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November 29, 2013
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The coalition intends to hugely increase pension benefits, introduce a minimum wage and increase public spending. There is as little provision for tax hikes (SPD campaign issues) as for tax relief (CDU and CSU pledges). Trend growth, in particular labour supply, will be weakened. Inefficiencies in energy policy will be inadequately addressed. The sustainability of public finances will be substantially reduced. [more]
Focus Germany: Launchpad to the past Current Issues Business cycle The coalition agreement: Too many treats, too little growth stimulus, no structural reforms. The coalition intends to hugely increase pension benefits, introduce a minimum wage and increase public spending. There is as little provision for tax hikes (SPD campaign issues) as for tax relief (CDU and CSU pledges). Trend growth, in particular labour supply, will be weakened. Inefficiencies in energy policy will be inadequately addressed. The sustainability of public finances will be substantially reduced. Germany, the US and China: Tango for three? The further recovery of global growth will crucially depend on how business develops in the US and China. Approximately 50% of fluctuations in US growth feed through to Germany. The correlation is less clear-cut for the Chinese and the German economy, but is likely to have become stronger over the last few years. We expect growth to gain traction in the US and China, so real German exports should accelerate from 0.7% in 2013 to 5.7% in 2014. You can't teach an old dog new tricks – or can you? The OECD recently published the findings of the first PIAAC survey, which revealed that the literacy and numeracy skills of Germany's adults are also merely of middling standard. Specifically with regard to lifelong learning there is still quite a bit that the Germans can learn from the Scandinavian countries. The low share (by OECD standards) of adults with few formal qualifications is positive from a German point of view. The Federation, the Länder and the municipalities – all in the same boat. In Germany there is a large degree of financial integration between the Federation, the Länder and the municipalities, which conflicts with the budgetary autonomy guaranteed by the Basic Law. It therefore comes as a bit of a surprise that there are no explicit rules that specify how to address a budget crisis situation in a Land. Based on the principle of mutual support derived from the Basic Law the Constitutional Court has established a de facto bail-out rule to apply between the different levels of government. From which stage the respective government requires assistance, i.e. how comprehensive its own efforts must be, has in the past been decided by the Constitutional Court on a case-by-case basis. Debt ratio in Germany continues to decline. Thanks to the unexpectedly favourable budgetary trend of the past few years German government debt dropped below 80% of GDP in mid-2013. However, doubts are warranted with regard to the coalition's aim of undercutting the 70% mark by end-2017. Author s Klaus Deutsch Bernhard Gräf Heiko Peters Oliver Rakau Stefan Schneider Stefan Vetter Frank Zipfel Editor Stefan Schneider Deutsche Bank AG DB Research Frankfurt am Main Germany E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Ralf Hoffmann Content Page Forecast tables ...............................................2 The coalition agreement: Too many treats, too little growth stimulus, no structural reforms. ..........................................................3 Germany, the US and China: Tango for three? .............................................................8 You can't teach an old dog new tricks – or can you? ................................................... 20 The Federation, the Länder and the municipalities – all in the same boat .............. 25 Debt ratio in Germany continues to decline ... 29 Chart of the month ........................................ 31 Chartbook: Business cycle ............................ 32 Chartbook: Sectors ....................................... 35 Chartbook: Financial markets ....................... 36 Chartbook: Economic policy .......................... 41 Event calendar .............................................. 42 Data calendar ............................................... 43 Financial forecasts ........................................ 44 Data monitor ................................................. 45 November 29, 2013 Focus Germany Launchpad to the past Focus Germany 2 | November 29, 2013 Current Issues Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F Euroland - 0.2 1.2 1.4 1.5 1.4 1.5 1.8 1.4 1.3 - 2.9 - 2.4 - 2.0 Germany 0.5 1.5 1.4 1.5 1.5 1.8 7.1 7.0 7 .1 0.1 0.2 0.4 France 0.2 1.3 1.9 1.1 1.5 1.3 - 1.7 - 1.5 - 1.3 - 4.1 - 3.3 - 2.9 Italy - 1.8 0.6 0.5 1.5 1.5 1.5 0.6 1.3 1.8 - 3.1 - 2.9 - 2.9 Spain - 1.5 0.5 1.3 1.7 1.1 1.2 1.2 1.5 1.8 - 6.5 - 5.3 - 4.0 Netherlands - 1.1 0.4 1.2 2.8 1.8 1.8 12.8 11.7 1 2.3 - 3.9 - 3.3 - 3.0 Belgium 0.1 1.2 1.6 1.2 1.4 1.6 - 0.5 0.5 0.5 - 3.0 - 2.9 - 2.7 Austria 0.4 1.4 1.8 2.1 1.7 1.8 3.2 3.5 3.5 - 2.1 - 1.8 - 1.6 Finland - 1.0 0.9 1.5 2.4 2.0 1.9 - 0.8 - 0.4 0.7 - 2.7 - 1.8 - 0.7 Greece - 4.3 0.8 2.0 - 0.6 - 0.4 0.0 0.0 1. 0 2.0 - 4.5 - 3.4 - 2.5 Portugal - 1.7 0.8 1.3 0.6 0.9 1.1 0.5 1.5 2.0 - 5.4 - 4.4 - 3.3 Ireland 0.5 2.0 2.0 0.8 1.1 1.3 3.5 4.0 4.0 - 7.4 - 4.9 - 2.8 UK 1.5 2.5 2.0 2.7 2.2 2.0 - 3.5 - 3.2 - 2.8 - 6.0 - 4.8 - 4.1 Denmark 0.2 1.8 1.5 0.7 1.5 1.9 6.3 6.1 6.0 - 2.0 - 1.8 - 1.5 Norway 1.8 2.4 2.6 2.3 2.6 2.0 12.5 12.0 11.5 11.0 10.5 10.0 Sweden 0.7 2.3 2.5 0.1 1.1 2.0 6.5 6.0 6.0 - 1.5 - 1.0 0.5 Switzerland 1.9 2.0 2.0 - 0.1 0.5 1.0 12.5 12.1 11.8 0.7 0.8 1.0 Czech Republic - 0.5 2.0 2.8 1.4 1.2 2.0 - 0.6 - 1.0 - 2.5 - 3.1 - 2.7 - 2.6 Hungary 0.4 1.1 1.7 1.9 1.9 3.1 1.2 0.6 0.2 - 2.9 - 2.9 - 2.7 Poland 1.0 2.5 2.8 1.1 2.1 2.4 - 1.4 - 2.2 - 2.8 - 4.8 4.0 - 3.1 United States 1.8 3.2 3.5 1.6 2.5 2.3 - 3.0 - 2.6 - 2.7 - 3.8 - 3.1 - 2.0 Japan 1.6 0.7 1.3 0.3 2.7 1.5 0.8 1.1 2.1 - 9.5 - 8.0 - 6.6 World 2.7 3.7 3.9 3.0 3.5 3.4 *Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepanc ies compared to other DB publications. Sources: National Authorities, Deutsche Bank Forecasts: German GDP growth by components, % qoq, annual data % yoy DX 2012 2013 2011 2012 2013F 2014F 2015F Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4F Real GDP 3.3 0.7 0.5 1.5 1.4 0.7 - 0.1 0.2 - 0.5 0.0 0.7 0.3 0.4 Private consumption 2.3 0.8 0.9 0.9 0.8 0.0 0.0 0.3 0.1 0.3 0.6 0.1 0.3 Gov't expenditure 1.0 1.0 0.5 0.7 0.1 0.4 - 0.5 0.6 0.1 0.1 - 0.2 0.5 0.1 Fixed investment 6.9 - 2.1 - 0.4 4.0 2.9 - 0.4 - 1.9 0.1 - 0.6 - 1.9 1.6 1.6 0.6 Investment in M&E 5.8 - 4.0 - 1.7 4.2 3.6 - 0.4 - 3.7 - 0.6 - 0.3 - 1.6 1.2 0.5 1.0 Construction 7.8 - 1.4 - 0. 5 3.0 2.8 - 0.5 - 1.0 0.5 - 1.0 - 2.3 1.9 2.4 0.3 Inventories, pp - 0.1 - 0.5 0.2 0.0 0.0 - 0.1 - 0.1 - 0.3 0.1 0.4 - 0.3 0.2 0.0 Exports 8.0 3.2 0.7 5.6 5.9 1.7 1.4 0.5 - 1.6 - 1.0 2.4 0.1 2.5 Imports 7.4 1.4 1.5 6.1 6.0 0.1 0.7 0.1 - 0.9 - 0.6 1.9 0.8 2.7 Net exports, pp 0.7 0.9 - 0.3 0.2 0.4 0.8 0.4 0.3 - 0.5 - 0.2 0.3 - 0.4 0.1 Consumer prices* 2.1 2.0 1.5 1.5 1.8 2.1 1.9 2.0 2.0 1.5 1.5 1.6 1.3 Unemployment rate, % 7.1 6.8 6.9 6.7 6.6 6.8 6.8 6.8 6.9 6.9 6.8 6.8 6.9 Industrial production 6.8 - 0.4 - 0.1 3.8 3.0 Budget balance, % GDP - 0.8 0.1 0.1 0.2 0.4 Public debt, % GDP 80.0 81.0 78.5 76.0 73.3 Balance on current account, % GDP 6.2 7.0 7.1 7.0 7.1 Balance on current acco unt, EUR bn 161 187 193 198 207 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Sources: Federal Statistical Office, German Bundesbank, Federal Employment Age ncy, DB Research Focus Germany 3 | November 29, 2013 Current Issues The coalition agreement: Too many treats, too little growth stimulus, no structural reforms The coalition intends to hugely increase pension benefits, introduce a minimum wage and increase public spending. There is as little provision for tax hikes (SPD campaign issues) as for tax relief (CDU and CSU pledges). Trend growth, in particular labour supply, will be weakened. Inefficiencies in energy policy will be inadequately addressed. The sustainability of public finances will be substantially reduced. Taken together, expenditures on social benefits are set to expand three times as much as those on "growth-friendly" areas. These are to be covered mainly by pay-as-you-go contributions. This means the government will not lower contribution rates in the statutory pension system. Unfortunately, absolutely no priority has been attached in the public budgets to correcting less important measures or misguided activities. There will be no structural reforms focusing on ossified goods and services markets. The introduction of a minimum wage on the conditions agreed will generate risks to employment already in advance of 2017 and lead to permanent conflicts in industrial relations as well as between government on the one hand and employers and unions on the other. The coalition agreement will bring about a substantial shift in fiscal policy. In the area of fiscal policy it was decided to increase expenditures by about EUR 23 bn from the federal budget and by at least EUR 40 bn via contribution-funded social security schemes over the next four years. Chancellor Merkel says the benefits nonetheless dovetail with the financial scope of about EUR 16 bn in the federal government's medium-term fiscal framework, especially since the coalition agreement meets the CDU/CSU campaign pledge not to allow any increase of tax rates or broadening of assessment bases. The partners will adhere to the target of a structurally balanced budget in 2014 and a nominally balanced budget in 2015. Contribution rate hikes for statutory long-term care are to be introduced gradually and to a very limited degree. In the short term, the higher pension benefits are to be funded from temporary surpluses in the statutory pension scheme. Within a few short years, though, increases in contributions equivalent to rate hikes of one to two percentages points will become unavoidable. Nevertheless, the sustainability of public finance suffers from a gap of 3% of GDP already which will be increased. As regards the Länder and the municipalities, the federal government will improve their fiscal situation by a total of over EUR 7 bn and thus will probably fulfil the majority of their immediate demands. There are also budget risks related to the planned introduction of the financial transaction tax which has been budgeted (EUR 2 bn in annual revenues, starting in 2015). All in all, however, adjustments to individual budgets should enable the government to at least partially close a notional funding gap of around EUR 14-16 bn over four years. Alternatively, this could be done by curbing the growth of expenditure. Given the normal high level of uncertainty about how finances will develop over four years, such precise planning is not possible anyway. — What the coalition has resolved specifically is to boost spending on education, research and development to 10% of GDP. As a result, the Länder are to be allocated a total of EUR 6 bn in additional funding for the education system and the non-university-affiliated research facilities are to be granted a further EUR 3 bn, partly because the EU is probably going to extend the calculation of GDP in 2014 to cover intangible assets including research and development. Sticking to the R&D spending target of 3% of GDP is predicated on higher expenditures. — Moreover, the municipalities will temporarily receive EUR 1 bn per year ahead of the full assumption by the federal government of the costs of Focus Germany 4 | November 29, 2013 Current Issues integrating the disabled in the workplace, which will cost a total of EUR 5 bn in the final stage. — The federal transport budget is to be increased by a total of EUR 5 bn to enable numerous investments to be made in the maintenance of the transport infrastructure. A further EUR 600 m is to be earmarked for urban renewal projects. — Transfers for official development policy cooperation are to be raised by EUR 2 bn. The federal government also assumes the costs of integrating job-seekers in the labour market (EUR 1.4 bn). In the fiscal space, the grand coalition is also quite rightly planning to tackle a broad reorganisation of fiscal federalism. This is every bit a necessity as much as an opportunity, for the currently applicable rules for important sections of the existing pact expire at the end of 2019. This is when benefits will cease to be paid by the Solidarity Pact II, designed to cover the special needs in east Germany dating back to Germany's division. The case taken to the Federal Constitutional Court by the states of Bavaria and Hesse against the Länder financial equalisation system (roughly EUR 8 bn in dispute) will find political consideration. Problems of city-states and over-indebdted small Länder will have to be addressed. Reorganising regional policy from 2020 is an urgent matter not only because of changes to subsidy conditions in the EU. In addition, the provisions of the EU's Fiscal Compact and Germany's "debt brake" for the Länder – which are required to show structurally balanced budgets as of 2020 – will have to be applied and implemented in a way that is politically feasible. Furthermore, a Commission on fiscal federalism is to be set up which will also have the job of considering the future of the solidarity surcharge on income tax (2012 revenue: EUR 13.6 bn). Owing to its comfortable majority in the Bundes- tag and the fact that 15 out of 16 Länder governments are headed either by the CDU, the CSU or the SPD, the grand coalition has, in principle, an excellent starting position for finding a solution before the end of 2016. The last Commission on fiscal federalism was similarly successful with its introduction of the debt brake a few years ago. The focus of government activity, gauged by the volume of fund transfers, is on social security. Disregarding the warnings of countless pension and financial experts the coalition agreed to expand the scope of social security benefits in five areas. At present it is impossible to put an exact figure on the total costs involved, but they will add up to at least EUR 10 bn per year from 2015. The lion's share of expenditure is to be funded from pay-as-you-go contributions. Correspondingly, the contribution rates cannot be reduced as actually mapped out. The federal government will increase the grant to the social security system by a total of EUR 2 bn. — The highest costs will arise from the introduction of the so-called "pension for mothers" , which credits mothers who had children before 1992 with an extra "remuneration point" in the pension system. From July 1, 2014 this will lead to higher pension benefits and an average EUR 6.5 bn increase in expenditure per year. — The second expensive component is the "pension at 63" , that is the reintroduction of penalty-free early retirement at the age of 63 (increasing to 65, parallel to the pension at 67) if contributions have been paid in for 45 years with credit for a maximum five years' unemployment. This measure is to kick in on July 1, 2014 and is expected to result in annual expenditures in excess of EUR 5 bn. Early retirement is usually penalised by a 3.6% pension discount for every year in question. — Third, a poverty-alleviating minimum pension of EUR 850 per month is to be introduced from 2017 with the aim of providing basic old-age security. Focus Germany 5 | November 29, 2013 Current Issues — Fourth, consideration has been given to increasing the level of reduced earnings capacity pension benefits. — Finally, pensions in east Germany are to be lifted to the west German level by 2020 at the latest. In 2017, the east German pensions are already to be reviewed for adjustment. Currently, pensions in east Germany still fall about 10 percent short of west German levels. In the area of labour policy , January 2015 is to see the introduction of a nationwide minimum wage of EUR 8.50 per hour. In a transition period up to January 1, 2017 existing collective agreements that provide for wages below this threshold will remain valid; furthermore, new collectively bargained settlements may still undercut this level. During this period it will also still be possible to differentiate by region. Subsequently, there may still be exceptions for certain groups of labour market participants. On top of this, the collective wage policy framework is to be altered. In future, it is to become much easier for the government to declare collective wage settlements as universally binding, since they will no longer have to cover more than 50% of sector employees. There are going to be stricter arrangements for temporary employment agency work. Deployment of temporary workers is to be limited to a maximum of 18 months; such workers are to be granted the same conditions as regular employees after nine months. Moreover, the legislation covering contracts for work and labour (Werkverträge) is to be tightened. All in all, the coalition is attempting to bolster the collective wage system by means of government support and to integrate the employees not covered by