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Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler
Silvia Quandt & Cie. AG, Merchant & Investment Banking / Schlagwort(e): Sonstiges
- Which leading indicator will Germany follow: the IFO or the PMI?
- German growth potential likely higher than latest Bundesbank estimate
Mixed economic news and uncertainty over the direction of the Euro zone are keeping markets volatile. The latest leading economic indicators confirm the view that the growth base is spreading from the US to much of the rest of the world. Especially China is showing signs of revival. However, Europe remains at the tail end and there are no signs that countries in recession will recover soon. Germany is caught between those developments and reading the data for direction is not easy. In our judgment, Germany's strengths outweigh the drags from Europe. This should not only be visible in better economic performance this year, but a higher growth potential for the rest of this decade.
Up or down or apples and oranges?
The Euro-area debt crisis has undoubtedly a negative effect on the German export sector. How much this will pull down the economy, however, is less clear. Most economists have raised their growth forecasts for this year and next, but the actual data remains mixed. The contrast is best seen in the divergence between the two most watched leading indicators, namely the manu-facturing PMI and the manufacturing part of the IFO index. The IFO has been on an uptrend since November. The PMI also improved around the turn of the year, but that gain was more than lost over the last three months. Moreover, the IFO is in expansionary territory, while the PMI points to a contraction.
So, which indicator is more reliable? Some argue that the IFO is better since it has a much larger sample size (7.000 versus the PMI's 1.000). Indeed, the PMI's bias toward larger companies could explain some of the difference. Yet the real difference is design. The IFO is a qualitative survey, which asks companies to evaluate current business conditions and expectations. The PMI is a quantitative survey, which asks companies about actual output, orders, inventories, employment and prices. Thus, the message from the two indicators is that the Euro-area
debt crisis has a negative (quantitative) impact on current activity, but that this is not spoiling business confidence (qualitative). Companies feel competitive and profitable and expect the business environment to improve, which includes a gradual stabilization of the Euro-area debt crisis. This optimism is also reflected in the continued positive labor market development, which we believe was not altered by the April rise in unemployment (see box). Of course, quantitative indicators need to improve over time for the optimism to last. The necessary growth impetus is more likely to come from other parts of the world, especially emerging markets, and less from Europe.
German growth fundamentals have improved
Whether Germany can keep going is crucial for the Euro's chance of survival. Important is also how strong Germany will grow. Estimating future growth potentials is an art and not a science. A good starting point is to look at potential growth in the past. This can be done using regression techniques or simply looking at trend growth over full business cycles (peak-to-peak). The latter approach shows that Germany's growth potential over the last two business cycles was about 1.5%. Before unification, West Germany's growth potential was well above 2% and then collapsed after the unification boom, marked by slower capital and labor deployment. East Germany's growth potential was 3% in the cycle after unification as labor was replaced by massive capital investments. In the cycle prior to the financial crisis, East and West German growth potentials and resource deployment rates converged.
So, where from here? The Bundesbank estimates that the growth potential will average just 1.25% until the end of the decade (see April monthly report), due to negative demographic developments. To be sure, aging will be a significant drag. In our judgment, however, this effect will be more than offset by strong immigration from other parts of Europe, structural changes that raise competitiveness and productivity, thus leading to more capital spending, and the favorable reversal in monetary conditions. As a result, we believe that the growth potential is closer to 2%.
- According to the Bundesbank's base case scenario, net immigration will average 200.000 p.a. until 2015 and then decline to 150.000 until the end of the decade. That implies that net immigration already peaked in 2011/12. The federal statistics office reported net immigration of 135.000 in the first half of 2011 (+122% oya) and first indications point to a further acceleration in the second half. In our judgment, this trend will continue. Despite initially low mobility, the competitiveness gaps between Germany and the Euro-area periphery will increasingly trigger labor movements somewhat similar to the adjustments after German unification (see ITL March 8, 2012).
- In the words of the Bundesbank's April monthly report, the success of Germany's structural reforms was primarily to adjust the labor market and public finances to a moderate growth environment. We believe the reforms, including changes at the corporate level, achieved much more. To see that, it is better to look just at West Germany. In the cycle prior to the financial crisis, trend growth in West
Germany already reaccelerated. And given that the fruits of the reforms only started to kick in from the middle of the past decade, it is reasonable to assume that the growth potential already exceeded 1.5% before the crisis. Indeed, in its monthly report from October 2007, the Bundesbank itself raised the growth potential to 1.50-to-1.75%. Besides corporate and labor market reforms, German exporters made a big structural shift from stagnating OECD markets to vibrant emerging markets.
