Posts Tagged ‘germany’

DCF 1.0

Fear. In different times greed is just as important. But right now, and across most of Europe, fear is the key driver. Money sloshes around, and all that those who control it want to do is limit the downsize. They are trying to mitigate against fear. And so afraid are they, that at times they have put money in assets that give negative interest rates, just to feel safe. This has been rather good news for Germany, because while fear has driven money away from Greece and Spain and co, making the government cost of repaying debt in these countries seem prohibitive, in Germany it has been quite different. Fear has boosted Germany coffers. And a new report tells us that the boost has been dramatic. This is why.

The euro crisis just won’t go away. In Germany they are sick of it too, and with good reason. Germany has done nothing wrong. Its work force has worked hard, saved for retirement, and what is wrong with that? Yet they are being punished; they are told that to atone for their sins of working hard and saving for the future, they must pick up the tab for indebted Europe. Yet, there is another way of looking at this, according to data produced by Germany’s own finance ministry, because the country has made a tidy profit from the euro crisis.

It all boils down the fact that money has to go somewhere. Corporates are saving. Across much of Europe, households are saving. Where does the money go? One thing is for sure, putting it in Greek bonds is risky. Spanish, Italian and Portuguese bonds don’t seem much safer either. But German bonds, in contrast, feel as safe as a safe house in a land with no crime. In fact so safe are German government bonds or bunds, perceived to be, that there have been times when the yields on some of them have been negative. So actually, Germany has done rather well out of fear created by the euro crisis – or should that be the other way around – a euro crisis created by fear? But can we put a number on how well?

German Social Democrat Joachim Poss wanted to know how much, and, as a man in power, he got an answer. The Germany finance ministry responded to Poss’s question by getting the abacus out and making some calculations. The ministry took its estimate for interest payments on its debt, and subtracted from that the actual interest. From its calculations it drew the conclusion that between 2010 and 2014, it will save 40.9 billion euros thanks to interest rates being lower than expected, which is thanks to money flooding into German bunds for the sake of safety.

This is a rather important point. Right now, Italy is posting a primary budget surplus, meaning its government is spending less than it receives before deducting interest on debt. If it was paying the kind of interest on debt that the German government pays, Italy would be close to being in surplus. And that in a nut shell is the case for euro bonds; that is to say for all countries in the euro area to raise money by using the same bonds, backed by each and every government. You can see why Germany does not like that idea, but then again, a monetary union with one central bank controlling monetary policy, cannot really work unless governments pay the same interest on their debts.

But the data relating to German savings on its debt does not tell the full story. The fact is that German exporters, the drivers of its economy, have done well out of the euro for another reason. If Germany still had the Deutsche mark, the currency would surely have risen sharply in recent years. By sharing a currency with the likes of Greece, Germany has enjoyed a massive terms of trade benefit.

So actually, for Germany there have been plenty of upsides to being in the euro, which is why it is right that it pays for the downsides too.

© Investment & Business News 2013

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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The numbers say what the numbers say. It may not feel right; it may defy reason, but there are reasons to think the Eurozone may be set to exit recession.

The latest flash Purchasing Managers’ Index tracking Eurozone manufacturing and services hit an 18 month high.

That is good, but especially encouraging was that the July index was 50.00, which is good news because 50 is seen as the key level. Anything below 50 is supposed to correspond with contraction; anything above signifies growth. Okay, a reading of 50 is not that remarkable, and this is just the flash reading, meaning that it is an early estimate. But it is a good sign, nonetheless.

Markit, which compiles the data, said: “Manufacturers reported the largest monthly increase in output since June 2011, registering an expansion for the first time since February of last year. Service sector activity meanwhile fell only marginally, recording the smallest decline in the current 18-month sequence and showing signs of stabilising after the marked rates of decline seen earlier in the year.”

In Germany output rose at the fastest rate for five months. Service sector growth hit a five-month high while manufacturers reported the steepest monthly increase in output since February of last year. Overall job creation hit the highest since March.
As for France, the PMI hit its highest level since March 2012. It’s not the only good news out of France of late. An index showing that morale in the industrial sector recently rose for the fourth month running, led the French Finance Minister Pierre Moscovici to say: “Nous sommes en sortie de recession,” or “We are out of recession.”

On the other hand, the index measuring French industrial morale is still below the historic average. The PMI was up, but at 48.8 still pointed to contraction, and in any case, France has to enforce much more substantive reforms to its labour market before it can claim its struggle is over.

