Schadenfreude (and other great German words)
11 Feb 2019
Germany is undoubtedly struggling at the moment. Growth expectations have decelerated rapidly since last summer.
This article forms part of the UK's 'Weekly Digest' series.
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Not that this is a problem specific to Germany. Perhaps more worrying, given that country’s groaning public debt burden and unconventional government, was the EC’s cut to Italy’s 2019 growth forecast, from 1.2% to 0.2%. Its growth forecast for the whole euro area was reduced from 1.9% to 1.3%. Reasons given range from locally specific problems (more of which in a moment) to China’s domestic slowdown, the US government shutdown and, naturally, Brexit.
The good news is that the discounting characteristics of financial markets mean that much of this is already priced in.Do we need to be alarmed? The good news is that the discounting characteristics of financial markets mean that much of this is already priced in. At its nadir, Germany’s DAX Index of leading shares was 23.4% below its peak (currently still -18.6%). And even though the bad news is unlikely to reverse immediately, the pace of downgrades has probably peaked. No doubt this is somewhat dependent upon matters that are outside Germany’s control, such as the outcome of US/China trade talks or Brexit (or a possible iceberg that we haven’t spotted yet), but, on balance, we are of the opinion that both of these issues will be resolved without triggering crises.
There was also an unexplained black hole in pharmaceutical production numbers. In a recent FT blog, Gavyn Davies estimated that these factors reduced Germany’s annualised growth by 1.4% in the second half of 2018. If they normalise (as he expects) and there is some catch-up, growth in the first half of this year could be more than 2%. Cue widespread relief.
And if governments would exercise such opportunities to borrow more at invitingly low rates – also, heaven forbid, to cut income and expenditure tax rates - aggregate demand for goods and services would be stimulated. And businesses would add to their productive capacities, including their work forces. And depressed rates of growth of GDP and accompanying incomes would improve.
Governments with such favourable credit ratings neither have to undertake the construction nor the management of such low return projects that can be leased to private operators who win competitive tenders to do so.Demand for credit, especially bank credit, would be encouraged, bank balance sheets would strengthen, while the national savings rates declined and interest rates could rise for very good reasons. Demand for capital to invest would be rising faster than supplies of savings. Less not more austerity is urgently called for in northern Europe - to help save the euro and the European project. The Italian and other populists are on the right track while the German fiscal conservatives perversely continue down a dead end.”
About the author
John is Head of Investment Strategy for Investec Wealth & Investment UK, is a member of the Global Investment Strategy Group, and is Chair of the Investec & Investment UK Asset Allocation Committee. John graduated from Exeter University in Modern Languages in 1984. He spent 27 years as an institutional stockbroker with Merrill Lynch and Lehman Brothers, before moving to investment management in 2011 and joining Investec in 2013. John is an Everton FC supporter.