blanket agreements, especially in east Germany and in sectors with weakly organised unions or employer associations, into generally valid structures. Also, the principle of allowing only one agreement in every company will limit the activities of specialised unions. In sum, there are likely to be massive adjustments on the part of the wage-negotiating parties and companies as a reaction to the introduction of the statutory arrangements in the transition period up to 2017. Potential reductions in employment can only fully be judged once all the details of the legislation are in place. However, the minimum wage will clearly worsen the employment situation of the low-skilled and other groups with problems in the labour market. In health and long-term care policy the coalition plans to beef up outpatient care, enhance many benefits for members of the statutory health scheme and considerably improve the management of the hospital sector in order to tackle the overcapacities that co-exist with staffing shortages. Funding of the system is to be adjusted with the employee paying somewhat less and the employer paying more. The small element of contribution payments not related to income has been rolled back considerably. Furthermore, a drug rebate agreement that was due to expire will be made permanent. In addition, there are plans for the contribution rate to the statutory long-term care scheme to be increased in two stages by a total of 0.5 points. This in turn is intended to fund a long-discussed expansion of benefits, better pay, the training of soon-to-be-needed care personnel and a small reserve for future spending increases. In energy policy numerous changes to the statutory and regulatory framework are planned. A high-priority objective is the renewed amendment of the Renewable Energy Sources Act (EEG) by summer 2014. A statutory expansion path will be established with a renewable energy share of 40-45% in 2025 and 55-60% in 2035. The regulations for photovoltaics are to remain unchanged; there will be scope for a further 17 GW of installed capacity which will be built more slowly than recently. The subsidies for onshore wind farms are to be granted according to stricter criteria and focused on good locations for wind power. For offshore wind farms the new capacity targets have been reduced and adjusted to the current situation (6.5 GW in 2020 and 15 GW in 2030) as to cut the current over-subsidisation. There will, however, be an expansion of the Focus Germany 6 | November 29, 2013 Current Issues KfW programme to ports and shipping and a special programme for special ships and machinery geared to the technology. For plants with a capacity of more than 5 MW a direct sales obligation based on the sliding market premium will be introduced, applying to all plants from 2017. New plant is also to be controllable. Big power generators will possibly be obliged to feed into the base load. The moratorium on fracking will remain in place. Major new ideas on carbon capture and storage or use (CCS, CCU) are nowhere to be found. The coalition has, however, agreed to support back-loading in the European Emissions Trading System, as long as this occurs on a temporary basis (the European Commission would like to withdraw 900 million allowances from the system in order to stabilise the price). A national energy efficiency plan is intended to help reduce energy consumption more strongly than has been the case to date; tax or other incentives did not make it into agreement, however. A compromise has been found in nuclear policy. Talks are to be held with the operators about dealing with the follow-on burdens; the SPD wanted, by contrast, to transfer the reserves into a public fund. The energy-intensive sectors are to continue receiving preferential treatment, even though not all the hitherto exempted companies are likely to retain this status. In order to improve the interplay between renewables and conventional energy suppliers, flexibility options are to be expanded, the grid reserve is to be improved and a capacity market developed in the medium term. There will be no general climate bill. In the telecommunications and digital infrastructure sector the coalition plans numerous initiatives, but it has not earmarked any funding for them. Instead, the KfW is meant to help solve the supply bottlenecks in the broadband infra- structure. In 2018 a basic service with a speed of 50 Mbit/s is to be made available nationwide. To achieve this, the vacated DVB-T2 frequencies are to be used primarily for providing broadband in rural areas. The regulatory framework for investment is to be improved significantly. In addition, more intensive use of local WLAN networks is to be facilitated and net neutrality is to be strengthened. In industrial and Mittelstand policy the coalition pledges to support nearly every existing sector, but will adjust existing industrial policy approaches only minimally. In particular, tax incentives for research and development have not even been readdressed; instead, existing programme grants will be retained. All the same, the focus of research subsidies will be shifted to some new areas. In the business-related transport infrastructure segment some of the federal government's public-sector investments are to be increased (EUR 5 bn) and new funds are to be provided for expanding user financing (truck tolls on main roads and car tolls for foreigners). In financial market policy the coalition has not planned any major national projects. Instead, the focus is on more work at the EU level on banking structure policy (Liikanen Commission proposals), which favours the introduction of a binding leverage ratio for banks and the financial transaction tax. In European policy there is no discernible change of tack. The SPD ultimately agreed to the use of the European Stability Mechanism as the final defence mechanism for bail-out measures in the eurozone banking system in future. Apart from this, the course set by the last federal government in negotiating banking union with its variety of directive proposals was confirmed. In addition, the coalition now supports bilateral agreements between the EU and member states which shall promote structural reforms. Political timetable . The coalition has refrained from revealing how the new government's portfolios will be divided up between the parties or which cabinet posts will be occupied by whom at the request of the SPD until the poll of the party's rank-and-file is completed. At least 20% of the SPD's 470,000-plus members must participate in the next two weeks for a vote to be binding on the party. A simple majority of the votes cast is sufficient. Given the extensive Focus Germany 7 | November 29, 2013 Current Issues support from the leaders of the party a majority can be expected. On December 17, the incumbent federal chancellor Dr. Angela Merkel is therefore likely to be elected for the third time in a row, while the cabinet and the distribution of the ministries will also be announced. The Bundestag will set up its committees by the beginning of January and temporarily set up a main committee that can and will make urgent decisions. Klaus Deutsch (+49 30 3407-3682, klaus.deutsch@db.com) Focus Germany 8 | November 29, 2013 Current Issues Germany, the US and China: Tango for three? The global economy has overcome the weak phase recorded in the winter of 2012/13. However, a sustainable recovery and – above all – an acceleration of global economic growth depend crucially on further developments in the US and China. Together, the two countries account for more than one-third of global economic output. As a heavily export-oriented nation, this is of particular importance to Germany. To be sure, its domestic economy has picked up speed and private consumption has become the most important driver of growth. But weak foreign demand has so far dampened overall economic growth. Like many other forecasters, we expect GDP growth in the US to accelerate (2014: +3.2%; 2013: +1.8%) and the Chinese economy (2014: +8.6%; 2013: +7.7%) to grow more strongly again – with positive effects for Germany, where real export growth should improve from 0.7% in 2013 to 5.7% in 2014. Empirical analysis has shown that fluctuations in US growth are passed on to Germany to an extent of approximately 50% – which is confirmed by our own research. The correlation is less clear-cut for the Chinese and the German economy. Given the pronounced increase in German-Chinese economic relations over the last few years, however, the correlation has likely become stronger. This paper shows the close economic links between Germany and the US as well as between Germany and China and reveals transmission channels of cyclical fluctuations. An analysis of the goods structure of bilateral trade flows suggests that it is mainly Germany's mechanical engineering and motor vehicle industries that depend on developments in the US and China. The German-American tango It cannot come as a surprise that the world's largest economy with a share in global GDP of 22.5% (at current exchange rates) has a major impact on the global economy and of course on Germany. A comparison of the last 40 years reveals an almost synchronous trajectory of economic activity in the US and Germany, with US economic growth leading by roughly one quarter. Only two periods saw diverging developments for several consecutive quarters, i.e. a slowdown in the US while economic growth picked up in Germany and vice versa: first in the period following German reunification in the early 1990s, and second between 2005 and 2007 when the US real estate boom ended and the effects of the subprime crisis in the US increasingly dampened economic growth there. Hence, the German-American tango hardly ever got out of step, and only under exceptional circumstances. Excluding the two episodes mentioned above, the correlation between economic growth in the US and Germany has been quite high since the 1970s and has even intensified over the past years – at least at first glance. While the correlation coefficient was 0.68 for the period 1971-1989, it came to 0.86 between 2008 and 2013. Note, however, that this period was characterised by the synchronous slump in global economic activity following the outbreak of the financial crisis, which probably overstates the bilateral German-American economic connection. Economic growth 3 Correlation coefficient between real GDP in Germany and the US Q1 1971 - Q4 1989 0.68 Q1 1990 - Q4 1993 - 0.68 Q1 1994 - Q4 2004 0.42 Q1 2005 - Q4 2007 - 0.73 Q1 2008 - Q2 2013 0.86 1971 - 2013 0.53 1971 - 2013* 0.67 *Excl. Q1 1990 – Q4 2003 and Q1 2005 – Q4 2007 Source: DB Research 0 1 2 3 4 5 6 7 8 - 6.0 - 4.0 - 2.0 0.0 2.0 4.0 6.0 8.0 72 76 80 84 88 92 96 00 04 08 12 US Germany German unification US subprime crisis German - American tango 1 Real GDP, % yoy, mov. 4Q average, US leads by one quarter Sources: Federal Statistical Office, BEA - 2.0 - 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 89 90 91 92 93 94 US Germany Economic growth 1989 - 1994 2 Real GDP, % yoy, mov. 4Q average Sources: Federal Statistical Office, BEA Focus Germany 9 | November 29, 2013 Current Issues Roughly half of impact feeds through According to an analysis by the German Council of Economic Experts 1 , roughly half of all fluctuations in US growth rates are transmitted to Germany. The study finds that an acceleration of growth by 1 percentage point in the US will push up Germany's real GDP by approximately 1/4 of a percentage point in the same quarter and exert its full effect of 1/2 pp after approx. four quarters. We arrived at a similar result using simple regression analyses of German and US economic growth. Roughly half of all fluctuations in US growth feed through to Germany. In the German-American tango, the US leads, which is clearly proven by a Granger causality test we carried out. China: Dancing to its own rhythm Contrary to the relatively strong parallels between German and US economic growth, a comparison of German and Chinese GDP developments reveals only a very loose correlation. Only between 1965 and 1980 did we find temporarily synchronous growth paths, which are probably a reflection of a global economy dominated by US growth and the global effects of the oil price crises at the beginning and the end of the 1970s, however. For the period from 1980 to 2000, the correlation between economic growth in China and Germany is even clearly negative and it only turned significantly positive around 2005. However, this is probably partly due to the fact that the world economy generally moved in sync at the time. Given the transmission channels of economic developments which we will dis- cuss in greater detail later on, the very loose connection between China and Germany, compared with the US, does not come as a surprise. Both the US and Germany are developed industrialised nations which have been linked with each other for decades via their real economies and financial markets, while this hardly applies to China, especially not between 1960 and 1990. However, the economic linkages between China and Germany, which have grown noticeably over the last few years, could over time also lead to increasingly parallel growth paths. Our calculations show that the cyclical correlation between China and the US is not particularly strong, either. 1 See Council of Economic Experts (2009). Deutschland im internationalen Konjunkturzusammen- hang and Eickmeier, S. (2009). A FAVAR-based analysis of the transmission of US shocks to Germany. Deutsche Bundesbank. Discussion paper. Series 1: Economic Studies. No 35. Regression results 4 Dependent variable: Real GDP in Germany, % yoy Explanatory variable: Real GDP in the US, % yoy, 1Q time lag Period Coefficient t - value p - value r² Q1 1971 - Q4 1989 0.53 9.216 0.000 0.53 Q1 1990 - Q4 1994 - 1.20 2.928 0.011 0.38 Q1 1995 - Q4 2004 0.50 4.268 0.000 0.30 Q1 2005 - Q4 2007 - 1.25 2.262 0.046 0 .34 Q1 2008 - Q2 2013 1.21 6.531 0.000 0.68 1971 - 2013 0.51 7.986 0.000 0.28 1971 - 2013* 0.63 12.367 0.000 0.52 *Excl. Q1 1990 – Q4 2003 and Q1 2005 – Q4 2007 Source: DB Research -10 -5 0 5 10 15 20 25 -6 -4 -2 0 2 4 6 8 10 65 69 73 77 81 85 89 93 97 01 05 09 Germany (left) China (right) Economic growth 5 Real GDP, % yoy Sources: Federal Statistical Office, World Bank - 0.8 - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 75 79 83 87 91 95 99 03 07 11 Vs. China Vs. Germany Sources: BEA, Federal Statistical Office, World Bank Correlation coefficient for German economic growth 6 Moving 10Y correlation based on annual data Focus Germany 10 | November 29, 2013 Current Issues Transmission channels: Trade, companies, finance and confidence The transmission of cyclical fluctuations can be divided into four major channels: i. the trade channel, which works via both direct trade relations and third- market effects, ii. the corporate channel, iii. the financial market channel, and iv. the confidence channel. Cyclical activity describes the degree to which an economy's output potential is utilised. Put simply, changes in business activity result from fluctuations in demand with potential output at a given and, on a short-term horizon, relatively constant level. Correspondingly, the trade channel is the genuine transmission channel of fluctuations in business activity between two countries, A and B, as it comprises the exchange of goods between two economies and hence, directly, the demand component. Besides the direct trade effects, the trade channel also includes so-called third-market effects. Hence, changes in demand in a country A also lead to changes in other countries, which then impact on economic activity in country B via their trade relations. Besides foreign trade, interlinkages between financial markets also represent an important transmission channel for fluctuations in business activity. The financial market channel has gained considerable importance, especially in the last few years, on the back of increasing globalisation. It is particularly susceptible to reciprocal effects between international financial markets and domestic demand. Interest rates, for instance, influence demand for consumer and capital goods as well as property, and share prices have an effect on investment decisions (via Tobin's q) and consumption (via wealth effects). Changes occurring in the major financial markets are transmitted within a very short space of time, which is impressively demonstrated by the almost synchronous development of the German and the US stock markets. Confidence also has an effect on economic activity, which is reflected in the close relationship between confidence indicators and economic growth. This also holds true in an international context, of course: changes in confidence in one country exert an influence – especially in the case of intensive trade relations – on confidence in another country and its economic situation. In addition, changes to the organisational structure of the international division of labour – especially increased offshoring of parts of the production chain – have led not only to intensified trade between countries but also to more synchronous patterns of business activity. The connection between closely tied corporations and direct