The Four Faces of German Ballast
La hammered on one's feet It is a hilarious classic in silent film comedy. However, it is not at all funny if it is self-inflicted on the foot ends of the largest economy in the Eurozone, with dire consequences for people's working lives and well-being.
La Germany in the last decade it has given itself some beatings that will force it to remain in 2024 in recession for the second consecutive year, and with a worsening trend cyclical.
On the surface it looks like this: minimal variations of GDP: -0,3% in 2023 and -0,2% in 2024 (according to the latest estimate by the Berlin government itself). But with this slide back at the end of the year the Germans they will not have recovered the income of 2019, after the pandemic collapse and the partial post-rebound, so that we can talk about lost five years. Let us add that the current trend is declining: the PMI output It fell further in September and is now in sharp contraction territory, with its epicenter in manufacturing.
THEGerman industry it's screwing up, because the orders both domestic and foreign are in free fall, while production ends up in stocks, which are increasingly high. So, the manufacturing recession in Germany has just begun. And it is dragging down the other major economies of the Eurozone with it, with the exception of Spain.
What are the blows? that have crippled Germany's economy? We list four: excessive energy dependence on Russia; the dieselgate; the obsession for the balanced public budget; the redesign of the globalization.
Before the war of Russian invasion of Ukraine Germany it mattered 35% of oil, 50% of coal and 55% of gas from Russia. It had to diversify much more and more quickly than other European countries, also because in the meantime it closed its nuclear plants. Beyond the measurable effects in terms of costs, the Germans found themselves psychologically affected twice: in pride for having had to admit the grave mistake of having placed themselves in Moscow's hands; in safety so as not to know if and at what price they would have energy.
The second blow was the dieselgate of 2015, namely the tests on polluting emissions from engines that German car manufacturers they made up to meet the stringent American limits, just when they were banking on diesel as a winning technology because it was less polluting than petrol. This forced them to to remake one's image launching itself at forced stages towards electric vehicles, which implies give up 60% of added value and employment that the internal combustion engine gives. In the meantime, however, China, which is now the world's leading automotive market, has become a leader in electric cars.
The pandemic has hid these flaws because it has allowed car manufacturers to prioritize, given the chip shortage, the manufacturing of more profitable models, increasing turnover and profits. But now that production is massive and the question languid for many good reasons that have nothing to do with public incentives alone (lack of charging infrastructure, regulatory uncertainty, rapid technological obsolescence, still high prices, lower propensity to own a car, waiting for the less expensive Chinese offer), the chickens come home to roost.
The third blow has ancient roots and derives from theobsession with deficit and public debt. So much so that it was written in the constitution that the deficit must not exceed 0,35% of GDP in structural terms. Bypassing this constraint, the German government allocated off-balance sheet funds for rearmament and for the double digital and green transition. But last autumn the Constitutional Court declared this procedure illegal and Berlin had to eliminate incentives for transition, resulting in a flood of orders being canceled. Just when the push for electric cars was at its highest, so that factory yards filled up with unsold vehicles.
The "brake rule” the deficit in the German Constitution primarily slows down the economy. This rule, in fact, has caused a underinvestment of 300 billion euros in the last decade, compared to what other countries that boast a triple A rating of public debt reliability have done (figures estimated by the European Policy Center). The proven German inability of Germany invest in infrastructure, renewable energy and digitalisation (despite zero or negative real rates) contribute to Germany's current stagnation. One example: the systematic railway breakdowns which make train travel timetables unreliable, so much so that Switzerland no longer wants Deutsche Bahn trains on its railways.
The fourth blow comes from aanother obsession: export, export, export. The surplus in foreign accounts is the macho symbol of economic power and competitive superiority. When German governments and entrepreneurs were advised to raise wages to stimulate domestic consumption, they responded in astonishment with the same question: "Do you want us to become less competitive?". Now that the globalization has gone into reverse and Chinese are less inclined to buy foreign brands, machismo collapses and becomes a boomerang.
So, the German economic difficulties have deep structural roots that will not be eradicated in a flash. And they risk getting stuck in a political identity crisis, with unemployment and impoverishment bringing votes to nationalist parties. Therefore theEurozone could stay for a long time tail light of the global economic convoy.
At the head of this convoy remain the USA, roaring locomotive more than puffing and resembling the bullet train Japanese, while the Eurozone remembers the nice Casimiro steam train carrying the Dumbo circus, a memorable Disney film. The bullet train USA has the double traction consumption-employment, with the real wage bill growing and guaranteeing families the ability and desire to spend, while private debt remains irrelevant thanks to the treasure trove of extra savings which was accumulated during the lockdowns and which the revision of national accounts has further raised.
The outcome of presidential USA (November 5) risks being the boulder that derails the convoy? Difficult, at least in the immediate future. For two reasons: the result of the vote will not be available in the short term, given the very narrow gap between Harris and Trump in the states where the game of the great electors; thethe inauguration will take place on January 20th and until then the policies will not change. We will return to this topic in the next Lancet. In the meantime, we can safely say that the US growth remains high: +3,2% GDP in the third quarter now forecast by the Atlanta Fed, with growth also from non-residential private investments in addition to consumption.
On the contrary, the China It is marching slowly compared to the standards we were used to, and yet it is advancing. In this case the PMI indicates continuation along a lower trend, rather than stagnation. A slowdown that Angus Maddison had already predicted in 1998 in Chinese Economic Performance in the Long Run, 960-2030 AD, and when we asked him why he replied that the transition to lower growth rates would have been physiological together with the transition from a chasing economy to a leading global economy, as it was before the English Industrial Revolution.
