Perspectives

Nearing a turning point

st  
10  
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
Germany  
Nearing a turning point  
Economic activity increased by only 0.6% in 2019, as the decline in manufacturing production was offset by increased activity in more  
domestically oriented sectors. In the coming two years, the economy will be supported by more accommodative fiscal policies.  
From Q2 2020, the pick-up in exports related to the partial lifting of uncertainties may more than compensate for easing consumption  
growth. Nevertheless, GDP growth is expected to remain below potential. The possible departure of the SPD from the ruling coalition  
forms a major political risk.  
A prolonged period of virtual stagnation  
1- Growth and Inflation  
According to the latest statistics and business cycle indicators,  
economic activity hardly increased in Q4 2019. Industrial production  
might even have further contracted as the manufacturing PMI,  
despite its hesitant improvement, remained firmly below the 50 mark.  
In particular Germany’s large car industry was affected. In October-  
November, production in this sector was about 20% lower from two  
years earlier.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2
.8  
1
.9  
1
.7  
1
.5  
1
.4  
1.4  
1.2  
1.2  
20  
0
.6  
By contrast, activity in construction and services held up quite well  
according to the ifo surveys. In the service sector, the indicator even  
rose in December to its highest level of the past six months. In  
construction, companies remained upbeat of their current business  
situation, but became more pessimistic about activity in the coming  
few months.  
0
.4  
1
7
18  
19  
20  
21  
17  
18  
19  
21  
Source: National Accounts, BNP Paribas  
2
- Growth and Inflation  
Despite the economic slowdown, labour market conditions have  
hardly deteriorated. In November, the unemployment rate amounted  
to 3.1%, only 0.1% higher than in the previous month. Moreover, job  
vacancies have remained at a relatively high level. Even in the  
manufacturing sector, many employers still report labour shortages  
as being a limiting factor for their production.  
2
, ▪▪▪ Greenhouse gas emissions in CO equivalent tonnes  
Targets of the climate package  
1
200  
1
000  
8
00  
Nevertheless, employers’ organisations and trade unions have been  
adapting to the weaker business climate, as recent wage  
settlements have been less generous than those concluded one  
year earlier. The negotiated wage rate in the period August-October  
missed target  
600  
4
00  
00  
0
2019 was 2.4% higher compared to a year earlier. In early 2019, the  
2
annual rate of change stood at around 3%.  
For the moment, the increase in labour costs has hardly affected  
consumption prices. In 2019, HICP inflation declined to 1.4%  
compared with 1.9% in the previous year, as the rise in energy  
prices slowed to 1.3%. By contrast, prices for services increased by  
2
000  
2010  
2020  
2030  
2040  
2050  
Source: Umweltbundesamt, BNP Paribas  
government also intends to increase spending in order to reduce the  
emission of greenhouse gases (see below). As share of GDP,  
government spending - excluding interest payments - is expected to  
reach a highest in 2021 since the reunification peak.  
1.6%.  
Fiscal easing  
During the economic boom in the years 2014-2018, the government  
followed Keynesadvice to follow tight fiscal policies in order to  
restore government finances. The government indeed succeeded in  
reducing the debt-GDP ratio to 61.2% of GDP in 2019.  
On the revenue side, income taxes will be lowered, in particular  
because of the partial scrapping of the solidary tax. On the other  
hand, additional tax receipts can be expected related to the rapid  
increase in wages and the progressiveness of the tax system.  
Moreover, energy taxes are set to increase. Overall, the tax burden  
will be virtually unchanged. Government finances are expected to  
For 2020 and 2021, fiscal policy is set to be eased in line with the  
coalition agreement. Government investment will be stepped up in  
particular for transport and digital infrastructure and education. The  
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11  
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
remain in surplus during the projection period and the debt-GDP  
ratio could decline below 60%.  
3
- Improving outlook for exports  
Orders (2015=100, three-month moving average) :  
▪▪ Eurozone,  Outside the eurozone  
The political uncertainty has increased as the SPD members  
elected as chair persons of their party Saskia Esken and Norbert  
Walter-Borjans, two critics of the grand coalition. They are calling for  
renegotiating the coalition agreement. However, CDU and CSU are  
unlikely to give in. This places the SPD for a difficult choice.  