investments on economic activity is at the centre of the corporate channel. To be sure, the individual transmission channels can theoretically be separated from one another; in reality, however, there is strong mutual interconnectivity, such as between the trade and the corporate channels. Also, confidence not only affects the trade channel but also and above all the financial markets. Naturally, the trade channel is by no means independent of the financial market channel. Focus Germany 11 | November 29, 2013 Current Issues The trade channel: US the second most important export destination, China in fifth place As a result of Germany's increasing integration into the world economy, its dependence on economic activity in other countries has risen markedly. The openness of the German economy, measured by the share of exports and imports of goods and services in GDP, has almost doubled since 1991, to just under 100%. Among the G7 countries, Germany is by far the most integrated economy internationally. To a large extent, this is probably the result of the Single European Market, though. The strength of the direct trade channel and hence the effects on Germany's economic growth hinge primarily on three factors: i. the significance of foreign demand for the German economy, ii. the volume of growth fluctuations in the partner country, i.e. the degree to which demand in this country rises or falls, and iii. the import elasticity of the partner country, i.e. the part of demand accounted supplied by foreign countries and especially Germany. As regards its significance as an exporting country, the US comes in second after France, with an export share of just under 8%. China ranks fifths, behind the Netherlands and the UK, with a share in total exports of just over 6%. After a temporary increase in its export share to more than 10%, the US is now roughly back at a level registered in the early 1990s. By contrast, China's significance for Germany's export sector has risen dramatically. Since 1990 German deliveries to China have grown more than twenty-seven-fold, and the country's share in total exports has risen from 0.7% at the beginning of the 1990s to a good 6% at present. This means it has almost caught up with Germany's exports to the US. US import elasticity higher than average As regards import elasticity, i.e. the ratio of the percentage change in imports to the percentage change in overall economic growth, the US boasts higher elasticity than its trade partners, which in economic literature is referred to as the Houthakker-Magee asymmetry 2 and can be attributed, among other things, to demographic factors, a country's age structure and the share of immigrants in the population. 3 Compared with older societies, younger societies tend to register a higher import share in consumption, while domestic services such as health spending tend to be below average. In addition, immigrants usually prefer goods from their countries of origin. A further explanation lies in dynamic growth in the economies of the most important trade partners. There is evidence that countries with high economic growth rates offer a larger range of export products and that their exports are of higher quality, which means higher demand from abroad. According to analyses of this effect, it plays an important role in explaining the Houthakker-Magee asymmetry. 2 See Houthakker, H. and S. P. Magee (1969). Income and Price Elasticities in World Trade. Review of Economics and Statistics 51(2). 3 See Brook, A.M., F. Sedillot and P. Ollivaud (2004). Channels for Narrowing the US Current Account Deficit and Implications for Other Economies. OECD Economics Department Working Paper No. 390. 0 20 40 60 80 100 91 95 99 03 07 11 DE UK FR US JP Openness 7 Exports and imports of goods & services, % of GDP Sources: Federal Statistical Office, OECD, BEA 0 2 4 6 8 10 12 90 94 98 02 06 10 China US German exports 8 Share in total exports, % Source: Deutsche Bundesbank - 6 - 4 - 2 0 2 4 6 - 25 - 20 - 15 - 10 - 5 0 5 10 15 20 25 00 02 04 06 08 10 12 Goods imports (real) GDP (real) US: Economic growth & imports 9 % yoy Source: BEA Focus Germany 12 | November 29, 2013 Current Issues Direct trade effects of up to 0.2% of GDP intensified by third- market effects German exports are affected not only by changes in import demand in the destination countries, but also by the fact that changes in the economic situation of these countries have a bearing on third countries, which in turn impacts on import demand for German products from these third countries. Changes in the economic situation in the US and China, the world's largest economies and importers (accounting – respectively – for 22.5% and 11.4% of global GDP and 12.6% and 9.8% of global imports), exert a considerable impact on the world economy. According to our calculations, US import elasticity stands at approximately 2.5. An increase in economic growth of one percentage point would thus mean additional German exports to the US in the order of approx. EUR 3.5 bn, or 0.13% of Germany's GDP. This direct trade effect is compounded by the fact that the acceleration of growth in the US triggers a stimulus especially for Asia and North America via higher import demand. This will likely benefit China and Canada, in particular, as these two countries together account for approx. one- third of total US imports. More buoyant business activity there is likely to boost demand for German goods, too. As China's import elasticity stands at roughly 1.5 to 2 (although the larger amplitude of the Chinese cycle must be taken into consideration), German US and China’s imports by region 11 % of total imports (H1 2013: US EUR 79 4 bn; China EUR 588 bn) Sources: IMF – DOTS, Deutsche Bank Research -30 -20 -10 0 10 20 30 40 50 0 2 4 6 8 10 12 14 16 80 85 90 95 00 05 10 GDP, real (left) Goods imports, real (right) China: Economic growth & imports 10 % yoy Source: IMF North America South America Africa Oceania Europe Asia 32% FR 11 DE 40 IT 7 NL 6 GB 6 Other 31 Chinas imports from Europe % of total imports from Europe FR 9 DE 24 IT 10 CH 8 GB 13 Other 37 US imports from Europe % of total imports from Europe Focus Germany 13 | November 29, 2013 Current Issues exports to China would increase by roughly EUR 2.25 bn or 0.08% of GDP if China were to register one percentage point higher growth. Here, too, third- market effects would have to be added. As China orders a large part of its imports from Asia – Hong Kong, South Korea and Japan together account for slightly over 35% – an acceleration of growth in China will fuel growth in all of Asia and hence import demand for German production in other Asian countries. Export structure increases dependence on global business cycle The close connection between the German economy on one side and the Chinese and US economies on the other is rooted in German industry's specific goods structure. Germany's export sector offers exactly those products for which there is demand in China and the US, i.e. mostly capital goods. If one compares the structure of German goods exports as a whole with the goods imported by the US and China, it becomes obvious that the predominant groups are machinery, vehicles and electrical engineering products. Since 2008 they have accounted for nearly 50% of German exports, while making up slightly less than 40% of all goods imported by China and the US. If one deducts natural resources and energy, which hardly play any role at all in German exports for geological reasons, from these countries' imports, the import share of these groups of goods rises noticeably. At 55% (China) and 46% (US), the shares were roughly as high as the share of these goods in total German exports (48%). Germany's bilateral trade relations with the two countries show an even stronger predominance of its "flagship sectors" mechanical and electrical engineering as German exports by region 12 % of total exports (H1 2013: EUR 516 bn) Sources: IMF – DOTS, Federal Statistical Office, Deutsche Bank Research North America South America Africa Oceania Europa Asia AT 8 FR 15 IT 8 NL 10 GB 11 Other 48 German exports to Europe % of total exports to Europe 0 2 4 6 8 10 FR US GB NL CN AT IT CH BE PL Top 10 German export destinations % of total exports 0 20 40 60 80 100 US imports Chinese imports German exports Food Raw materials Energy Chemicals Other manuf. goods Mach. & transp. equip Commodities Machines and automobile sector dominate German exports as well as US/Chinese imports 13 Share by SITC product group, average from 2008 - 2012, % Sources: Eurostat, DB Research, Federal Statistical Office Focus Germany 14 | November 29, 2013 Current Issues well as automobiles. While together they accounted for nearly 50% of total German exports (2008-2012 average), the share of exports to the US even came to 59% and that of deliveries to China to as much as 70%. However, there are pronounced differences among capital goods exports. At 26% of total German exports to the US, the lion's share was motor vehicles. Electrical and mechanical engineering registered export shares of 15% and 17%, respectively. German exports to China, by contrast, were predominantly machinery (29%), while automobiles (23%) and electrical engineering products (19%) lagged slightly behind. The predominance of the capital goods sector in German exports has led to a situation where the effect of volatile business activity in the US and China on the German economy is intensified by the fact that demand for capital goods fluctuates particularly strongly in the course of the business cycle. While US growth in the past two decades moved between -2.8% and +4.8%, investment demand fluctuated in a range from -21.6% to +12.9%. In Germany, the standard deviation of growth rates of investment in plant and equipment, for instance, is more than twice as high as that of GDP, and in the US it is even four and a half times as high. To be sure, the purchase of motor vehicles by private individuals is not counted as an investment but rather added to the quite stable consumption figures. However, consumption of consumer durables (such as cars or washing machines) is also considerably more prone to fluctuations than that of consumer goods (food). The Chinese government aims to strengthen domestic consumption as well as the domestic services sector. 4 In doing so, it seeks to reduce the economy's dependence on export- and investment-driven growth. This entails risks for German exporters. On the one hand, mechanical engineering companies could come under pressure due to less dynamic investment in plant and equipment in China – an effect which is exacerbated by the strongly growing domestic mechanical engineering sector in China. On the other hand, though, China will continue to need large-scale investment in its infrastructure for the foreseeable future, creating opportunities e.g. for German electrical engineering companies. Moreover, the planned modernisation of China's health sector opens up new opportunities for the medical technology sector. There has been increasing talk recently of a re-industrialisation of the US which is supported first and foremost by lower energy prices. Increasing exploitation, for instance, of shale oil and gas in the US has led to a marked drop in energy costs for companies producing locally. Even though energy costs are only one factor to be considered in the choice of location for an industrial company, it can be the decisive factor particularly for energy-intensive firms, e.g. from the chemical industry. Energy costs also play an important part in the production of plastics reinforced with carbon fibre. A supplier for this German sector therefore has already relocated to the US. In the medium to long term, this could raise the relative attractiveness of the US as a location for investment and weaken German exports to the US. However, German mechanical and electrical engineering companies may well be involved in the establishment of new production locations. Also, lower energy costs even speak in favour of direct investments by German manufacturers, which could even help strengthen the relationship between US and German industry as well as supplier relations. 4 For a more detailed discussion of China's significance for German industry see Stobbe, Antje (2013). German industry: China market growing moderately. Research Briefing. DB Research. Frankfurt am Main. April 10, 2013. 0 20 40 60 80 100 Total USA China Total, ex EMU EMU Chemicals Pharma Metal (goods) Electrical engineering Mechanical engineering Automobile "Classic" German sectors also dominate in bilateral trade 14 German exports, share by sector, selection, %, average 2008 - 2012 Source: Federal Statistical Office Focus Germany 15 | November 29, 2013 Current Issues Corporate channel: Supplier relationships increasingly important In practice it is quite difficult to separate the trade channel from the corporate channel. The focus here is on the interaction of closely tied corporations and overall economic output. This transmission channel has noticeably gained in importance with the increasing relocation of parts of the production chain outside the country and the increase in direct investment registered over the last few years. Thanks to the increasing significance of global value added chains, the US and China are attractive locations not only as sales markets for finished products but also as destinations for German intermediates. 5 For instance, the trade in intermediates rose from around 54% of the global goods trade in 2000 to 58% recently. The share of intermediates in German exports amounts to 31% (EMU 37%). At 27% and 21%, respectively, their share in German exports to China and the US, however, is not dramatically lower than that of European neighbouring countries, despite the relatively large geographical distance, so that an increase in output in China and the US has direct and noticeable repercussions on capacity utilisation in German industry. Direct investment links industries Germany's integration in global value-added chains and the transmission of economic stimulus receives an additional boost from investment by Germany's manufacturing industry, for instance in foreign subsidiaries. A case in point is the construction of automobile plants by German carmakers in China, which in turn leads to local investment by German supplier companies in order to be able to provide the required services to these factories. The stock of foreign direct investment by German manufacturing companies came to just under EUR 300 bn in 2011, the lion's share of which went to EU countries (47%) With a share of 21%, however, the US is the single most important destination for German investment, which is in line with our initial assessment that the US and Germany have relatively synchronous business cycles due to their close links. German investment in the US markedly exceeds total investment in Asia (16%) and China (7%). However, it should be borne in mind that while the stock of direct investment in China is in fact relatively modest at present (EUR 22 bn) it boasts by far the highest growth rate. Compared with 2007, the stock of investment in China has more than doubled, while it grew by nearly 25% overall and by merely 12% in the US. Hence the link between the German and Chinese industrial sectors looks set to intensify, so the impetus for the German economy does not necessarily have to become weaker despite a potential growth slowdown in China. German carmakers, in particular, have made huge foreign investments. Of the total German FDI in 2011, 43% can be attributed to the automotive industry. Mechanical and electrical engineering only accounted for a good 10% each (chemicals: 15%). As regards German carmakers' FDI in the US, the pre- dominance is even more pronounced at 60%. In China, the figure was 45%. The share in total FDI of German mechanical and electrical engineering companies in China is higher than the average, at 17%. The different weightings of invest- ment in the US and China also reflect the above-mentioned structure of German goods exports to these two countries. 5 For a more detailed discussion see: Peters, H. (2013). Focus Germany: Structural improvements support exceptional position. DB Research. Frankfurt am Main. July 1, 2013. 