Ben May, European economist at Capital Economics, said: “There are some signs that the euro-zone economy is on the mend and might perhaps soon exit recession. Nonetheless, the PMI and other business surveys have signalled several false dawns in the recent past. What’s more, with banks still reluctant to lend and demand for credit remaining weak, it is still too soon to conclude that the region is in recovery mode.

© Investment & Business News 2013

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House prices might be rising in the UK, but that is not what’s happening across most of Europe.

According to new data from the EU Commission, house prices across the Eurozone fell 2.2 per cent year on year in the first quarter of this year. Across the EU they fell 1.4 per cent.

Among the Member States for which data are available, the highest annual increases in house prices in the first quarter of 2013 were recorded in Estonia (+7.7 per cent), Latvia (+7.2 per cent), Luxembourg (+4.3 per cent), and Sweden (+4.1 per cent), and the largest falls were seen in Spain (-12.8 per cent), Hungary (-9.3 per cent), Portugal (-7.3 per cent), and the Netherlands (-7.2 per cent).

In France they were down 1.4 per cent. They fell 5.7 per cent in Italy, 3.0 per cent in Ireland, and 0.4 per cent in Cyprus.

The latest data for Germany is not yet available, but in Q2 2012 they rose 2.3 per cent, year on year.

According to recent OECD data, when comparing average house prices to rent, they are 71 per cent above the historic average in Norway, 64 per cent more than average in Canada, 63 per cent more in Belgium, 61 per cent in New Zealand, 38 per cent in Finland, 37 per cent in Australia, 35 per cent in France, 32 per cent in Sweden, and 31 per cent in the UK.

Prices to rent are below the historic average in the US, Japan, Germany, Italy, Czech Republic, Greece, Ireland, Iceland, Portugal, Slovak Republic, Slovenia and Switzerland. In the case of Japan, Germany, Greece, Ireland, Portugal and Slovenia they are less than 80 per cent of the average relative to rents.

© Investment & Business News 2013

When the UK economy was recovering in 2010 a lot of people assumed the downturn was over, that the bad economic times were drawing to a close. This column often expressed puzzlement. The markets were buoyant, but the reasons unpinning their enthusiasm seemed as solid as an especially ethereal ghost. This time it is happening again, but are there better reasons for confidence?

Actually you can really put the confidence into categories. There is confidence based on reality; based on very exciting developments. And there is confidence based on the same old ills that got us into trouble in the first place.

Recent surveys and other data have been promising. See: Can this be true: “impressive stuff on UK economy”? 

But dig deeper and there are other reasons for optimism. Take the car industry. UK car exports have soared by 178 per cent since 1998. Over the same time period, car imports have risen by 102 per cent.

The growth in exports has been constant too. In Q1 1998 they were worth £2.2 billion; in 2005 £3.2 billion; they passed £4 billion in 2008 and in Q1 of this year they were worth £6.2 billion. In fact between 1998 and the first quarter of this year, there have only been three quarters in which exports of motor vehicles exceeded imports, but those three quarters all occurred in the last 15 months. And as is the case that US companies are, as it were, re-shoring or bringing their manufacturing back to their home country, much the same thing is happening in the UK, albeit on a smaller scale, and lagging somewhat behind.

Recent Purchasing Managers’ Indices (PMIs) and a survey from the British Chamber of Commerce both point to rising exports, while data from the ONS shows that exports to China have increased seven-fold since 2002. Growth in exports to the rest of the BRICS has not been so fast, but has nonetheless been impressive. In December 2012 the BRICS collectively represented the UK’s third largest export market, behind the US and Germany. Okay imports have risen too, but in recent years the pace of export growth to the BRICS has been greater than import growth.

For years the UK relied on exporting its wares to the Eurozone. It was generally agreed that the UK needs to re-balance from consumer to export led growth, but that is not an easy thing to do when your main trading partner is in economic depression. It has taken time to reduce our reliance on this region, but at last this appears to be happening.

Looking further forward, 3D printing may provide a new opportunity. Retailers may start making clothes on demand, and shop assistants could become experts in computer aided design. We may even see the return of craftsman on the high street, making products for niche markets or on demand, using 3D printing to make products as cheaply as was once only possible with assembly line production.

Although there are reasons to be cautious about a buoyant housing market, it does appear that construction is set to take off, quite significantly.