Pressing too hard for policy change could lead to a government  
crisis and new elections. Given the SPD’s position in the polls, a  
severe defeat is likely, which could pave the way for a coalition  
between the CDU/CSU and the Greens.  
Export expectations (balance of opinions, RHS)  
120  
115  
30  
25  
20  
15  
10  
5
1
1
1
10  
05  
00  
95  
Greener policies add to inflation  
90  
0
8
5
-5  
Last December, the German Parliament adopted a climate package,  
targeting zero CO emissions by 2050 (Chart 2). The intermediate  
2
objective is to reduce greenhouse gas emissions by 55% in 2030  
compared with 1990. However, the government has admitted that  
the country will miss the 2020 target, a reduction of 40% of carbon  
emissions from the 1990 level.  
80  
-10  
2015  
2016  
2017  
2018  
2019  
Sources: Deutsche Bundesbank, IFO, BNP Paribas  
significantly higher number of orders from abroad. Even in the  
automotive industry, managers have become significantly less  
pessimistic. This will compensate for slowing domestic demand  
growth. Despite very accommodative monetary and fiscal policies,  
household disposable income growth is projected to increase at a  
slower rate than in previous years. This will weigh on consumer  
demand and housing construction. Moreover, investment demand  
could weaken, as capacity utilisation ratios have fallen below their  
long-term level. All in all, GDP growth is expected to increase by  
0.8% and 1.2% (adjusted for calendar effects by 0.4% and 1.2%) in  
2020 and 2021, respectively.  
2
The main measure is the creation of a CO tax for sectors that are  
outside the scope of the EU Emission Trading Scheme (ETS). In  
021, the tax should amount to EUR 10 per tonne CO2. It will  
2
steadily increase to EUR 35 per tonne by 2025. Tax receipts will be  
used to finance climate protection measures such as lowering  
electricity prices, increases in commuter allowances, and subsidies  
for green projects.  
At a macroeconomic level, the consequences of the package are  
likely to be limited. The CO levy will result in a rise in energy prices  
2
by 2%, thus raising inflation by around 0.2% in 2021. Core inflation  
will be hardly affected. The effect on activity will also be quite limited.  
The tax will reduce disposable income, but as the receipts are  
completely used for climate protection spending, the impact on  
activity will be neutral. Moreover, as the measure does not affect  
large energy users that are subjected to the ETS, the possible effect  
on price competitiveness is likely to be limited.  
Although growth will remain well below potential in 2020 and 2021,  
the labour market is likely to remain very tight. On the one hand,  
manufacturers have resorted to reducing work hours and short-time  
working schemes to avoid dismissing their core workers. In addition,  
employment growth remains strong in particular in non-market  
services. Moreover, immigration is likely to slow as job opportunities  
diminish. The unemployment rate is projected to remain at very low  
levels. Negotiated pay rates may further ease in 2020 due to the  
downturn in the industrial sector, but may pick up next year. Inflation  
excluding food and energy is expected to rise slightly as past wage  
increases, in particular in services, are gradually passed onto  
consumers. Total inflation could edge down in 2020 to 1.2% and  
slightly accelerate in 2021 to 1.4% .  
However, the measure will have an impact on the income  
distribution. It is well-known that carbon taxes particularly hurt low-  
income families and seniors. On the positive side, it will shift  
demand away from polluting activities.  
Exports prospects have improved  
All business cycle indicators point to continuing subdued growth in  
Q1. Industrial production might even further contract, but this is  
compensated by a slight increase in activity in more domestically  
oriented sectors such as services and housing construction.  
Demand in these sectors is still underpinned by strong disposable  
income growth and robust labour market conditions.  
However, the cycle may be about the turn. The ifo export  
expectations index rose significantly in December, underpinned by  
signs of an easing in the trade conflict and more clarity about Brexit  
after the UK general election (Chart 3). In particular, manufacturers  
of electrical products and pharmaceuticals are expecting a  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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