0 20 40 60 80 100 Total USA China Total, ex EMU EMU Agricultural goods Intermediate goods Investment goods Durables Non - durables Energy Other goods Source: Federal Statistical Office German exports, share by main industrial group and destination, %, 2008 - 2012 Intermediate goods important despite large distance to USA/China 15 0 100 200 300 08 09 10 11 08 09 10 11 08 09 10 11 08 09 10 11 Total EU USA China German FDI abroad: Strong growth in China but from low base 16 Source: Bundesbank German foreign direct investment by German manufacturing companies, stock, bn EUR 0 20 40 60 80 100 Total EU USA China Chemical sector Electrical engin. Mechanical engin. Automobile sector Other Source: Bundesbank German FDI abroad: Auto sector with biggest share 17 German foreign direct investment by German manufacturing companies, stock, share in % Focus Germany 16 | November 29, 2013 Current Issues Financial market channel increasingly important Greater financial openness has contributed to intensified trade links and boosted economic transmission effects. Analyses suggest that the transmission intensity of international shocks to German financial markets has increased, especially since the mid-1990s. While Germany is the No 1 among the G7 countries in terms of openness of the real economy, it ranks somewhere in the middle in terms of financial openness. The usual measure of financial openness, i.e. claims and liabilities from portfolio investments in relation to GDP, has increased sevenfold since the beginning of the 1990s, to more than 180% of GDP. Among the larger European countries, it is above all the UK (over 300%) and France (230%) that boast a considerably higher degree of financial openness. The financial market channel centres above all on the correlation between financial market prices and thus the interdependence of international financial markets and domestic demand. Both consumption and investment demand are being affected by the financial market channel. As far as consumption is concerned, there are the effects stemming from private household incomes, as interest and dividend income in Germany contributes around 20% to disposable incomes, as well the wealth effects triggered by changes in asset prices. The latter occur when a household feels "richer" due to the rising value of its assets and hence saves less. According to an OECD survey, consumption in Germany rises by 1 to 2 cents when households' financial wealth increases by 1 euro. 6 But statistically speaking, the propensity to consume due to changes in equity assets is extremely low, which is hardly surprising given the small proportion of equities held by households in Germany (only 5.2% of Germany's financial wealth was held in direct equity investments in 2012) and the fact that stock ownership is concentrated in the higher-income groups. Changes in asset prices abroad can lead directly to fluctuations in domestic consumption via the financial market channel, given the international diversification of financial wealth. However, the strength of this channel has probably declined in the course of the financial crisis and the sovereign debt crisis in the euro area periphery with an increase in home bias. Indirectly, though, changes in consumption can also be triggered by domestic asset price changes induced by developments in foreign countries. German stock market follows US market by and large The high degree to which international stock markets are linked with each other is reflected in the strong correlation between the German and American stock markets. For the period between 1992 and 2013 it is 0.85, and it rises once again slightly on a one-day lead of the US equity market. Therefore, the German stock market closely tracks its US counterpart. However, equity market developments not only impact private consumption via wealth effects but also represent a non-negligible factor influencing investment decisions. According to the Q theory ("Tobin's q") developed by James Tobin 7 there is an incentive to shift a portfolio's assets into physical capital as long as the market value of an enterprise is higher than the replacement costs. If, however the replacement costs exceed the company's market value, no tangible 6 Compare Catte, P., Girouard, N., Price, R. and Andre, C. (2004). Housing Markets, Wealth and the Business Cycle. OECD Economics Department Working Papers No. 394. 7 See Tobin, J (1969). The Equilibrium Approach to Monetary Theory. In: Journal of Money, Credit and Banking. Vol. 1. 0 50 100 150 200 250 300 350 91 95 99 03 07 11 DE US UK FR JP Financial openness 18 Claims and liabilities from portfolio investments, % of GDP Source: IMF 0 400 800 1200 1600 2000 0 2000 4000 6000 8000 10000 80 84 88 92 96 00 04 08 12 Dax (left) S&P 500 (right) Stock market indices 19 Source: Global Insight - 1.0 - 0.8 - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 80 84 88 92 96 00 04 08 12 Correlation coefficient Dax – S&P 500 20 Sources: Global Insight, DB Research Moving 12M correlation based on monthly data Focus Germany 17 | November 29, 2013 Current Issues investments will be made. 8 Hence, rising share prices would stimulate investment. Interest rates driven by US Interest rate developments in Germany are also determined to a large extent by those in the US, as is impressively shown by the accompanying chart. The correlation between US and German yields on 10Y government bonds in the period 1970 to 2013 is 0.80, with the correlation having intensified further over the last few years. Between 1990 and 2013, the correlation coefficient even amounts to 0.96. Interest rates are a major factor in investment decisions, too. Hence, interest rate developments in the US have a very strong bearing on German investment. Chinese financial markets still hardly significant Due to their size and degree of development, the US financial markets dominate developments in Germany. The US-German financial market channel and thus the transmission effects through this channel are very strong. With a volume outstanding of more than USD 25,000 bn (170% of US GDP), the US bond market is by far the largest in the world; the same applies to the US stock market (market capitalisation: USD 18,700 bn or 115% of US GDP). The financial market channel between China and Germany, by contrast, is likely to be very weak given the fact that China's financial markets are of relatively little significance – despite reforms to open them up to foreign investors. Even though the Chinese bond market, for instance, has grown substantially over the past few years, with its volume of bonds outstanding increasing roughly fivefold, it is nonetheless still relatively small (USD 3,400 bn or 40% of China's GDP) and smaller than the German bond market (approx. USD 4,400 bn). Moreover, only a relatively small portion of the bonds are currently traded internationally. Following the Qualified Foreign Institutional Investor (QFII) Programme, only a 8 Tobin's q is based on a portfolio theory approach and says that economic subjects seek to structure their asset portfolios in such a way that for a given return their risk is minimised and for a given risk their return is maximised. For the rates of return, Tobin differentiates between the expected rate of return on new investment and the supply price of capital, the latter reflecting the market valuation of existing real capital. Tobin’s q is the ratio of the two rates of return and thus the ratio of an enterprise's market valuation (i.e. the discounted future returns on investments) to the replacement costs for the enterprise's real capital. Shifts in the rates of return lead to adjustments in the asset structure accordingly. As long as the market value of an enterprise is higher than the replacement costs, i.e. q > 1, there is an incentive to shift some of the portfolio's assets into physical capital. 6.0 6.5 7.0 7.5 8.0 8.5 9.0 0.00 0.20 0.40 0.60 0.80 1.00 1.20 95 97 99 01 03 05 07 09 11 13 q = market capitalisation /gross fixed assets* Investment in machinery & equipment/GDP Tobin's q 21 Germany, q (left), % (right) Sources: Federal Statistical Office , DB Research *) shifted forward 1 year 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 70 74 78 82 86 90 94 98 02 06 10 US Germany 10Y government bond yields 22 % Sources: IMF, Global Insight - 1.0 - 0.8 - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 71 75 79 83 87 91 95 99 03 07 11 Sources: IMF, Global Insight Correlation coefficient of German & US yields 23 0 1000 2000 3000 4000 5000 6000 7000 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 97 99 01 03 05 07 09 11 13 Dax (left) Shanghai A Share Price Index (right) Stock market indices 24 Source: Global Insight Dec 31, 1987 = 100 (left) Dec 19, 1990 = 100 (right) Focus Germany 18 | November 29, 2013 Current Issues good USD 37 bn was held by foreigners at the end of 2012. But the reform drive continues with pilot programmes. China's stock market capitalisation has also risen markedly over the past few years, to USD 3,000 bn. However, this only corresponds to 36% of GDP and thus lags behind Germany's stock market capitalisation (roughly USD 1,550 bn or 46% of GDP). Although China's GDP is half as much as the US figure, stock market capitalisation in China is only about one-fifth of the US level. Confidence channel: Does it exist or doesn't it? Yes, it does! Confidence certainly is an important factor in economic decisions. However, it is not clear whether confidence actually exerts an independent effect on business activity and that a confidence channel exists for economic transmissions, or whether the confidence of companies and consumers only reflects hard economic indicators and hence is included in the other transmission channels. The relatively good leading qualities of confidence indicators such as the ifo business climate and purchasing managers surveys compared with the real economy seem to provide confirmation of an independent confidence channel. Companies and sometime consumers, too, respond not only to national economic developments but also to major international events. For example, business and export expectations of German companies are probably influenced directly by business data from the US. In addition, changes in confidence in other countries can be transmitted directly to confidence levels in Germany, which is demonstrated by the fact that the German and American Purchasing Managers' Indices move largely in sync. Several studies conclude that there is a significant correlation between assessments by corporate managers in the US and Germany, and that this correlation has intensified since the mid-1990s. Besides economic confidence, which is at the heart of corporate surveys with – for instance – questions regarding an assessment of current and future production as well as employment, confidence in politics has considerable influence. If policy uncertainty rises, this induces companies to postpone or entirely shelve their investment and hiring plans. In addition, households curtail their consumption expenditure. Empirical analyses which depict policy uncertainty by means of a political uncertainty indicator show that higher political -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 98 02 06 10 Correlation coefficient Dax – Shanghai A 25 Sources: Global Insight, DB Research Moving 12M correlation based on monthly data - 8.0 - 6.0 - 4.0 - 2.0 0.0 2.0 4.0 6.0 78 82 86 90 94 98 102 106 110 114 118 95 97 99 01 03 05 07 09 11 13 Ifo index (left) Real GDP (right) Germany: ifo index & growth 26 Index 2005 =100 (left), % yoy (right) Sources: ifo, Federal Statistical Office - 40 - 30 - 20 - 10 0 10 20 30 40 30 35 40 45 50 55 60 65 95 97 99 01 03 05 07 09 11 13 US PMI (left) German exports to US (right) Sources: ifo, ISM % (left), % yoy, 3M mov. average (right) German exports to the US & US PMI 27 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 04 05 06 07 08 09 10 11 12 13 US Germany China Purchasing Managers’ Index 28 Sources: Markit, ISM - 1.0 - 0.8 - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 05 06 07 08 09 10 11 12 13 Germany/US Germany/China Moving 12M correlation Sources: Markit, ISM, DB Research Correlation coefficient of purchasing managers’ indices 29 Focus Germany 19 | November 29, 2013 Current Issues uncertainty has an adverse effect on economic growth 9 . At the outbreak of the global economic crisis in 2007 the level of political uncertainly rose massively and has since remained elevated. Due to the close economic and political ties between Germany and the other EMU member states, the correlation between the German and the European uncertainty indices is relatively high (0.67). As with the other transmission channels, the correlation is higher between Germany and the US (0.43) than between Germany and China (0.22). Conclusion Our analysis shows a close correlation between US and German economic activity, via both the trade and financial market channel and corporate confidence. Roughly half of all fluctuations in the pace of US growth are mirrored in Germany. The correlation of business activity in Germany and China, however, is much less pronounced but could intensify in light of rapidly increasing trade relations and the fact that China's financial markets are developing further and opening up. As the US and China together account for approximately one-third of global GDP, developments in these two countries are of particular importance to Germany's highly export-dependent economy. The expected economic upswing in the US and stronger growth in China are thus likely to provide a larger contribution to German growth again next year, and business activity in Germany – which has been supported entirely by domestic demand this year – will thus enjoy a broader basis. This is one of the reasons why we expect a positive contribution to growth from net exports next year, while it will probably come in more or less neutral this year. The various transmission channels have demonstrated clearly that the recent debate about Germany's export surpluses has been too narrow and misguided. High exports and the resulting profits can also pave the way for direct investment by German companies, generating jobs and demand in the host country – an aspect of the discussion that is frequently overlooked by short- term-oriented Keynesian economists. Bernhard Gräf (+49 69 910-31738, bernhard.graef@db.com) Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 9 The policy uncertainty indicator is measured as a weighted average of the number of times the word "uncertainty" appears in the media, announced fiscal policy measures and differences between inflation forecasts. For detailed information on the indicator see Baker, S. R; Bloom, N.; Davis, S.J. (2013). Measuring Economic Policy Uncertainty. Chicago Booth Research Paper 13- 02. 0 50 100 150 200 250 300 350 97 99 01 03 05 07 09 11 13 US Europe CN DE Policy Uncertainty 30 Source: Scott Baker, Nicholas Bloom and Steven J. Davis www.PolicyUncertainty.com. Policy uncertainty index - 0.6 - 0.4 - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 98 00 02 04 06 08 10 12 DE and US DE and Europe DE and CN Correlation of Polity Uncertainty across regions 31 Source: Scott Baker, Nicholas Bloom and Steven J. Davis www.PolicyUncertainty.com. 12M correlations Focus Germany 20 | November 29, 2013 Current Issues You can't teach an old dog new tricks – or can you? Interesting aspects of the OECD Skills Outlook 2013 from a German point of view In its “Skills Outlook 2013” the OECD recently published the findings of the first PIAAC survey (“Programme of the International Assessment of Adult Competencies”). Along the lines of the PISA survey, tests were conducted into the literacy and numeracy skills of around 166,000 adults aged between 16 and 65 from a total of 22 OECD countries as well as the non-OECD nations of Cyprus and Russia. Based on their test results, the participants were graded into five different levels with Level 5 representing the highest level of proficiency. As was already the case with PISA, Germany's performance in the PIAAC study is also merely middling in all areas. The highest scores for literacy were achieved by Japan (296 points) followed by Finland (288) and the Netherlands (284). Germany managed only 270 points and thus scored just below the average of 273 points. On numeracy, Germany does at least score 3 points higher than the average, but it is nevertheless a long way behind the leading group. The highest scores for numeracy were achieved by Japan (288), Finland (282) and Belgium (280). Comparing the age groups reveals that the 25 to 34- year-olds generally do best in all countries, whereas the 55 to 65-year-olds achieve the lowest scores. Furthermore, there is, though, a series of other interesting details that can be gleaned from the PIAAC survey which are of particular relevance from a German and European perspective. 1. Good schooling must lead to lifelong learning The findings of the PIAAC survey show a strong correlation with those of the 2009 PISA survey across all countries. This applies particularly to younger adults aged between 25 and 34; as expected, the correlation weakens as the adults become older. Especially with regard to literacy there is hardly any country which scores well in PISA but poorly in PIAAC (and vice-versa). With numeracy, too, there is a strong correlation between the two tests. All the same, it is striking that in Denmark, Norway and Sweden there are three Scandinavian countries that did particularly poorly in the PISA survey, but scored well above average in the adult survey. In particular, these countries are very good at ensuring their citizens also have access to further skills training after they have left school. There, the concept of lifelong learning is a great deal more widely entrenched than in most other OECD countries, both in society and in companies. Eurostat data shows that the share of adults who have recently participated in further training programmes is much higher in Norway (20%), Sweden (27%) and Denmark (32%) than the EU average (14%). So education does not end when pupils have completed their school-leaving exams. Even after that there are still opportunities to effectively nurture the individual capabilities of adults. Germany is not the only country with catching- up to do in this respect; the same also applies to the crisis-hit eurozone countries. Particularly Italy and Spain (and to a lesser degree Ireland, too) already performed very poorly in the PISA survey, but the competencies of their 25 to 34-year-olds were a great deal lower yet than the OECD average. Focus Germany 21 | November 29, 2013 Current Issues 2. A small share of low-skilled is the best recipe for low unemployment Due to the differing education (and training) systems there are very large differences between the respective shares of university graduates in the OECD nations. While Austria and Germany score well below the OECD average with just 20% and 35% respectively, over 50% of the 25 to 34-year-olds in Denmark, Japan and Canada have successfully completed tertiary education. South Korea is top of the pile with 62%. 