Economy

“With the first brightening of the business climate in seven months, the economic start to the new year has been successful, at least in terms of sentiment. Companies finally see light at the end of the tunnel – and rightly so! A “technical recession” in the winter half-year 2021/2022 can hardly be avoided. But the renewed pandemic-related phase of weakness should be over in the foreseeable future. A strong growth spurt is likely to follow as early as spring, driven by the recovery of consumer-related services and then increasingly by industry as the year progresses. Hopes rest on an overcoming of the pandemic in the course of the year and significantly fewer disruptions in the global supply chains.”

"The Fed, unlike the ECB, pursues a dual mandate. The Fed's mandate is to maximise employment while keeping prices stable. The US labour market is performing well, with the unemployment rate at 3.9% in December further approaching the pre-crisis level of 3.5%. This allows the Fed to focus on the fight against rising prices. The inflation rate in December was 7.0%, the highest level since 1982. To counteract this development, the Fed announced the end of the bond-buying programme in March, and in the December meeting it also signalled the prospect of three interest rate steps in 2022. Some members of the Fed's Open Market Committee have recently advocated that the first hike should take place in March. The press conference following the January meeting will probably be used to prepare this step. In addition, the reduction of the Fed's balance sheet of almost USD 9 trillion will be discussed. I think it is possible that the reduction will already begin in the summer.”

“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.”

“The last data point of 2021 did not bring the slowdown in price growth expected in the expert survey. The inflation rate rose for the sixth time in a row in December to now 5.0%. This year, it is to be expected that the inflation rate will fall again due to the elimination of special effects. But how fast it goes depends on overcoming supply bottlenecks and energy prices. Unfortunately, the omicron variant makes new supply chain disruptions more likely, even if a further tightening of the pandemic situation could cool price pressures somewhat for the time being. In any case, if a noticeable downward trend in the inflation rate fails to materialise, the pressure on workers to seek higher wage settlements will increase and with it the risk of second-round effects. It is therefore crucial that the ECB keeps a close eye on this development and clearly and reliably communicates the prospects for an interest rate turnaround in light of further inflation developments. The announced reduction in securities purchases was an important step in this direction and appropriate both from a monetary policy perspective and with a view to the economy, despite all the uncertainty.”

“In the year just ended, inflation has increased a lot. It has reached new heights every month since the beginning of the year, with the exception of a short pause in June. In December, the inflation rate, as measured by the consumer price index CPI at 5.3% (HICP: 5.7%), is climbing to another high point. As with mountain climbing, the question that arises when looking at inflation is whether the descent awaits after the summit or a further, hitherto unexpected rise. Both are conceivable: there is much to suggest that price growth will cool off as a result of the elimination of base effects but also due to a renewed intensification of the pandemic situation. At the same time, it remains uncertain how quickly the acute supply shortages on the energy markets and the supply bottlenecks will ease. If these persist well beyond the first quarter of 2022, the decline in inflation rates is also likely to slow. In this case, the pressure on the collective bargaining parties, which is still low due to the pandemic, will increase and could result in higher wage agreements. It is therefore crucial that the ECB keeps an eye on the interest rate turnaround, communicates it reliably and pursues it consistently, taking into account further inflation developments. The planned reduction in its purchasing programs was an important step in this direction and, despite all the uncertainty, appropriate both from a monetary policy perspective and with a view to the economy.”

"The labour market balance at the turn of the year is mixed. On the plus side, the labour market situation improved rapidly: Unemployment has fallen to the end of the year. At 2.3 million, the number of unemployed persons is almost 400,000 lower than in the same month of the previous year. The number of short-time workers has fallen from 6 million in April 2020 to 700,000 in October 2021. There are 800,000 job vacancies currently registered with the Federal Employment Agency, the highest number in two years. These figures are encouraging. But the recovery on the labour market is still on shaky ground. On the debit side – followed by the shortage of skilled workers – is Omicron. The new viral mutant will become another severe test for the German economy. The outlook for the economy and the labour market is therefore highly uncertain for the next few months. Many companies and jobs are still being supported with extensive subsidies. It is right for companies and jobs to be preserved for a limited period of time in a state of emergency. But the support must be phased out in good time and the companies must be able to operate under their own steam again. The overriding goal must therefore be to combat the virus on a broad front. Vaccinating as many people as possible worldwide – if necessary with adapted vaccines – holds out the only hope of ending the state of emergency in the new year."

“The strong comeback of services has given a powerful boost to economic output in the euro area. At the same time, disrupted supply chains in the industrial sector have weighed less on production than in Germany. As a result, the precrisis level is within reach. However, with the lifting of most Corona measures, the potential for rapid improvements in the economic situation has now been exhausted. At the same time, the recovery is being held back by an unpleasant combination of rapidly rising energy prices, persistent shortages and local waves of infection of varying severity. A year-end spurt in growth will therefore fail to materialise.”

“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.”