And theItalian? Difficult times await him, generated by the context just described, by the need to reduce public deficit and debt (according to the new European rules which Italy helped to write) and from housing investment boom recoil, a boom that explains two-thirds of the growth of the last three and a half years. No incentives = no investments in housing = less GDP. Fortunately, the PNRR and, as the inestimable President of the Republic, Sergio Mattarella, has repeatedly urged, everyone to the bar to make it happen.
Inflation will always be with us
Il cooling of consumer prices It is a reality. Clearer in the Eurozone than in the US precisely because of the growth differential that is starting to widen again. And even clearer in Italy than in the Eurozone. A reality that will continue to manifest itself, albeit gradually.
Gradualness is linked to the sea change which has happened in recent years with the affirmation of the shortage of workers in relation to the question. This holds on wage dynamics, which is the main cost element of economic systems. The ultimate meaning is that we will not return to the deflationary context which prevailed after the Great Financial Crisis and before the pandemic.
All the more so since wars, the redesign of globalization and the green transition are inflationary. As can also be seen from the recent trend of oil and non-oil raw materials.
Short-term rate decline continues
“Rates must and will go down”, we wrote in last month's Lancette. The Fed he kindly agreed – even beyond our own expectations – and the ECB, which for once had taken the initiative to lower key rates before its American counterpart, will agree again at its meeting on October 17, bringing the overall decrease since the beginning of the year to 75 basis points. The Fed has made 50, but it will be able to catch up with the ECB in this happy race to the bottom, at the meeting next month. A competition that is also justified by theequally happy disinflation underway, a disinflation that is seen both in the USEFULL that in the expectations. Market rates are got off, apart from one modest rise connected to the good news about the American labor market.
Of these reductions in the cost of money the economy, on both sides of the Atlantic, had and needs, "as a deer longs for streams of water" (Psalm 42). The key rates are one thing, but the rates that families and businesses then pay are another. Both in the US and in the Eurozone, Both key rates and (real) rates for loans and mortgages continue to be significantly above the rate of economic growth, which means that monetary policy is still restrictive. A restriction that is not justified, given the geopolitical clouds that loom on the horizon and given the no room for maneuver for budgetary policies to support the economy.
But back to the half-point reduction decided by the Fed last month. We now know, from the minutes, that the nearly unanimous decision was actually more painful than it seemed. And it was later criticized by former Treasury Secretary Larry Summers (a grumpy hawk). But we must not forget the fundamental difference between the statute of the Federal Reserve and our ECB. The latter has carved into its statute the fight against inflation, and only once this objective has been achieved, monetary policy can kindly worry about the well-being of the Eurozone (growth, employment and other 'minor' objectives...). Now, the mandate of the Fed it's different: its statute puts it high two goals: low inflation and maximum employment. So, when the heads of the two Central Banks weigh up the pros and cons of a change in rates, these pros and cons they unfold along a different 'reaction function'. Now, in the September reduction, the clear reduction in price dynamics already ensured, in compliance with the first objective, a quarter of a point. And what did “maximum employment” require? Note that the mandate speaks of employment and not of growth in general. But the job market showed signs of a marked slowdown: In the first part of the year, the three-month change in private nonfarm payrolls was above half a million, but by August (the latest available data from the Fed in September) it had fallen to 3. Since then, with the September figure, it has climbed back to 300-odd, but still below the previous pace. And, taking into account that Rate changes take time to have an impact on the economy, it is understandable that the Fed wanted to act proactively. There will certainly not be a similar reduction in November, but The Fed is likely to continue its path of rate reduction of guide rates.
In reality, some effects generated by market expectations for the reduction of FED rates are already observable. mortgage refinancing, which increases disposable income for families, is very sensitive to the reduction of mortgage rates. These had reached prohibitive levels, but with refinancing families can reduce the monthly mortgage payment.
La yield curve (difference between the yield on 2-year and 10-year bonds) has normalized to America, as already mentioned, e it is no longer reversed in Germany and the United Kingdom. For Italy it's different: the curve has never inverted, since the original sin of the long-term weighs on the stockshigh public debt. An original sin, incidentally, that the market judges too severely: if we look at the today, there are no reasons to justify a performance of btp higher than that of the French titles. And this level of our long-term yields hurts us more than others, with higher real rates.
However, our spread, both compared to Germany (which fell below 130) and to France and Spain, they continue to report good weather, despite the fibrillations for the upcoming budget maneuver. It is noteworthy that the yields of 10-year government bonds in French have surpassed those of the Spain, and the spread between the btp and OAT French has fallen to its lowest level since before the Great Financial Crisis.
The tendency of rival currencies to appreciate dollar - euro e yuan – has recently been interrupted, following two American data – the rise in job creation and inflation that is struggling to fall – which have Fed's next move cast doubt at the November meeting: a 25 basis point drop, or no drop? Anyway, In the short term, the dollar could strengthen further, following the fall in ECB rates (see the graph on long-term real rate differential between T-Bonds and Bunds); and even if the Fed were to drop further in November, further reductions are more likely in the Old Continent than in the New.
La chinese coin there is little reason to tear up or down: with trade wars underway – tariffs and retaliation – there is no point in opening another front on the currency.
Stock markets don't give up and are hovering around historic highs both at Wall Street that Frankfurt and Tokyo. The only major exception is Shanghai: Despite the recent surge (following promises of stimulus from the Chinese government), we are still a long way from the highs. The Summer bad mood on Western stock markets did not reach the size of the correction, and quickly dissipated following the retaining earnings and the growing evidence of a monetary policy turnaround of no return. This justifies our constant invitation to overweight stocks in the portfolio of a confident investor. drawer. The only danger for the stock markets is the warlike and bellicose clouds, in the Middle East and in Ukraine, and we have no jurisdiction over this danger – apart from the please.