6% year-on-year in May to a new historic high. There is still steam in the boiler. This is driving consumer price inflation in June as well. As in the previous month, the biggest contributions are likely to come from energy prices and food. Above all, the war in Ukraine and the pandemic or China's "no-covid" policy continue to disrupt energy supplies and supply chains. This argues against a rapid decline in inflation and poses the risk of a wage-price spiral. Collective bargaining parties in current negotiations are faced with the challenge: on the one hand, they have to compensate for the loss of purchasing power for employees, at least partially, and on the other hand, they have to limit the feedback effects on inflation. Fiscal policy can contribute to easing the situation if it cushions social hardship. The ECB must deliver with the interest rate turnaround in order to further contain inflation expectations."

“The fall in sentiment underscores: The German economy is struggling along slowly at best. Solid assessments of the current business situation are contrasted by very gloomy business expectations since the Russian invasion of Ukraine; the gap between the two components of the business climate remains enormous in June. This shows that the fear of recession is still huge and, in view of the many unknowns, is likely to dampen entrepreneurial propensity to invest. For the transformation to succeed, however, the opposite is crucial, namely a surge in investment. Unfortunately, a turn for the better can only be expected when the gun smoke from the war clears, the global material bottlenecks ease and inflation and cost pressures subside. On balance, I still expect economic growth of 1.6% this year – only about half what would have been possible without the war.”

"Last week the ECB got serious: it initiated the interest rate turnaround. Because the spreads of Southern European countries have risen significantly as a result, the ECB's Governing Council held an ad hoc meeting today. In terms of content, the ECB has stuck to its decisions from last week but the meeting has nevertheless contributed to calming the markets, at least in the short term. A look at the fundamentals also shows that the situation is different today than it was at the time of the euro crisis: although debt levels in the affected countries are higher today, the decisive factor is that the interest burden is significantly lower relative to economic output. The declining long-term inflation expectations prove that the ECB is credibly implementing the interest rate turnaround from the market's point of view. The challenge remains to counter the market fragmentation with suitable instruments.”

"US Federal Reserve Chairman Jerome Powell has recently made it very clear that the Fed will continue its aggressive monetary policy turnaround until there are clear successes in the fight against inflation. A 0.5% increase in the key interest rate for both the upcoming June and July meetings seems to already be set in stone and the tightening of monetary policy will also continue at pace. In addition to the interest rate steps, the reduction of the USD 8.5 trillion Fed balance sheet has al-ready begun. In 2022, the reduction should add up to about USD 1.0 trillion, with a further reduction of USD 1.5 trillion expected for 2023. The Fed's balancing act is to slow down the price increases and at the same time not limit the economy too much through higher interest rates. Jerome Powell has already warned in this context that the fight against inflation could become painful."

"The consequences of the Russian aggression are severe for the European economy. The slightly positive growth in the euro zone at the beginning of the year can therefore only provide short-lived relief. The Ukraine war is prolonging and intensifying the headwinds for the economy and robbing the economic recovery from the pandemic much of its strength. The worsening of China’s Covid-19 outbreak adds to the burden. High energy costs and supply bottlenecks are weighing particularly heavily on the construction and manufacturing sectors. Meanwhile, consumer sentiment is plummeting, a consequence of the significant loss of purchasing power and the uncertainty caused by the war. Only the lifting of the containment measures and fiscal relief packages remain as supporting factors for economic growth."

"The real surprise came already in mid-January when the Federal Statistical Office indicated a significant decline in economic output in the autumn quarter and at the same time implicitly pointed to substantial upward revisions in the previous quarters with the annual rate of 2.7% reported at that time. In particular, licensing income from Biontech, recorded for the first time, probably shook up the growth statistics. Then, at the end of the year, the pandemic dragged the economy down again, with the hospitality industry, for example, seeing its all-important Christmas business severely curtailed. The quick release for the fourth quarter published today is also prone to revision, as data from December is still missing. For the autumn of 2020, for example, quasi-stagnation (+0.1%) was originally reported, which ultimately turned into very decent quarterly growth of +0.7%. Ultimately, however, year-end 2021 is likely to remain in the red, and a further decline is also likely in the current quarter before growth picks up again in the spring.“

"The U.S. economy grew by an annualized 6.9% in the fourth quarter. For the year 2021, this results in a GDP growth of 5.7%. Extensive fiscal spending and a very loose monetary policy have contributed to the situation that US economic output is now well above the pre-crisis level. Washington and the Fed are increasingly turning away from crisis mode in view of the good economic development. The government's fiscal support will be much smaller in 2022 than in previous years. The Fed has already begun to scale back its expansionary monetary policy. Rising interest rates and an increase in the cost of financing for companies are therefore to be expected. Economic development in 2022 will therefore be characterised by fading catch-up effects and a normalisation of the growth rate. We expect stable GDP growth of 3.8%.“

