Unchanged policy despite stagnation

EcoPerspectives // 4 quarter 2019  
Unchanged policy despite stagnation  
Weak data and business cycle indicators suggest that economy would be in a mild technical recession. The weakness is mainly in the  
manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is  
unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-  
over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long  
planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.  
1- Growth and inflation  
A mild recession  
GDP Growth (%)  
Inflation (%)  
Weak manufacturing data and business cycle indicators suggest  
that the economy contracted in Q3 for the second consecutive  
quarter, implying that the economy would be in technical recession.  
As the economy is currently operating close to full capacity, the  
current turbulence could for the moment be considered as a  
normalisation of the economic situation.  
The weakness is in particular located in the manufacturing sector,  
against the backdrop of Brexit and elevated trade tensions.  
Germany’s large manufacturing sector seems more affected than  
that in other countries. It is partly due to Germany’s specialisation in  
transport and investment goods and its rather important exposure to  
the Chinese market. Moreover, several large firms listed on the DAX  
have been experiencing serious problems. The difference in  
price/book value between the S&P500 and the DAX is even at its  
largest for 18 years. By contrast, in the non-manufacturing sector,  
activity indicators, although weaker from a year earlier, remain at  
relatively high levels.  
Source: National accounts, BNP Paribas  
- Manufacturing production (%, y/y)  
▪▪▪ France, Italy, Spain (unweighted average)  
Despite the mild recession, labour market conditions remain  
extremely tight and vacancies remain at record high levels. In  
August, the unemployment rate stood at only 3.1%, the lowest in the  
eurozone. Given recent recruiting difficulties and the Germany’s  
strict employment protection legislation, employers might prefer to  
hold on to their workforce by using short-time working schemes. The  
number of employees in these schemes has been increasing.  
Government sticking to their fiscal guns  
In September, Finance Minister Scholz announced the 2020 Budget.  
It will be mildly fiscal expansionary in accordance with the coalition  
agreement but the budget will remain in surplus (Schwarze Null).  
Policy will remain directed at increasing disposable income in  
particular for low and average income earners and families. This  
policy will continue in 2021 by increasing child benefits and the  
scrapping of the solidarity tax  a surcharge to help rebuild eastern  
Germany - for 90% of tax-payers. The authorities want to reduce the  
general government debt to close to 50% by 2023.  
Source: Eurostat  
emission trading system to cover the transport sector and the  
heating of buildings. The climate plan completes the earlier  
announced phasing out of coal by 2038. The government has made  
EUR 40 bn available for the restructuring of the coal regions over  
the coming 20 years.  
Given the favourable budgetary situation and negative borrowing  
costs, the German government has come under pressure from  
international organisations such as the IMF and the ECB to use the  
fiscal room to support the economy. Recently also the German  
employers’ organisation DBI joined the chorus. For the moment,  
these appeals have fallen on deaf ears. The German government  
argues that the economy is still operating close to potential.  
Moreover, because of the long lags and uncertain impact, fiscal  
In addition, in the same month the government announced a  
comprehensive climate package in order to reduce CO emissions  
by 55% from the 1990 level by 2030. From 2050, the economy  
should become carbon neutral. For the period 2020-2023,  
EUR 54 bn will be spent on incentives for climate-friendly behaviour  
and investment. This will be largely financed by the extension of the  
EcoPerspectives // 4 quarter 2019  
stimulus, beyond the operation of the automatic stabilisers, is  
maybe not the most appropriate instrument for the fine tuning of the  
business cycle. In addition, the spill-over effects on the rest of the  
eurozone is rather limited (see Box). However, Finance Minister  
Scholz has declared that he stands ready to loosen the purse  
strings in the case of an economic crisis.  
- The effectiveness of fiscal policy  
We have used the NiGEM model to simulate the effect of an  
increase in government investment by 1% in GDP maintained over  
two years. Assuming no change in interest rates, real GDP in  
Germany would be 0.5% higher compared to the base run after two  
Prolonged stagnation and political tensions  
GDP growth is forecast to slow to 0.4% in 2019 and 0.2% in 2020.  
The main driver is domestic demand, in particular supported by  
generous wages increases. In Q2 2019, contract wages were 3.8%  
higher from a year earlier. Inflation is expected to decline from 1.4%  
in 2019 to 1% in 2020. However, core inflation is likely to increase  
gradually in the coming years, as a result of domestic wage  
pressures. The Bundesbank estimates that an increase in wage  
costs would lead to an increase in consumer prices by 0.3% in the  
medium term.  
This is substantially smaller than the initial shock, as the increase in  
demand pulls in more imports. Moreover, the labour market is set to  
tighten further which will drive up wages and consumer prices. In  
the second year, consumer prices will be 0.3% higher than in the  
base run. The resulting loss in competitiveness will also be  
supportive for imports, whereas exports may decline. As a result,  
the current account surplus will decline by 0.7% of GDP.  
The initial deterioration of the government balance will be softened  
by the increase in tax receipts and reduced social spending. All in  
all, the government balance is set to deteriorate by 0.9% of GDP.  
Heavy losses in the European and state elections for the governing  
parties CDU/CSU and SPD have led to tensions within the coalition.  
An increasing number of SPD members would like the party to leave  
the government. The SPD congress in December should elect a  
new leader  Finance Minister Scholz is amidst the contenders –  
and may choose a new direction, which could increase tensions in  
the coalition.  
The spill-over effects to other countries are limited. The main  
beneficiaries of a fiscal boost are the small neighbouring countries.  
In particular, production in Hungary & Slovakia (both 0.4% higher  
than base run after two years) and the Netherlands & the Czech  
Republic (both 0.3%) will benefit from a German budget stimulus.  
The effect on France, Italy and Spain is close to 0.1% after two  
Raymond Van der Putten  
These results should be interpreted with care. As a consequence of  
the shock, government investment would increase by almost 50%. It  
is doubtful if sufficient projects can be found on this scale and within  
a short time span. Moreover, labour shortages in the construction  
sector may form a major obstacle in implementing the programme.  
Source: calculations BNP Paribas with NiGEM  
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.
Ce site présente leurs analyses.
Le site contient 2452 articles et 630 vidéos