10 There is no disputing that a well-trained population is an essential element in securing a country's future competitiveness. That is why one of the European Commission's Europe 2020 targets is to boost the share of 30 to 34-year-olds with a university degree to 40% by 2020. This makes sense, especially if it means that people already in employment also have the opportunity – even after a number of years in work – to receive further vocational training at universities and polytechnics. The simple logic that furthermore the highest possible percentage of university graduates automatically leads to a lower jobless rate does not hold true, however. This becomes clear when the percentage of university graduates is replaced by an alternative measure of a country's educational prowess, namely the share of the low-skilled. This term is used to describe persons without an upper secondary level qualification, i.e. those without advanced schooling or vocational training. There is a relatively strong positive correlation between the share of 25 to 34- year-olds without advanced schooling or training and the current unemployment rate. In order to correct for cyclical effects that in the current crisis are being manifested in Spain, for example, in a historically high unemployment rate, a recommended alternative yardstick is the structural jobless rate. Here, too, a marked positive correlation with the share of low-skilled in the population can be observed, albeit to a slightly lesser degree than before. 10 A comparison of these figures, however, delivers only limited informative value. For example, there are some occupations that require training in Germany and Austria but which in other countries require a (lower) university degree. AU AT BE CA CZ DK EE FI DE IE IT JP KR NL NO PL SK ES SE GB US R² = 0.4214 255 265 275 285 295 305 315 460 480 500 520 540 PISA average PIAAC average PISA and PIAAC literacy 1 X - axis: PISA scores 2009 Y - axis: PIAAC scores for 25 to 34 - year - olds Sources: OECD, DB Research AU AT BE CA CZ DK EE FI DE IE IT JP KR NL NO PL SK ES SE GB US R² = 0.4337 250 260 270 280 290 300 310 480 490 500 510 520 530 540 550 PISA average PIAAC average PISA and PIAAC numeracy 2 X - axis: PISA scores 2009 Y - axis: PIAAC scores for 25 to 34 - year - olds Sources: OECD, DB Research Focus Germany 22 | November 29, 2013 Current Issues If the share of graduates is instead used to measure national educational attainment, there is only a very weak statistical correlation. This finding is also interesting because academics in all OECD countries have a smaller risk of becoming unemployed – and above all becoming one of the long-term unemployed. 11 Nevertheless, the highest possible percentage of graduates does not guarantee low unemployment. It thus appears to be at least as important that there is a good base in the intermediate qualification segment and the lowest possible percentage of low-skilled persons. Also consistent with this is that especially in Germany small and medium-sized enterprises not only complain about a lack of university graduates in the so-called STEM subjects (Sciences, Technology, Engineering and Mathematics), but also more frequently about the low number of applicants for skilled jobs. 12 One possible explanation for the lack of a correlation between the share of university graduates and the structural unemployment rate could be that a workforce containing many highly qualified persons primarily leads to large productivity gains. This explanation is, however, refuted by the practically non- existent correlation between the share of the population with a tertiary qualification and labour productivity. 11 See for example OECD (2013). Education at a Glance. 12 See for example DB Research (2012). “Die größten Familienunternehmen in Deutschland, Ergebnisse der Herbstbefragung 2012”, and DIHK (2013). “DIHK Arbeitsmarktreport: Fachkräfte auch bei schwächerer Wirtschaftslage gesucht.” DE KR ES IT R² = 0.392 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 40 Sources: OECD, DB Research Strong positive correlation between unemployment rate and population share without upper secondary qualification 3 X - axis: % of population without training or advanced schooling Y - axis: Unemployment rate, % DE PL SK KR ES IT R² = 0.2444 0 5 10 15 20 0 5 10 15 20 25 30 35 40 X - axis: % of population without training or advanced schooling Y - axis: Structural unemployment rate, % Sources: OECD, DB Research Positive correlation between structural unemployment rate and population share without upper secondary qualification 4 DE SK AT KR ES IT R² = 0.0507 0 5 10 15 20 0 10 20 30 40 50 60 70 X - axis: % of population with university degree Y - axis: Structural unemployment rate, % Sources: OECD, DB Research No statistical correlation between structural unemployment rate and share of university graduates 5 DE CA CZ JP AT NO KR IT R² = 0.0035 3.0 3.3 3.6 3.9 4.2 4.5 15 25 35 45 55 65 X - axis: % of population with university degree Y - axis: Log of labour productivity, GDP per hour worked Sources: OECD, DB Research Share of university graduates has no influence on labour productivity 6 Focus Germany 23 | November 29, 2013 Current Issues 3. Low educational attainment and few competencies reduce perceived social integration The correlation that a deficiency in education and vocationally related skills leads to lower income and negative social outcomes can be observed in all OECD nations, but to differing degrees. In the PIAAC survey adults with few literacy skills (lower than Level 2) are compared with those with good literacy (Levels 4 and 5) using a number of indicators of social integration. The potential negative results that we observe here are: (i) a self-reported poor state of health, (ii) little perceived political influence and (iii) little trust in other people. The OECD then calculates for each indicator the odds ratio of a poor outcome, that is how much greater the probability is of a negative social outcome for those people below Level 2. Comparing the odds ratios across countries should, however, be done with caution as the higher risk is always relative to the reference group in the respective country, which can give rise to a distorting effect. A high relative probability can arise either via a particularly good outcome of the reference group, via a particularly bad outcome for the socially disadvantaged group, or via both. Moreover, the comparability is made more difficult by the very marked differences between the countries' self-assessment response behaviour in some cases. In a similar OECD survey, for example, 90% of US citizens stated that they were in good or very good health, whereas the figure was only 72% in France, just 65% in Germany and a mere 32% in Japan. 13 According to the OECD average the risk of having or claiming to have a poor state of health is roughly twice as high for a person with few literacy skills as for the reference group. The inequality in this area is most pronounced in Germany and the US with a risk that is more than four times as a high. This is puzzling because in the US socially disadvantaged groups actually have much less health insurance coverage and therefore a greater inequality in the healthcare system than in Germany would be expected. With respect to perceived political influence Germany also has a high odds ratio for people with few literacy skills. Germany also scores below the average with regard to trust in others. These findings are interesting not least because Germany is not one of the OECD nations with the highest income inequality. As already mentioned, making an international comparison of odds ratios based on self-assessments is, however, only of limited informative value. 4. Migration background and low level of education increase risk of few skills In order to assess the skill level of people with a migration background and educationally disadvantaged families the odds ratio is calculated relative to a native speaker born in the country with at least one parent who has an upper secondary school qualification. Compared with this reference group a child in Germany with low-skilled parents (i.e. without an upper secondary school qualification) who was born abroad and raised in a foreign mother tongue is ten times more likely to achieve a poor literacy score (below Level 2). Also, foreign children with at least one higher- skilled parent are still nearly five times more likely to have poorer opportunities compared with the reference group. In both cases Germany thus does much worse than the OECD average. 13 See OECD (2011). “Health at a glance 2011: OECD Indicators.” 0 1 2 3 4 5 Health 7 Odds ratio for poor health Sources: OECD, DB Research 0 1 2 3 4 5 Political efficacy 8 Odds ratio for percieved lack of political influence Sources: OECD, DB Research 0 1 2 3 4 5 Trust 9 Odds ratio for little trust in others Sources: OECD, DB Research Focus Germany 24 | November 29, 2013 Current Issues According to the Federal Statistical Office, nearly 20% of the German population has an ethnic minority background, and 60% of these persons were born outside Germany. Due to demographic change, which makes increased immigration necessary, the integration into the labour market of migrants (also those who are second-generation) will become increasingly important. It is thus a worrying sign that education prospects in Germany are so heavily dependent on a person's ethnicity and educational background. On the one hand, this makes integrating migrants more difficult, while on the other hand companies cannot meet their requirements for skilled employees. There is, however, also an unequal distribution of skills between the members of the population without an ethnic minority background. According to the OECD average, the probability is that persons born in their home country who have low-skilled parents are roughly twice as likely to possess few literacy skills as persons with better qualified parents. The differences between the countries are, however, relatively small, and Germany is also close to the OECD average on this count. Conclusion Lifelong learning and the continuing acquisition of skills also after the completion of schooling and occupational training is becoming increasingly important in our society. From a macroeconomic point of view it is the basis for remaining internationally competitive. At the same time from an individual point of view it is the best strategy for minimising the risk of poverty and unemployment. After all, occupations with more exacting educational requirements are accounting for an increasingly large share of the available jobs, while the relative importance of occupations requiring medium-level and low-level qualifications is declining steadily. A good school education – also in early childhood – is the most important foundation for acquiring skills, but public and private investment in human capital also pays off in later years. It is important to include all sections of the population and in particular to provide people whose educational attainment is below average with opportunities for lifelong learning of occupational skills that are tailored to their needs. Lilian Sachtleben Stefan Vetter (+49 69 910-21261, stefan.vetter@db.com) 0 2 4 6 8 10 12 Native - born/native speaker, neither parent has upper secondary qualification Foreign - born/foreign language speaker, at least one parent has upper secondary education Foreign - born/ foreign language speaker, neither parent has upper secondary education Germany Netherlands UK Italy OECD average Spain Odds ratio for poor literacy 10 Source: OECD Compared with reference group (native - born/native speaker, at least one parent with upper secondary qualification) - 15 - 10 - 5 0 5 10 15 20 1998 2000 2002 2004 2006 2008 High (more than 15 years of schooling) Medium (12 - 14 years of schooling) Low (fewer than 11 years of schooling) By number of mandatory years of schooling, change in employment share since 1998 (%) Source: OECD Employment in the OECD by qualification 11 Focus Germany 25 | November 29, 2013 Current Issues The Federation, the Länder and the municipalities – all in the same boat — In Germany there is a large degree of financial integration between the Federation, the Länder (the individual federal states) and the municipalities. This is the result of the division of duties prescribed by the country's Basic Law, the sharing of tax revenues, their redistribution between the different levels of government and the co-financing of many tasks. — The close financial relations conflict with the budgetary autonomy guaranteed by the Basic Law and thus primarily with the freedom to make decisions on expenditure. This autonomy not only places limits on the influence of the Federation on the Länder and between the Länder themselves but also on the influence of the Länder on the municipalities. — It is therefore not really a surprise that in Germany there are no explicit rules in the Basic Law or other legislation that specify how to address a budget crisis situation in a Land. No legal provision whatsoever is made for an insolvency of the Federation, a Land or a municipality. — Based on the principle of mutual support derived from the Basic Law the Constitutional Court has established a de facto bail-out rule to apply between the different levels of government. From which stage the respective government requires assistance, i.e. how comprehensive its own efforts must be, has in the past been decided by the Constitutional Court on a case-by-case basis. Germany is a federal state – as set out explicitly in Article 20 of the Basic Law. Its federal structure, i.e. the separation between the Federation and the Länder as well as the fundamental involvement of the Länder in the legislative process via the Bundesrat, is firmly enshrined in the Basic Law. Constitutional changes that amend these principles are in fact forbidden. The Basic Law guarantees municipal self-administration for the municipalities as the third level of government with the right to their own sources of revenue (including autonomy in setting tax rates – primarily trade tax and property tax). However, the tripartism is not expressed this clearly in the Basic Law. It is only the Federation and the Länder whose tasks, expenditure and revenue responsibilities and legislative powers are relatively clearly stipulated by the constitution. The more precise definition of municipal duties is stipulated in the constitutions of the Länder and primarily the municipal codes, and it is up to each Land to specify its own definition. This means that the municipal authorities have no direct link with the Federation at the institutional level. Nevertheless, the Federation has very great de facto influence via mandatory duties (especially in the social services sector) and administrative regulations concerning the execution of duties. Why is this division relevant for the fiscal situation and liability in the federal state? The division of competencies and duties between the Federation and the Länder in Germany ultimately also determines the division of revenue and expenditure between the levels of government, i.e. who does what and who pays for what. The division of government tasks between the Federation and the Länder is functional in nature, i.e. instead of an exact definition specifying certain tasks to be performed in full by one of the government levels, a differentiation is made between legislative powers or framework legislation, administrative responsibilities and, as regards finances, also the apportionment of tax revenue. In principle, the Länder enjoy legislative powers for all matters as long as the Basic Law has not assigned the given task to the Federation – or the Federation has not claimed it for itself. The latter can be observed on a grand scale in practice, with the Federation wielding the de facto overwhelming legislative competence, whereas the administrative function is largely in the Focus Germany 26 | November 29, 2013 Current Issues hands of the Länder and the municipal authorities – apart from some exceptions (e.g. customs). The major influence of the Federation is shown on the revenue side by the fact that the Länder essentially only have a say in the overall volume of tax receipts via the tax legislation in the