“The very high expectations placed in the German economy at the beginning of 2021 were only partially fulfilled. The exceptionally stubborn global supply chain problems, two further Corona waves and a rise in inflation that eroded purchasing power ultimately prevented a faster recovery last year. Taken on its own, the economic growth of 2.7% reported for 2021 is nevertheless respectable; since reunification it has averaged only 1.2% per year. The economic stabilisation despite new hurdles caused by the continuing smouldering pandemic is also due to the fiscal effort, as reflected in the high government deficit of 4.3% of GDP. The task now is to reduce the government debt again in perspective and at the same time channel sufficient resources into the upcoming transformation. This difficult balancing act is best achieved with solid economic growth and close monitoring of expenditure quality and efficiency. The outlook for economic growth is generally favourable, but the risks are high, especially in the short term. As in 2021, there is the threat of an economic rollercoaster ride over the peaks and valleys of new Corona waves. With the highly contagious Omicron variant, the pandemic will again cause an economic false start, but this may be followed by a strong growth spurt from the spring onwards. The prerequisite is the successful control of the pandemic – ideally its transformation into an endemic – as well as an easing of supply bottlenecks.”

“After double-digit growth rates at the beginning of this year, growth in the broad monetary aggregate M3 in the euro area is falling back to a level similar to that at the start of the pandemic (7.4%). Growth rates are also likely to remain in single digits in the coming months, especially after the ECB announced at its September meeting that it would buy "significantly less" in Q4 than in the two preceding quarters. This will have little impact on the currently heightened inflationary pressure: For one thing, price increases are largely driven by supply-side factors which are beyond the control of the central bank. For another, M3 growth remains well above the average of the pre-crisis years. More housing loans and government bonds on bank balance sheets are primarily responsible for this development, while growth in corporate loans plays only a minor role after strong contributions at the beginning of the pandemic.”

"The US is suffering a fourth wave of the COVID-19 pandemic. The seven-day average of new infections is about to exceed the 150,000 mark, a value last reached in January. The fact that the rising number of cases is also once again increasingly influencing everyday life can be seen at the annual central bank meeting in Jackson Hole, which was switched to a viral format at short notice. However, this does not diminish the excitement with which people are waiting for US Federal Reserve Chairman Jerome Powell's speech. The US inflation rate will remain above the Fed's target of 2% in the coming months and the recovery on the labour market has recently picked up speed. So everything is actually in place for a gradual turnaround in monetary policy. However, the Fed is certainly concerned about the rising Corona case numbers and the associated economic uncertainties. A different weighting of these factors explains the divided opinion in the Fed Committee in the run-up to the symposium. So it's worth watching closely to see whether Powell will give the first hints of a reduction in Fed bond purchases during his speech on Friday."

“Coping with the Corona pandemic has been and will be associated with further, substantial financial burdens for the EU member states. The temporary application of the escape clauses enshrined in the European fiscal rules therefore provides additional room for maneuver. The EU Commission today proposed to apply the escape clause to the year 2022 as well. This is intended to ensure that the fiscal stimulus does not have to be withdrawn too early due to the rules and that the economic recovery after the pandemic is not stifled. Against the background that some member states are likely to need until 2023 to reach the pre-crisis level of GDP, this proposal appears to make perfect sense. However, in view of the structurally high debt levels in the euro area and the ECB as the largest single creditor of the member states, medium-term strategies that credibly reduce debt levels to a sustainable level in the long term are crucial. In this context, the targeted and efficient use of resources from the Recovery Fund should be given the same weight as a fiscal reform process. In this way, fiscal sustainability can be combined with the need for investment in green and digital projects for the future.”

“After the crashing slump in December, retail sales have now fallen even further. No wonder, because the retail sector was hit by two adversities at once in January: the lockdown and the withdrawal of the temporary VAT cut, the extension of which would have helped only those companies that hardly suffered any losses anyway. Since a significant part of the retail sector – including mail order, supermarkets and other convenience stores – remained open during the lockdown, the aggregate minus of 4.5% says little about the shortfall in the closed stores. In some cases, the scope for adjustment is limited, which is why the need for targeted support remains high. In terms of the economy as a whole, we will come through the second lockdown much better than through the first, thanks to the stable recovery in manufacturing. For the sectors directly affected by the lock-down, however, this is little consolation.”