- Potential growth is largely about supply-side conditions. However, demand-side conditions, especially structural policy conditions matter as well. The cost of unification put Germany into a fiscal straight jacket for over a decade. More importantly, Germany entered the Euro with a much overvalued currency and real interest rates well above the real rate of growth. Today, Germany's real effective exchange rate is 25% lower than 15 years ago and real interest rates are well below the real growth rate. And that reversal is likely to persist for years.
- Finally, housing is a special case in the potential growth analysis. In its October 2007 report, the Bundesbank said that housing remains a drag on potential growth due to the adjustment after the unification boom. This has clearly changed as supply is falling short of demand and financial conditions have improved sharply (see ITL March 22, 2012).
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor, and was first published 4 May 2012, Silvia Quandt Research GmbH, Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt.
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Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz) in combination with the German regulation concerning the analysis of financial instruments (Finanzanalyseverordnung) requires an enterprise preparing a securities analysis to point out possible conflicts of interest with respect to the company or companies that are the subject of the analysis. A conflict of interest is presumed to exist, in particular, if an enterprise preparing a security analysis:
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(d) is serving as a liquidity provider for the company's securities by issuing buy and sell orders;
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(f) or the analyst covering the issue has other significant financial interests with respect to the company or companies that are the subject of this analysis, for example holding a seat on the company's boards.
In this respective analysis the following of the above-mentioned conflicts of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG, and its affiliated companies regularly hold shares of the analysed company or companies in their trading portfolios. The views expressed in this analysis reflect the personal views of the analyst about the subject securities or issuers. No part of the analyst's compensation was, is or will be directly or indirectly tied to the specific recommendations or views expressed in this analysis. It has not been determined in advance whether and at what intervals this report will be updated.
Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate the shares of the companies they cover on an absolute basis using a 6 - 12-month target price. 'Buys' assume an upside of more than 10% from the current price during the following 6 - 12-months. These securities are expected to out-perform their respective sector indices. Securities with an expected negative absolute performance of more than 10% and an under-performance to their respective sector index are rated 'avoids'. Securities where the current share price is within a 10% range of the sector performance are rated 'neutral'. Securities prices used in this report are closing prices of the day before publication unless a different date is stated. With regard to unlisted securities median market prices are used based on various important broker sources (OTC-Market).
Disclaimer This publication has been prepared and published by Silvia Quandt Research GmbH, a subsidiary of Silvia Quandt & Cie. AG. This publication is intended solely for distribution to professional and business customers of Silvia Quandt & Cie. AG. It is not intended to be distributed to private investors or private customers. Any information in this report is based on data obtained from publicly available information and sources considered to be reliable, but no representations or guarantees are made by Silvia Quandt Research GmbH with regard to the accuracy or completeness of the data or information contained in this report. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. Prior to this publication, the analysis has not been communicated to the analysed companies and changed subsequently. This report is for information purposes only; it is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the securities mentioned in this report. In compliance with statutory and regulatory provisions, Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH have set up effective organisational and administrative arrangements to prevent and avoid possible conflicts of interests in preparing and transmitting analyses. These include, in particular, inhouse information barriers (Chinese walls). These information barriers apply to any information which is not publicly available and to which any of Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates may have access from a business relationship with the issuer. For statutory or contractual reasons, this information may not be used in an analysis of the securities and is therefore not included in this report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may conduct or may have conducted transactions for their own account or for the account of other parties with respect to the securities mentioned in this report or related investments before the recipient has received this report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates, its executives, managers and employees may hold shares or positions, possibly even short sale positions, in securities mentioned in this report or in related investments. Silvia Quandt & Cie. AG in particular may provide banking or other advisory services to interested parties. Neither Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG or its affiliates nor any of its officers, shareholders or employees accept any liability for any direct or consequential loss arising from any use of this publication or its contents. Copyright and database rights protection exists in this publication and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Silvia Quandt Research GmbH. All rights reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Past performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this publication.
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Frankfurt am Main, 04.05.2012
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