Bundesrat – apart from a few exceptions (e.g. exclusively Länder-imposed taxes such as land acquisition tax). Although the Länder have strong veto rights in the Bundesrat, they are largely prevented from making quantitatively significant decisions about the level of taxes and thus their own revenues. At last count, 70% of taxes in Germany were so-called joint taxes (2012: EUR 426 bn of the total revenue of EUR 600 bn; the latter was equivalent to some 22.7% of German GDP). This revenue is mainly comprised of income tax and value-added tax. Only 2% of these were exclusively Länder- imposed taxes and 9% were municipal taxes, which accrue in part to the Federation and in turn to the Länder. In the end, the distribution of tax revenues among the three levels of government as a whole in Germany has remained relatively constant since the dawn of the new millennium. The Federation and the Länder collect roughly the same amount of taxes, while the municipal authorities' share comes to about 14%. All in all, there is a large degree of financial integration between the Federation, the Länder and the municipalities in Germany. The Basic Law explicitly grants the Länder (as well as the Federation) appropriate funding to be able to fulfil the allocated tasks. Thus, in what is essentially a four-stage process 70% of taxes are first shared vertically between the Federation, the Länder and the municipalities. At the next stage these revenues are then shared horizontally between the Länder and between the municipalities in the respective Land. Then, within the financial equalisation framework tax revenues are redistributed horizontally between the financially weak and the financially strong Länder (roughly the same is also carried out between the municipalities of a Land). In the fourth and last stage the Federation finally makes direct transfers to the Länder – the so-called supplementary federal grants. There is a variety of such grants. In principle, these grants are, on the one hand, intended to largely cancel out the remaining differences between the financial resources of the Länder. On the other hand, the transfers are granted for specific purposes (these include the distribution of funds for Solidarity Pact II). There is one further system of grants that also exists between the Länder and the municipalities. The close financial relations between the Federation, the Länder and the municipalities conflict with the de jure explicitly guaranteed budgetary autonomy. The Federation may not issue direct regulations concerning expenditure to either the Länder or the municipalities. The same also applies to the relationship between the Länder and the municipalities. However, within the framework of municipal oversight a Land can exercise the right of scrutiny or approval in the event of an extremely precarious municipal budget situation. The rights have been beefed up via the establishment of bail-out funds. Placing limits on municipal autonomy, however, always requires the walking of a legal tightrope in each individual case. With the setting-up of the Stability Council a control body has been introduced at the Federation and Länder levels that is intended to help make the debt brake-related target of structurally balanced budgets (for the Federation from 2016 and for the Länder from 2020) an attainable objective. However, the Stability Council has no scope to impose ultimate direct sanctions. Given these conflicting principles of financial integration and autonomy it is somewhat surprising that neither the Basic Law (nor any other laws) ultimately contain any explicit provisions that stipulate 14 how to navigate through dire 14 The exceptions here are precise rules for dividing up potential fines between the Federation and the Länder, which Germany would have to shoulder in full if it failed to comply with the Maastricht criteria. See here and below the still applicable "Gutachten des wissenschaftlichen Beirats of the Federal Ministry of Finance (2005), Haushaltskrisen im Bundesstaat, especially p. 29ff. 0% 10% 20% 30% 40% 50% 60% 70% 80% 94 96 98 00 02 04 06 08 10 12 Joint taxes Federation taxes Länder taxes Municipal taxes Sources: DB Research, Bundesbank Länder have little tax autonomy 1 Share of total tax receipts 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 99 01 03 05 07 09 11 13 15 17 Federation Länder Municipalities EU Sources: Federal Statistical Office, Federal Ministry of Finance, DB Research Share of tax receipts 2 Respective share of total tax receipts 39.4% 36.2% 9.6% 14.8% Tax revenues (net) Current grants Charges and contributions Other Respective shares of adjusted revenues Sources: Städtetag, Federal Statistical Office, DB Research Municipal revenues: Mostly taxes and grants 3 Focus Germany 27 | November 29, 2013 Current Issues budgetary straits at the Länder level. In addition, the German Insolvency Act (in contrast, for example, to chapter 9 of the US insolvency code) explicitly rules out insolvency of the Federation and the Länder as well as of legal persons established in public law that are subject to the oversight of a Land government (thereby including municipalities). Instead, the Federal Constitutional Court has, based on Articles 104a and 107, derived and concretised the principle of allegiance to the federation (and federally supportive behaviour) and reaffirmed it in several rulings. Accordingly, all the levels of government have a mutual obligation to grant assistance in the event of an extremely grave budget situation if the affected entity is unable to extricate itself from this situation alone and is thereby prevented from fulfilling its assigned duties. This principle of mutual support or allegiance to the federation (or "Bündisches Prinzip", as it is also called in German) thus includes an obligation both for the Länder towards the Federation and also for the Federation towards the Länder as well as between the Länder themselves. This applies in particular if the federal order (article 20) and the autonomous fiscal management (article 109) are jeopardised. Materially, fiscal solidarity is first displayed in the above-described financial network – above all in the financial equalisation systems (stages 3 and 4). This means that ultimately a de facto bail-out facility exists in Germany's federal system. The decision whether, for example, additional federal assistance for individual Länder is necessary has in the past been made by the Federal Constitutional Court (for example in Saarland and Bremen in 1999 and in Berlin in 2006) as part of a ruling, i.e. on a case-by-case basis. In 2006, for example, the Court rejected supplementary assistance for Berlin as it firstly saw no emergency situation for the federal state that would have justified additional transfers and secondly observed that Berlin was making insufficient efforts of its own. In future emergency budgetary situations, for example of a Land, a similar process can be expected. If an emergency budgetary situation exists and the other Länder or the Federation cannot agree on supplementary assistance anyway, the affected Land can call on the Federal Constitutional Court and sue for assistance. In the event of a very grave fiscal situation of Land under the current institutional conditions the creditor can expect at worst a temporary delay in payment – insofar as the other Länder and the Federation have the financial wherewithal to assist the ailing Land. In the relationship between a Land and its municipalities something similar will probably apply, as the municipalities must also be in a position to perform their duties and ultimately a Land cannot leave its municipalities "without a leg to stand on". In other words – the Federation, the Länder and the municipalities are all in the same boat. This is a consequence of the provisions of Germany's Basic Law and even more so of the rulings of the Federal Constitutional Court. What drives the spreads between federal and Länder bonds? The de facto bail-out is also an important anchor for the yield spreads between federal bonds and the bonds issued by individual Länder. Since the end of the 1990s there has been a discernible change in how most of Germany's federal states obtain their funding. Making up 60% of total debt (at the start of 2000 the share was just 20%) Länder bonds have replaced direct loans from banks as the primary source of funding. Given the changing regulatory environment and the lack of alternative investment opportunities Länder bonds are becoming more important. Despite the described principle of joint liability, however, capital markets demand yield premia for Länder bonds relative to federal bonds of more than 100 bp in some cases. In a study we analyse potential causes a data set compiled by ourselves. Given the crisis-driven structural changes in the 5% 10% 15% 20% 25% 30% 0 50 100 150 200 250 300 350 400 450 95 97 99 01 03 05 07 09 11 13 All maturities - left Thereof: Maturity of more than 4 years - left Thereof: Maturity of up to 4 years - left Länder bond share of all public sector bonds - right Bonds increasingly popular 4 Nominal value of Länder bonds outstanding (EUR bn) Sources: Bundesbank, DB Research Focus Germany 28 | November 29, 2013 Current Issues government bond markets our study differentiates between two periods – from 2001 until the insolvency of Lehman Brothers and the period after the insolvency until 2012. The report's findings show that both higher liquidity and lower risk aversion in the market are accompanied by systematically smaller average yield premia for Länder bonds compared to federal bonds. This applies to the entire period and also to both the pre-Lehman and post-Lehman eras – risk aversion does become less important in the post-Lehman period, though. This can be interpreted as an indication that since 2008 the importance of Länder bonds as a safe haven has increased relative to federal bonds (and other assets, too). Other factors analysed, such as relative economic output, debt, revenue generating capacity, primary surplus, relative differences in unemployment, inflation and growth had no systematic impact on spreads in the period up until 2008. This changes in the post-Lehman period (after 2008). In line with the European government bond markets both debt and economic output (in this case expressed as GDP per capita) – along with liquidity and risk aversion – are statistically significant determinants of the spreads. A rise in per capita GDP of EUR 1,000 is thus associated with a 7.6 basis point smaller yield spread. A 10 percentage point increase in debt (relative to GDP) widens the yield spread by 1.6 basis points. It is, however, also conceivable that there is a correlation between debt and a regulatorily limited demand for the bonds of an individual Land. Other macroeconomic and above all fiscal variables, the latter geared towards direct budgetary discipline, play no statistical part. Frank Zipfel (+49 69 910-31890, frank.zipfel@db.com) Yield spread analysis – regression results 6 Variables Dependent variable: yield spread (I) (II) (III) Total Pre - Lehman Post - Lehman Risk aversion 0.00059 *** 0.00098 *** 0.00041 *** (6.04) (6.95) (3.07) Limited liquidity 0.02231 *** 0.02516 ** 0.01966 *** (6.64) (2.76) (4.38) Relative economic output 0.0000 *** - 0.0001 - 0.0008 *** ( - 4.40) ( - 0.96) ( - 4.74) Debt/GDP from previous period 0.0002 0.0004 0.0016 *** ( - 0.84) (1.35) (2.53) Crisis dummy - 0.00036 *** ( - 7.80) Country fixed effects Yes Yes Yes R2 0.9588 0.9077 0.9706 Obse rvations 321562 138714 182848 Source: Own calculations, DB Research 0% 10% 20% 30% 40% 50% 60% 70% 68 72 76 80 84 88 92 96 00 04 08 12 Share of Länder debt Share of all public sector bonds Importance of bond financing for Länder has increased exponentially 5 Share of Länder bonds in Länder debt and all public - sector bonds outstanding Sources: Deutsche Bank Research calculations, Bundesbank, Federal Statistical Office Focus Germany 29 | November 29, 2013 Current Issues Debt ratio in Germany continues to decline — German government debt dropped below 80% of GDP in mid-2013 — Outstanding development by European standards — However, doubts on the colaition’s plan to reduce public debt to below 70% of GDP until end-2017 are advisable In contrast to most other EU countries, the debt level in Germany continues to decline and was equivalent to only 79.8% of GDP at the end of Q2. On the one hand, this reflects the revenue-driven consolidation course pursued so far. In the coming years as well, structural surpluses in the total budget are likely as a result of steadily increasing revenues due to continuing economic growth and only moderate spending increases. On the other, the continuing reduction in portfolios at bad banks autmatically leads to a steadily declining debt level. Doubts on the coalition’s taget to reduce the debt level to below 70% of GDP by end-2017 are, however, advisable given the measures proposed in the coalition agreement. The government debt at the end of the second quarter (as % of GDP) is the most recent figure reported by the Member States. It is calculated by dividing the debt level by the sum of GDP of the last four quarters. As in most cases not all data are available and the reference value is the annual debt level of GDP of the current year, debt levels at the end of the quarter in the event of deviations are adjusted to the annual value at year-end and are therefore to be interpreted as preliminary values. Compared to the debt level in Q2 2012, besides Germany only three more EU countries succeeded in reducing the debt level. However, in all other countries, the debt ratio rises sharply in part. In this context, it is striking that the European Commission in its spring forecast systematically under- estimated the debt levels (2013) of a number of EU countries, which are faced with large fiscal problems. Only for some of these countries can changes in growth estimates be the reason for the change in forecasts of the debt level (in Portugal and Spain, the growth estimate has even been raised). In its autumn forecast the European Commission strongly raised the 2013 debt-level projection for the above-mentioned countries. 110 115 120 125 130 135 140 70 75 80 85 90 95 100 Apr/ 12 Jul/ 12 Oct/ 12 Jan/ 13 Apr/ 13 DE ES EA 18 EU FR UK IT - right Change in debt level 1 Sources: Eurostat, DB Research Debt level at the end of the quarter, change in pp of GDP, Q2 2013 yoy - 5 - 2.5 0 2.5 5 7.5 10 12.5 15 17.5 20 LV DE AT DK LT MT LU PL BG RO CZ EU - 28 HU NO BE EE FR SE EU - 18 UK FI NL SK IT PT SI ES CY IE GR Change of government debt 2 Sources: DB Research, Eurostat Debt at the end of the quarter, change in pp of GDP, Q2 2013 yoy BE DE EE IE GR ES FR IT CY LV LU MT NL AT PT SI SK FI EU - 17 - 2 - 1 0 1 2 3 4 5 6 7 0 20 40 60 80 100 120 140 160 180 200 Sources: EU Commission, DB Research Forecast revision of the commission , gross debt 2013 3 Change in pp , autumn forecast 2013 vs spring forecast Focus Germany 30 | November 29, 2013 Current Issues At the end of 2012, the German debt level was still 81% of GDP. Of these 81% of GDP some 13 percentage points were attributable to the effects of financial market support (11%) and the sovereign debt crisis (2%). In view of the continuing portfolio reduction at the bad banks (probably up to 1.5 percentage points of GDP), the debt level will probably decline to just below 79% by the end of this year. The effect of government support for financial institutions on the debt level varies a lot in the EU countries. Besides Germany, this value comes to over 10 percentage points of GDP in Greece, Ireland, Portugal and Cyprus, otherwise in most cases it is much lower, however. Frank Zipfel (+49 69 910-31890, frank.zipfel@db.com) 30% 50% 70% 90% 110% 130% 150% BE DK DE IE GR ES FR IT CY NL AT PT SI SE UK Share of debt level without support for financial institutions Share of debt level relating to support of financial institutions 2012, as % of GDP Sources: Eurostat, DB Research Maastricht debt level Debt level and share of support for financial institutions 4 Focus Germany 31 | November 29, 2013 Current Issues Chart of the month Is Germany's export surplus due to weak import performance? Germany has been the subject of harsh criticism for its export strength for quite some time. With the EU's decision to launch an in-depth review of excessive current account surpluses in Germany, the debate has reached new heights. The European Commission is potentially joining the chorus of those in Washington and at the IMF who claim that Germany's export surpluses hinder the reduction of imbalances in the euro area and the rest of the world. But where should such a reduction start? First of all, it is probably almost impossible to decrease Germany's exports just like that if its products are popular abroad and are therefore in heavy demand. Some critics suggest that Germany should seek to boost demand at home, and thus its imports, as a way to cut back the export surpluses. However, the question arises as to whether the German surpluses are due at all to weak import performance and, in this context, to a low degree of openness to foreign goods and services. By international standards, Germany is very open to foreign goods and