Yesterday brought some relatively downbeat news for the German economy. It’s main industry body gave its view on developments.
For Germany, the BDI expects GDP growth in the order of 3.5 percent this year – after 2.5 percent last year. German exports would increase this year by four percent compared to the previous year – and thus just half as much as last year.
We can start with 2021 basically being downgraded all year and ending up at 2.5%. This means that we can compare this with the numbers released in this morning’s ECB Economic Bulletin and note that Germany is underperforming the Euro area average.
Growth is expected to rebound strongly over the course of 2022. The December Eurosystem staff macroeconomic projections foresee annual real GDP growth at 5.1% in 2021, 4.2% in 2022, 2.9% in 2023 and 1.6% in 2024. Compared with the September staff projections, the outlook has been revised down for 2022 and up for 2023.
I also note that we have the same drumbeat for 2022 which in terms of economic growth has been revised lower. I would not worry too much about the 2023 numbers because the rise there will simply be a knee-jerk to the 2022 fall.
For once the idea of Germany being a manufacturer and producer does not come across as a strength.
According to the BDI, the industry is confronted with massive disruptions in its global supply chains. Many companies in the automotive, electrical and mechanical engineering industries are therefore suffering from delivery bottlenecks. “These bottlenecks will slow down industrial value creation in the years 2021 and 2022 by more than 50 billion euros each,” said Russwurm. “Despite full order books, missing microchips, components and raw materials will affect production for a long time to come.”
It is also interesting that in their requests/analysis Germany’s industry starts with worries about energy costs.
”High energy costs, slow digital change, lack of infrastructure investments, crippling government and high taxes – all of this makes the location less and less attractive for companies from home and abroad.”
There has been the short-term issue of SKW Piesteritz reducing ammonia and urea production affecting fertliser but also the longer-term one. As we moved into 2022 Germany added to its own problems as DW pointed out on New Year’s Eve.
Germany is to shut down three nuclear power plants on Friday, as part of the country’s phase-out of nuclear energy.
The closures take place as Europe faces one of its worst-ever energy crises and as nuclear power is, once again, gaining support as it produces significantly less carbon dioxide.
The plants in Brokdorf in the northern state of Schleswig-Holstein, Grohnde in Lower Saxony and Unit C at Gundremmingen in Bavaria in the south are being taken off the grid.
It really is quite extraordinary that this has taken place in the middle of an energy crisis. But there is more to come.
This means that in 2022, Germany will have just three nuclear power plants — in the states of Bavaria, Baden-Württemberg and Lower Saxony.
They are due to cease production in exactly a year’s time, cutting nuclear energy output by around four gigawatts — equivalent to the power produced by 1,000 wind turbines.
The final point about wind turbines omits to point out only when the wind is blowing sufficiently. But the long-term issue here is of industrial competitiveness when you willfully make your own energy supply both expensive and intermittent.
The German Bundesbank has a new President Joachim Nagel and he has already expressed his worries about inflation.
“right now I see more of a risk that the inflation rate could remain elevated for longer than expected at the current time. In any case, monetary policymakers must be on the alert.”
That issue was reinforced this morning by the news on agricultural prices.
WIESBADEN – Producer prices of agricultural products were 20.8% higher in November 2021 than in November 2020. This has been the highest year-on-year increase in prices since July 2018. Compared with October 2021, the prices were up by 4.1%.
The area particularly driving this is below.
The Federal Statistical Office (Destatis) also reports that especially the prices of plant products rose on the same month of the preceding year. In November 2021, they were 29.4% higher than in November 2020. The prices of animal products increased by 14.9% year on year.
So it looks like particularly bad news for vegetarians and vegans.
This added to news from yesterday of other price rises.
In December 2021 the selling prices in wholesale trade were 16.1% higher than in December 2020. In November 2021 and in October 2021 the annual rates of change had been +16.6% and +15.2%, respectively.
The only hopeful part was the lower rate of monthly growth.
From November 2021 to December 2021, the index rose by 0.2%.
This will all feed into consumer inflation although it will get a one-off reduction to below 5% from the present 5.7% as the VAT changes fall out of the annual comparison.
This is an area which has been left out of the consumer inflation numbers and the update below gives a very strong hint as to why.
WIESBADEN – In the third quarter of 2021, the prices of residential property (house price index) in Germany rose by an average of 12.0% year on year. This was the largest increase in the prices recorded for residential property transactions for the second time in a row since the beginning of the time series in 2000.
As you can see putting them in the inflation measure would give a reading similar to the 7% recorded in the US yesterday. It is hard not to have a wry smile at the reference to 2000 as it has been since then that they have been trying to get around to putting owner-occupiers expenditure in the inflation figures.
Actually the pace looks to be accelerating.
The Federal Statistical Office (Destatis) also reports that the prices of dwellings and of single-family and two-family houses were up by an average of 4.2% compared with the previous quarter.
What is quite noticeable is that the era of negative interest-rates and large-scale bond purchases or QE saw annual house price growth rise above 5%. The house price index was based at 100 in 2015 which is conveniently in line with that and ended 2020 at 138.7 showing quite a push which has become a shove in 2021.
The issue of house prices is attracting attention and of course the official view will concentrate on claimed wealth effects. But yesterday the German financial regulator expressed its worries about the situation.
However, vulnerabilities to negative economic developments and especially to the residential property market have built up. Recently, residential property prices and lending have developed particularly dynamically.
So in the coded language used for such situations they are worried and they have also made some changes.
The Federal Financial Supervisory Authority ( BaFin ) intends to set a countercyclical capital buffer of 0.75 percent of the risk-weighted assets on domestic risk positions and to introduce a sectoral systemic risk buffer of 2.0 percent of the risk-weighted assets on loans secured by residential real estate. The quotas are currently at zero percent.
So banks will have to hold a further 5 billion Euros against their mortgage lending.
So we have a confession that house prices are a problem and a collision between official bodies. Bafin is trying to act against the negative interest-rates and QE of the ECB in another example of how prescient Sir Walter Scott was.
‘Oh what a tangled web we weave/When first we practice to deceive’
With Germany joining the house price pumping party I also note that it has set policies to weaken and maybe cripple its previously successful industrial sector as that is the course its energy policy is on. Curious times indeed.