Recently, Capital Economics said: “While some economists fear that the economy’s underlying growth rate is now as low as 1 per cent, we think that it will revert to its pre-crisis average of about 2.5per cent. Demographic developments should remain favourable. The rate of technological progress should remain strong. And the reduction in the role of the public sector in the economy will create opportunities for more efficient firms.”

But, and this is the really promising bit, Capital Economics reckons growth will be around 4 per cent a year in the UK during the second half of this decade as the economy catches up with potential after years of operating below potential.

So far so good. But what are the catches?

Well there are several. For one thing, wages are still not growing as fast as prices. This means that workers are finding that month on month they are worse off than they were a year previously.

Here are two more catches and they go like this: UK house prices are too high, and UK households are in too much debt. See: Is that a sword of Damocles hanging over the UK housing market? 

© Investment & Business News 2013

New car registrations across the EU dipped by 5.9 per cent in May, falling to their lowest level recorded in the month of May since 1993. Intriguingly, the UK was one of the few countries in the region to see a rise in new car registrations. Meanwhile, the UK car export sector is one of the new sectors to see genuinely rapid growth. When you consider how awful the state of our main export market is, that is quite impressive.

According to the ONS: “In 2002, there was a deficit in trade in cars of around £7.5 billion. However, the value of exports of cars from the UK more than doubled over the 10 years to 2012, while the value of imports grew much more modestly so in 2012 this trade was close to break-even (that is, the levels of exports and imports were virtually the same).”

Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

Yet, look at car sales. According to the European Automobile Manufacturers Association, in May demand for new passenger cars declined by 5.9 per cent in the EU, reaching 1,042,742 units. In absolute figures, this is the lowest level recorded for a month of May since 1993 when new registrations stood below one million. Five months into the year, a total of 5,070,840 new cars were registered in the region, or 6.8 per cent less than in the first five months of 2012.

Sales were down 2.6 per cent in Spain and by 8.0 per cent in Italy. They fell 9.9 per cent in Germany and 10.4 per cent in France. The UK saw growth of 11.0 per cent.

So what can we read into this? Firstly, the fact that UK car registrations rose may be a sign of the UK economy picking up.

But it is genuinely impressive that the UK trade deficit in the car industry has shrunk and is possibly on the verge of going positive, at a time when our main market is stuck in depression, and at a time when UK domestic car sales are rising.

The UK car industry may actually do very well indeed once conditions return to normal. Indeed, even if they don’t return to normal, the UK only really needs to see the growth trajectory of its car exports to stay where it is, and by 2018 the UK car industry will once again be an important net contributor to UK GDP.

© Investment & Business News 2013

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There seems to be as many reasons for the protests in Turkey as there are protestors. Protestors appear to have quite different ideologies, quite different beliefs, although a desire for more secular politics seems to be a common thread.

But what about the economy?

The Turkish economy has been seen by many as one of the most exciting economies in the world. Indeed, it is one of the TIMPs – Turkey, Indonesia, Mexico and Philippines, the economies that may take over from the BRICS as the countries for investors to plough their money into.

Turkey’s main stock market index, the Borsa Istanbul 100, surged some 50 per cent over the 12 months to 22 May – an all-time high. In fact, the index more than trebled between September 2009 and the peak price two weeks ago.

Not surprisingly, the index has since fallen sharply, down some 10 per cent over the last fortnight

But then again, there might be explanations other than protests for the fall.

Turkey’s problem is its trade deficit and overseas debt. The IMF predicts that its trade deficit will be around 7.3 per cent of GDP next year. Unemployment, by the way, is currently 9.4 per cent, that’s low by, say, Spanish standards, but too high for comfort. Maybe this was a contributing factor to the protests.

According to Capital Economics, Turkey’s gross external financing requirement, that is to say its current account deficit plus debts maturing over the next 12 months, is 200bn, which is roughly 25 per cent of GDP. In fact, its external financing requirement has doubled since 2008.

Many people believe QE has created a bubble in bond prices, that by buying government bonds, central banks have artificially inflated prices, meaning the market for bonds is set for one mighty fall. This may or may not be right, but it is clear that emerging market bonds carry greater exposure than bonds pertaining to, say, the US, UK or Germany.

When it comes to emerging market bonds and the risk of a crash, Turkey is near the top of the pile – unlike, for example, much of South East Asia that this time around, unlike in 1997, has managed to fund much of its debt internally and in any case has not run the kind of debt levels seen in the past.

© Investment & Business News 2013