services. Its import ratio of 45.9% is nearly 15 pp higher than that of Italy (29.1%) or Spain (31.9%) on the eurozone's periphery. It also far outstrips that of the large EU members France (29.6%) and the United Kingdom (33.8%). Among the eurozone countries, only the Netherlands (80%), Belgium (84%) and Austria (54%) have a noticeably higher ratio, which is probably attributable to country- specific factors and the small size of these countries. In a global comparison Germany's import ratio is no less than 29 pp higher than that of the United States (16.9%) and Japan (16.6%). At about 2.5, Germany's import elasticity outstrips that of the other countries (worldwide average close to 2). This means that over the past few decades world trade and German import performance have been relatively similar. Against this backdrop it is highly doubtful whether German import behaviour may be held responsible for global imbalances. Bernhard Gräf (+49 69 910-31738, bernhard.graef@db.com) Elisabeth Grewenig 0 5 10 15 20 25 30 35 40 45 50 DE GB ES FR IT US JP Imports of goods & services DX 2012, % GDP Source: IMF - 15 - 10 - 5 0 5 10 15 80 84 88 92 96 00 04 08 12 German imports World trade German imports & world trade DX Real, % yoy Sources: Federal Statistical Office, IMF Focus Germany 32 | November 29, 2013 Current Issues Chartbook: Business cycle (1) — Growing by 0.3% qoq – in - line with the potential growth rate – the G erman economy continued its recovery in Q3. This was solely supported by domestic demand. Priv. consumption (0.1pp) and investment in machinery & equip. (0.0pp) only contributed modestly compared to construction (0.2pp). Net exports weighed strongly on GDP growth ( - 0.4pp) likely in large part due to one - offs. — Growth weakened materially compared to Q2 (+0.7% qoq) as Q2 was pushed by catch - up effects after the long and hard winter. — For Q4 we expect 0.4% growth resulting in annual growth in 2013 of 0.5%. In 20 14 we expect 1.5% growth. — Euro area GDP growth slowed to 0.1% in Q3 after Q2’s stronger growth rate of 0.3% that was supported by developments in Germany (+0.7% qoq) and France (+0.5%). In Q3 Germany (+0.3%) contributed again and Spain (+0.1%) left its recession while GDP contracted in France ( - 0.1%) and in Italy ( - 0.1%). — Considering the remaining adjustment needs in several EMU countries and weak global trade the EMU economy should continue to grow only moderately. Despite positive growth in H2, EMU GDP should decline again in 2013 by 0.2% (2012: - 0.6%). In 2014 growth could improve to 1.2%. — After a pause in October the ifo index returned on its upward path. In November the index rose strongly to the highest level in 18 months. This was foremost due t o better expectations, which are well above their historic average and at this level point to continued decent GDP growth. — The business climate improved in all major sectors. The manufacturing sector, in particular, showed higher senti - ment levels thanks t o higher expectations. Even export expectations rose decently despite the weakness in EMU’s November PMI readings. — The composite PMI saw a broad based improvement in November (54.3 after 53.2) lifting the Q4 average to 53.7 (Q3: 52.9), which points to GDP growth of 0.4% qoq in Q4. — The services PMI rose strongly (54.5 after 52.9) and more than made up for the losses in the prev. month thanks to improved order intake and employment senti - ment. The manufacturing PMI (52.5 after 51.7) rose decently due to markedly higher order intake (especially foreign orders) as well as a further slight increase of production growth. The manufacturing PMI is now at a 29 - month high. - 2 0 2 4 6 - 1.0 0.0 1.0 2.0 3.0 10 11 12 13 14 % qoq (left) % yoy (right) Real GDP growth Sources: Federal Statistical Office, DB Research - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 10 11 12 13 14 EMU ex DE DE GDP growth: DE vs EMU % qoq Source: Eurostat 70 80 90 100 110 120 130 08 09 10 11 12 13 Expectations Business situation Business climate Ifo i ndex - total economy 2005=100 Source: ifo 30 35 40 45 50 55 60 65 08 09 10 11 12 13 Composite Manufacturing Services Purchasing Manager Index PMI, i ndex Source: Markit Focus Germany 33 | November 29, 2013 Current Issues Chartbook: Business cycle (2) — The order intake continued its recovery in Septembe r. Thanks to further big - ticket orders the order level was 5.5% above September 2012 (3M moving average). Even excluding big - ticket orders (airplanes, trains, ships) orders were up 3.5%. In contrast to previous months orders from all major regions were abo ve Sept. 2012. — On a month - on - month basis orders were up 3.3% ( - 0.3% in August) thanks to big - ticket orders. Core orders remained unchanged after material strength in August (+2.8%). — Ifo and PMI suggest that the upward trend in orders will continue in the n ext months. — Industrial production declined 0.9% mom in September, after it had risen by 1.6% in August. Therefore, the Q3 increase of 0.6% qoq was moderate compared to Q2’s 2.1%. As a result the industrial sector (incl. construction) added less to growt h in Q3. — Thanks to the moderate upward trend in production, output was up 1.4% yoy (3M moving average). This is the first positive yoy - comparison since August 2012 excluding the strong June 2013. — Sentiment, capacity utilization and rising order intake poin t to another moderate output increase in Q4. — Thanks to immigration and rising participation rates employment continues to grow at a decent clip. In October it was up by around 250k compared to last year, The moderate build - up of employment, therefore, c ontinues. In contrast, unemployment was also higher by around 50k, a somewhat weaker picture. — The number of employees rose by 20k mom in October. Therefore, employment continues to mark record highs (seasonally adjusted 41.9 m). — The comparably strong i ncrease in unemployment of 10k mom in November was largely due to people leaving government sponsored labour market programmes. Therefore, this should not be interpreted as a sign of labour market weakness. Adjusted for this effect the number of unemployed was unchanged. — Leading indicators currently point to modest upward tendencies on the labour market. We expect the unemployment rate to average 6.9% in 2013 and fall to 6.7% next year on back of the improving business cycle. -20 -15 -10 -5 0 5 10 15 20 25 30 11 12 13 Total Domestic Foreign - EMU Foreign - Non - EMU New manufacturing orders % yoy Source: Federal Statistical Office 77 82 87 92 97 102 107 112 117 -25 -20 -15 -10 -5 0 5 10 15 20 08 09 10 11 12 13 14 Industrial production (left) ifo expectations (4M lag, right) % yoy (left), 2005=100 (right) Sources: ifo, Federal Statistical Office Industrial production and ifo expectations 90 95 100 105 110 115 120 - 0.5 0.0 0.5 1.0 1.5 2.0 08 09 10 11 12 13 14 Employment (left) ifo employment barometer (6M lag, right) % yoy (left), 2005=100 (right) Sources: ifo, Federal Employment Agency Employment and ifo employment barometer - 100 - 50 0 50 100 150 200 4 5 6 7 8 9 10 08 09 10 11 12 13 14 Change in unemployment (right) Unemployment rate (left) Unemployment % of total civilian labour force (left); mom, '000 (right) Sources: Federal Employment Agency, DB Research Focus Germany 34 | November 29, 2013 Current Issues Chartbook: Business cycle (3) — Inflation recovered somewhat in November. The inflation rate rose from 1.2% to 1.3% due to core inflation rising from 1.1% to 1.3% suggesting that low core inflation in October was in part due to one - offs. In contrast, energy inflation ( - 0.3% afte r - 0.5%) remained roughly un - changed and food prices slowed (+3.2% after +4.2%) as declining world food prices ( - 25% yoy) are increasingly passed through. — We expect inflation to average 1.5% in 2013 and 2014. Given moderate GDP growth, the expectation of s table commodity prices and moderate wage growth inflation should remain muted. — The trade balance surplus rose to a new historic high of EUR 18.9 bn in September (seasonally adjusted terms; after EUR 15.8 bn before). This lifted the Q3 average by EUR 2 b n versus the Q2 average. This however was not reflected in net - exports in the Q3 GDP data (probably due to price trends). — While exports saw marked growth for the 2 nd consecutive month (+1.8% mom, after +1.0%) imports declined strongly ( - 2%) largely due to falling energy prices. — Towards mid - 2013 exports fell below their 2012 - levels as even exports to the USA slowed and turned negative in July 2013. Exports to EMU had been falling since early - 2012. — Since the onset of the euro crisis EMU’s share in German e xports has dropped by almost 10 percentage points to around 37% (Asia 16% and the US 8%), as the crisis economies have reduced their imports from Germany significantly since 2008 (2012 Spain: - 36%; Italy: - 10%; Portugal: - 24%). — Ifo export expectations have increased markedly since mid - 2013 and rose to the highest level since Mai 2011 in November. However, in H1 2013 they strongly over - stated actual export growth. The details of the PMI survey as well as our forecasts for Chinese and US GDP growth in 201 4 support expectations of improving exports. — German imports should improve too given decent real income increases for households as well as rising demand for intermediate goods. -1.0 0.0 1.0 2.0 3.0 4.0 08 10 12 Inflation Core inflation Sources: Federal Statistical Office Inflation rate and core inflation rate % yoy 0 5 10 15 20 25 30 35 40 - 30 - 20 - 10 0 10 20 30 40 08 09 10 11 12 13 Trade balance (right) Exports (left) Imports (left) Merchandise trade % yoy (left), EUR bn (right) Source: Deutsche Bundesbank - 40 - 30 - 20 - 10 0 10 20 30 40 08 09 10 11 12 13 Total Asia EMU USA German merchandise exports by destination Merchandise e xports, % yoy, 3M moving average Source: Deutsche Bundesbank 75 80 85 90 95 100 105 110 115 - 30 - 20 - 10 0 10 20 30 08 09 10 11 12 13 14 Merch. exports (left) ifo export expectations (lagged by 3M, right) Exports & ifo e xport expectations % yoy (left), index (right) Sources: Deutsche Bundesbank, ifo Focus Germany 35 | November 29, 2013 Current Issues Chartbook: Sectors — Real industrial production in Germany rose by 0.3 % qoq in Q3 2013. This was, however, substantially below Q2’s 1.9% increase. The o rder intake increased by 1.6% qoq in real terms in the same period. — Demand from outside Europe has developed better than demand from EMU countries for a considerable time. Sl ight increases were recorded in both cases in September. — In full year 2013 we expect industrial production to stagnate (2012: - 1%). We are more optimistic for 2014 and expect an increase by 4%. — Exports of the mechanical and the electrical engineering in dustry to China have risen since the beginning of 2013. Thus, exports to China should support domestic production in both sectors in 2013; this holds even more for 2014 when the economic situation in China is expected to improve. — The automotive industry be nefits from rising exports to the US and UK in 2013. The Chinese market, however, is increasingly catered for by German companies’ local production sites. — In the German automotive industry real domestic production increased by 4% qoq in Q3 2013. The sig nificant increase of domestic production in August was due to a time displacement of factory holidays of a large car maker. We changed our 2013 forecast for the sector. We now expect domestic production to increase by 1% (former forecast: stagnation). — In 2014, automotive production in Germany could increase by 5%. Rising car demand in Western Europe is expected to be an important driver. — Business expectations returned to the positive range of late. Capacity utilisation decreased slightly in Q4 2013. — The German pharmaceutical industry has been growing mainly due to foreign demand during the last few years. The domestic market has shown a weaker development due to stricter regulation. — Order intake in the pharmaceutical industry has sent mixed signals since the beginning of 2013. In Q3 orders exceeded the level of the previous quarter by 1.7%. Foreign orders developed better than domestic demand of late. — We expect output in the pharmaceutical industry to increase by 3% both in 2013 and in 2014 (2012: -2.4%). 90 95 100 105 110 115 10 11 12 13 Production Orders Manufacturing: Production and order intake 2010=100, sa Source: Federal Statistical Office 0.0 0.5 1.0 1.5 2.0 08 09 10 11 12 13 Automotive industry Mechanical engineering Computer, electr., opt. products Electrical equipment German exports to China by sector EUR bn, moving average Source: Federal Statistical Office 50 60 70 80 90 100 80 90 100 110 120 130 10 11 12 13 Capacity utilisation (right) Production (left) 2010=100, sa (left), capacity utilisation % (right) Sources: Federal Statistical Office , ifo Car industry: Production and capacity utilisation 80 90 100 110 120 130 10 11 12 13 Production Domestic orders Foreign orders Pharmaceutical industry: Production and order intake 2010=100, sa Source: Federal Statistical Office Focus Germany 36 | November 29, 2013 Current Issues Chartbook: Financial markets (1) — On 6 November the ECB lowered its refi rate by 25 bp to the new historic low of 0.25%. In addition, the ECB’s full allotment scheme was announced to continue until mid - 2015. — The promise to keep interest rates at p resently low or even lower rates, forward guidance, was reaffirmed unanimously. — To counter the perception that the ECB’s room to manoeuvre has been exploited after the rate cut several ECB council members have started publicly discussing possible further “ unorthodox” measures. However, the governing council is unlikely to take any further steps in its December meeting. — Due to the diverging interest rate and growth expectations between the US and the euro area the yield spread between 10Y US treasuries an d German bunds has roughly doubled since mid - 2013 and currently stands at around 1pp. — Lately the good US payroll data in October and upward revisions to previous months, speculation on a Fed tapering in December as well as the ECB’s refi rate cut have driv en the rising yield spread. — German bund yields are currently at around 1.7%. US treasuries yield around 2.7%. — Other core countries’ yields have roughly moved in tandem with yields of Germany 10Y bunds after the ECB’s rate cut. Thus, the yield spread was roughly unchanged. — Peripheral spreads have narrowed since mid - July due to improved economic indicators and hopes that the EMU recovery will continue. — While the spread in Spain, Italy and Ireland fell relatively strongly, it narrowed much less in case o f Portugal. The positive Troika review and the release of the next loan tranche to the Portuguese government have, however, pushed the spread down to somewhat above 400 bp. — Ireland and Spain have announced plans to leave their rescue programmes until year - end and not to apply further support from the ESM. 0 1 2 3 4 5 6 08 09 10 11 12 13 ECB refi rate 3M interest EMU: Refi rate & 3M interest % Sources: ECB, Global Insight 1.0 1.5 2.0 2.5 3.0 3.5 4.0 11 12 13 DE US % Source: Global Insight US and German government bonds: 10Y yields 0 20 40 60 80 Jan 13 Apr 13 Jul 13 Oct 13 Netherlands Finland France Austria EMU: Bond yield spreads (i) Versus German govt. bond yield, basis points Source: Global Insight 100 200 300 400 500 600 Jan 13 Apr 13 Jul 13 Oct 13 Spain Italy Portugal Ireland EMU: Bond yield spreads (ii) Versus German govt. bond yield, basis points Source: Global Insight Focus Germany 37 | November 29, 2013 Current Issues Chartbook: Financial markets (2) — The Q3 reporting season for European companies (Stoxx Europe 600) has been weakish. Only around 37% of companies beat sales expectations while around 55% beat EP S expectations. Results of German companies were even somewhat weaker (Sales: 29%; EPS: 54%). — Not least due to the continued support from the expansionary supportive monetary policy in many DMs the DAX and the EuroStoxx50 are enjoying a clear upward trend. The DAX continues to mark new highs and currently stands at around 9.300. Against this backdrop our analysts’ target of 9,700 at end - 2014 is rather conservative. — Raw material prices have inched lower in 2013 due to the moderate global demand. They have fallen by a good 4% since the start of the year. — By contrast, food prices have dropped markedly since the peak of August last year. Although the decline has slowed in H1, food prices decreased again since mid - 2013. They are currently almost 25% lower than a year ago, which is gradually reflected in food inflation at the consumer stage. — Over the medium term prices should, however, accelerate according to the OECD. — After a temporary decline to USD 105 per barrel in November the oil price has recovered to USD 110. Lately, the transitional treaty between Iran and the international community have lead to hopes of higher Iranian oil exports. — Our commodity strategists expect an oil price of USD 110 per barrel in Q4 2013 and a gradual fall to USD 105 over the co urse of 2014. The marked supply expansion – especially thanks to the higher production of shale oil in the US – and the higher demand on back of the global recovery should roughly balance out. — The gold price has fallen to below USD 1,300 per ounce latel y. This came on back of better US data and speculation that the Fed could still taper in December 2013. The gold price is about 30% below the previous year’s peak (October 4, 2012: USD 1,792 per ounce). — For 2014 our commodities analysts expect the gold pri ce to remain stable at around USD 1,300 per fine ounce. 3000 4000 5000 6000 7000 8000 9000 06 07 08 09 10 11 12 13 Dax 30 EuroStoxx 50 (normalised) Equity indices Sources: Global Insight, DB Research 50 60 70 80 90 100 110 120 130 140 150 08 09 10 11 12 13 Food Energy Total Industrial Raw material prices HWWI index, 2010=100, based on EUR Source: HWWI 65 70 75 80 85 90 95 100 105 110 115 120 February 2013 May 2013 August 2013 November 2013 USD per barrel (left) EUR per barrel (right) Sources: Global Insight, Reuters, DB Research Oil price Brent Blend, USD or EUR per barrel 900 950 1000 1050 1100 1150 1200 1250 1300 1200 1300 1400 1500 1600 1700 February 2013 May 2013 August 2013 November 2013 USD per fine ounce (left) EUR per fine ounce (right) Sources: Global Insight, Reuters, DB Research USD or EUR per fine ounce Gold price Focus Germany 38 | November 29, 2013 Current Issues Chartbook: Financial markets (3) — Contrary to lingering inflation concerns in the general public the private forecasters of the ECB survey expect no acceleration of the EMU inflation. The expec ted inflation rate in 2 years is at 1.7%, while long - term inflation (5 years) have fallen slightly from 2.0% to 1.9%. — The implied inflation rate for the next 10 years – calculated as the difference between the yield of 10Y German government bonds and the y ield of inflation - protected bonds – hovers between 2 and 2 ½% since the beginning of 2011. — However, the “implicit inflation expectation” may be biased. On the one hand the current real interest rates close to zero earned on an inflation protected bond are hard to reconcile with economic considerations. On the other hand nominal bond yields are depressed by massive purchases of several major central banks. — The ECB’s surprise rate cut and the better than expected US data have brought the EUR vs. USD down t o around 1.35 from 1.38 previously. — Our FX - strategists see the fundamental drivers for an appreciation of the USD still in place. They expect the USD to appreciate to 1.15 until the end of 2014. They see the emerging strength of the USD as the beginning of a multiyear uptrend and forecast that the USD will reach parity to the EUR by 2017. -15 -10 -5 0 5 10 15 20 25 30 35 0.0 0.5 1.0 1.5 2.0 2.5 3.0 07 08 09 10 11 12 13 Implicit inflation expectation (left) Two years ahead* (left) Longer term* (left) Price trends over next 12 months** (right) Inflation expectations Eurozone % yoy (left), balance of pos. and neg. responses (right) * ECB Survey of Professional Forecasters, ** EC Consumer Survey Sources: ECB, EU Commission, Bloomberg 1.2 1.3 1.3 1.4 1.4 1.5 1.5 90 95 100 105 110 115 120 10 11 12 13 Nom. eff. EUR - exchange rate (lhs) Real eff. EUR - exchange rate (lhs) USD per EUR (rhs) 1999Q1=100 (left), USD per EUR (right) Sources: ECB, Reuters Exchange rate development for the EUR Focus Germany 39 | November 29, 2013 Current Issues Chartbook: Financial markets (4) — The decrease in lending to corporates continued in September. Reductions are clearly more pronounced in the euro area ( - 5.5%) – mainly reflecting the macro - economic situation and ongoing deleveraging in countries strongly affected by the crisis. However, the pace of reduction slightly slowed (August: - 5.7%). — Lending in Germany has been declining since the start of the year, with the trend becoming more pronounced in Q3 (September: - 2% yoy). — The substitution effect of debt issuance combined with low investment activity seems to be reflected in lending volumes. — Mortgage volumes in the euro area slightly up: +0.9% yoy (Aug. +0.7% ). — Growth for German mortgage lending has clearly reached pre - crisis level. Until August (+2.5% yoy), growth had been accelerating continuously with September signalling a pause (+2.4% yoy). — Low interest rates coupled with stable income and labour market conditions bolster property demand by house - holds. — Interest rates for mortgages and loans to corporates stood at 2.9% and 3% in September respectively. While there was a slight increase for corporate credit (+0.1pp compared to August) mortgage rates did not change (lowest level year to date: 2.7% in June). — Market conditions in Germany remain characterised by historically low interest rates. The recent ECB rate cut at the beginning of November works against any marginal increases we have seen recently. — Corporates on average continued to report no problems with credit supply. The share of corporates that consider lending policies restrictive remained at very low levels in October. — Sectoral perceptions diverge slightly, though. Construction industries re port a tightening (+1.2pp compared to previous months) but manufacturing companies state that credit conditions slightly eased ( - 0.4pp compared to previous month). -8 -4 0 4 8 12 16 06 07 08 09 10 11 12 13 Euro area Germany Loans to companies % yoy Sources: ECB, DB Research -2 0 2 4 6 8 10 12 14 06 07 08 09 10 11 12 13 Euro area Germany Mortgage volumes % yoy Sources: ECB, DB Research 0 1 2 3 4 5 6 7 06 07 08 09 10 11 12 13 ECB main refi - rate Ø - interest rate for mortgage loans (private sector, new loans) Ø - interest rate for loans to companies (new loans, smaller than 1m) Interest rates % Sources: ECB, Bundesbank 0 10 20 30 40 50 60 09 10 11 12 13 Manufacturing industries Construction sector Lending standards Share of companies that consider lending policies "restrictive" (in %) Source: ifo Focus Germany 40 | November 29, 2013 Current Issues Chartbook: Financial markets (5) — The debt security issuance of German public sector remained buoyant in September. Germany’s Länder and the federal government issued around EUR 45 bn, the second highest issuance in 2013. — The cumulative issuance in the first three quarters amounts to some EUR 358 bn and stands somewhat below the last two years’ pace. — With the weakening effect of the Euro crisis, German public sector bonds seem to benefit to a lower extent from the safe - haven effect which boosted markets during the previous years. — Bank bond issuance lost momentum in September with EUR 6 1 bn issuance volume, the lowest in a given month in 2013. — Nevertheless, in cumulative terms, German banks have raised EUR 683 bn on bond markets in the first three quarters of 2013, the highest value for this period since 2009. — Fed taper concerns combin ed with the seasonality in the data over the recent months, seem to cut down the speed of the bank bond issuance. — Corporate bond issuance remained subdued in September. Firms issued EUR 1.7 bn, the second lowest issuance of 2013. — Despite the rally in th e first half of 2013, the low issuance activity over the recent months has left an imprint on the cumulative issuance in the first three quarters , with cumulative issuance amounting to EUR 22.6 bn. — Higher interest rates following the debate about the FED’s tapering seem to have lowered corporates’ appetite for new bond issuance. — Equity issuance increased marginally in September with EUR 188 m, the second lowest September issuance since 2006. — The cumulative issuance volume remained almost flat in the thir d quarter and now stands at some EUR 8.7 bn year - to - date. — Growth in equity issuance has remained muted in the first three quarters of 2013, consistent with the slow pace of business investment in the eurozone. 0 100 200 300 400 500 600 700 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2012 2013 Gross issuance of public debt securities Cumulative issuance volume , EUR bn Sources: Bundesbank, DB Research 0 200 400 600 800 1,000 1,200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2012 2013 Gross bank debt issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research 0 5 10 15 20 25 30 35 40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2012 2013 Gross non - bank corporate debt issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research 0 5 10 15 20 25 30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2012 2013 Gross equity issuance Cumulative issuance volume, EUR bn Sources: Bundesbank, DB Research Focus Germany 41 | November 29, 2013 Current Issues Chartbook: Economic policy — Current polls show that a " grand coalition " of the CDU/CSU and SPD is still the most welcomed coalition to form the new government. — The approval rates have weakened recently; however, they vary substantially between polling institutes and outcomes depend on how t he surveys are worded. — Astonishingly, the (rather improbable) option of a snap election has recently gained considerable approval. The protracted coalition negotiations between CDU/CSU and SPD as well as the uncertainty about how the SPD rank and file will vote on the coalition agreement might be the reasons. — While until early 2013 the crisis in the euro area was the dominant political issue for German voters, it has since receded to the background. — When asked about the two main issues for German politi cs , 20% of the respondents cited unemployment as being number one − despite the currently robust labour market. — The second most frequently mentioned issue was the sustainability of the pension system (17%). — With regard to the average tax wedge – i.e. th e difference between wages firms pay, including taxes and contributions, and what employees actually receive in return for their labour, net of taxes and deductions – it is obvious that Germany is not one of the most favourable locations. — In the medium ter m the increase of social security benefits – as stipulated in the coalition agreement – will lead to additional burden. 55 ( - 11) 43 (+12) 32 ( - 5) 25 41 52 64 71 0 20 40 60 80 Coalition of CDU/CSU and SPD Snap election Coalition of CDU/CSU and Greens Minority government of CDU/CSU Very good/good Fair/poor % approval, change compared to the early beginning of October in brackets Sources: ARD Morgenmagazin, infratest dimap, DB Research How do you assess the following possibilities of forming a new government? 0 10 20 30 40 50 60 70 08 09 10 11 12 13 Unemployment Economic situation Pensions Euro/debt crisis Two possible mentions Source: Forschungsgruppe Wahlen Most important political issues in Germany 35 37 39 41 43 45 47 49 51 53 55 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DE FR IT ES PT GR Sources: OECD, DB Research Average tax wedge, single person at 100% of average earnings, no children Sum of personal income tax, employee and employer social security contribu - tions plus any payroll tax less cash transfer as a percentage of labour costs Focus Germany 42 | November 29, 2013 Current Issues Contact persons for our chartbooks: Business cycle and financial markets: Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Jan Schildbach (+49 69 910-31717, jan.schildbach@db.com) Sectors: Eric Heymann (+49 69 910-31730, eric.heymann@db.com) Lars Slomka (+49 69 910-31942, lars.slomka@db.com) Economic policy: Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Frank Zipfel (+49 69 910-31890, frank.zipfel@db.com) Dieter Bräuninger (+49 69 910-31708, dieter.braeuninger@db.com) Nicolaus Heinen (+49 69 910-31713, nicolaus.heinen@db.com) Germany: Events of economic-, fiscal- and euro-politics DX Date Event Remarks 6 to 14 Dec SPD members vo te on the draft of the coalition treaty The mail voting of the SPD members on the treaty for a grand co alition will be held in the 2nd week of December. 5 Dec Meeting of the ECB Council, press conference Review of the monetary policy stance. 9 Dec Small party convention of the CDU Vote on the coalition treaty. The 200 delegates are very likely to approve the treaty. 9/10 Dec Eurogroup/ECOFIN meeting Discussion of IMF Article IV interim mission to the euro area, review of the transition to the SSM, discus sion of national draft budgetary plans. 15 Dec Official announcement of the result of the ballot among the SPD members The SPD members are likely to approve the treaty. 17 Dec Likely date for the election of the chancellor After the likely agreement of the SPD members and of the CDU's and the CSU's small party conventions on the coalition treaty the Bundestag will elect Angela Merkel as chancellor of a grand coalition. 19/20 Dec European Council EU heads of State and Government meet in Brussels. Offi cial Agenda on Common Security and Defence Policy. 9 Jan Meeting of the ECB Council, press conference Review of the monetary policy stance. Source: DB Research Focus Germany 43 | November 29, 2013 Current Issues Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Germany: Data calendar DX Date Time Data Reporting period DB forecast Last value 6 Dec 2013 12:00 New orders manufacturing (Index, sa), pch mom October - 1.0 3.3 7 Dec 2013 12:00 Industrial production (Index, sa), pch mom October 1.2 - 0.9 9 Dec 2013 8:00 Trade balance (EUR bn, sa) October 16.6 18.7 9 Dec 2013 8:00 Merchandise exports (EUR bn, sa), pch mom (yoy) October 1.7 (2.2) 1.6 (0.8) 9 Dec 2013 8:00 Merchandise imports (EUR bn, sa), pch mom (yoy) October 5.1 (0.4) - 1.9 ( - 2.0) 16 Dec 2013 9:30 Manufacturing PMI (Flash) December 53.0 52.5 16 Dec 2013 9:30 Services PMI (Flash) Decemb er 54.5 54.5 18 Dec 2013 10:30 ifo business climate (Index, sa) December 108.5 109.3 30 Dec 2013 8:00 Import prices (Index, sa) pch mom (yoy) November 0.0 ( - 3.0) - 0.7 ( - 3.0) 6 Jan 2014 14:00 Consumer prices preliminary (Index, sa), pch mom (yoy) Decem ber 0.3 (1.3) 0.2 (1.3) 7 Jan 2014 10:00 Unemployment rate (%, sa) December 6.9 6.9 14 Jan 2014 8:00 Real GDP (Index, nsa), % yoy 2013 0.5 0.7 17 Jan 2014 8:00 Retail sales (Index, sa), pch mom November 0.7 - 0.8 Sources: DB Research, Federa l Statistical Office, Federal Employment Agency, ifo, Markit Focus Germany 44 | November 29, 2013 Current Issues Heiko Peters (+49 69 910-21548, heiko.peters@db.com) Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) Financial forecasts DX US JP EMU GB CH SE DK NO PL HU CZ Key interest rate, % Current 0.125 0.10 0.25 0.50 0.00 1.00 0.20 1.50 2.50 3.20 0.05 Dec 13 0.125 0.10 0.25 0.50 0.00 1.00 0.30 1.50 2.50 3.10 0.05 Mar 14 0.125 0.10 0.25 0.50 0.00 1.00 0.30 1.50 2.50 3.00 0.05 Sep 14 0.125 0.10 0.25 0.50 0.00 1.25 0.40 1.75 3.50 3.00 0.05 3M interest rates, % Current 0.24 0.22 0.23 0.52 Dec 13 0.35 0.20 0.25 0.55 Mar 14 0.35 0.20 0.30 0.55 Sep 14 0.35 0.20 0.40 0.55 10J government bonds yields Yields, % Spreads vs. EMU, pp Current 2.73 0.61 1.70 2. 59 - 0.83 0.55 0.05 1.09 Dec 13 2.50 0.90 2.20 3.00 - 0.70 0.25 0.25 0.65 Mar 14 2.75 0.90 2.30 3.25 - 0.65 0.20 0.30 0.70 Sep 14 3.00 0.90 2.50 3.75 - 0.65 0.20 0.30 0.75 Exchange rates EUR/USD USD/JPY EUR/GBP GBP/USD EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK Current 1.36 102.03 0.83 1.63 1.23 8.93 7.46 8.25 4.20 299.08 27.34 Dec 13 1.30 103.00 0.84 1.55 1.25 8.50 7.46 7.75 4.15 290.00 27.00 Mar 14 1.26 106.00 0.83 1.52 1.25 8.25 7.46 7.25 4.11 287.50 27.00 Sep 14 1.18 112.00 0.82 1.44 1.24 8.05 7.46 7.15 4.04 282.50 27.00 Sources: Bloomberg, Deutsche Bank Focus Germany 45 | November 29, 2013 Current Issues German data m onitor DX Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 N ov 2013 Business surveys and output Aggregate Ifo business climate 101.4 106.1 105.3 107.2 105.9 106.2 107.6 107.8 107.4 109.3 Ifo business expectations 95.6 103.0 101.9 103.3 102.6 102.4 103.3 104.2 103.7 106. 3 PMI composite 49.1 52.8 49.9 52.9 50.4 52.1 53.5 53.2 53.2 54.3 Industry Ifo manufacturing 95.1 101.1 100.5 102.8 101.5 101.6 103.2 103.5 103.0 105.0 PMI manufacturing 46.3 49.7 48.7 51.2 48.6 50.7 51.8 51.1 51.7 52.5 Headline IP (% pop) - 2.5 0.0 2.1 0.6 2.1 - 1.1 1.6 - 0.9 Orders (% pop) 0.9 0.5 1.4 1.6 4.5 - 2.0 - 0.3 3.3 Capacity Utilisation 81.4 82.5 82.1 83.2 83.2 Construction Output (% pop) - 2.1 - 5.9 10.5 1.6 3.2 0.1 - 0.8 0.7 Orders (% pop) 2.6 1.6 1.0 - 1.2 4.2 1.1 - 6.5 - 2.6 Ifo construction 117.7 125.7 123.8 120.4 123.4 121.9 120.2 119.0 118.9 120.8 Services PMI services 50.0 53.8 49.9 52.6 50.4 51.3 52.8 53.7 52.9 54.5 Consumer demand EC con sumer survey - 10.0 - 6.5 - 4.2 - 3.2 - 3.2 - 2.3 - 3.4 - 4.0 - 4.2 - 2.1 Retail sales (% pop) - 0.7 1.4 - 0.1 - 0.4 - 1.0 - 0.2 0.4 - 0.2 - 0.8 New car reg. (% yoy) - 6.2 - 10.5 - 3.7 - 1.4 - 4.7 2.1 - 5.5 - 1.2 2.3 Foreign sector Foreign orders (% po p) 2.0 - 1.0 3.4 1.0 5.1 - 3.1 - 2.2 6.8 Exports (% pop) - 2.4 0.2 0.1 0.4 1.2 - 0.8 1.0 1.6 Imports (% pop) - 0.8 - 1.2 1.2 - 0.3 - 0.4 0.2 0.1 - 1.9 Net trade (sa EUR bn) 47.0 50.1 47.7 49.5 15.9 15.0 15.8 18.7 Labour market Unemployment rate (%) 6.9 6.9 6.8 6.8 6.8 6.8 6.8 6.9 6.9 6.9 Change in unemployment (k) 24.7 - 6.0 20.7 7.3 - 11.0 - 5.0 9.0 23.0 3.0 10.0 Employment (% yoy) 0.9 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Ifo employment barometer 106.2 106.2 104.9 106.3 104.4 105.6 106.8 106.4 106.1 107.8 Prices, wages and costs Prices Harmonised CPI (% yoy) 2.0 1.8 1.5 1.7 1.9 1.9 1.6 1.6 1.2 Core HICP (% yoy) 1.3 1.4 1.0 1.2 1.2 1.2 1.2 1.3 1.0 Harmonised PPI (% yoy) 1.3 0.8 - 0.1 - 0.3 0.1 0.0 - 0.5 - 0.5 - 0.7 Commodities, ex. Energy (% yoy) 0.7 - 3.5 - 7.0 - 12.2 - 8.2 - 13.7 - 11.5 - 11.4 - 11.3 Oil price (USD) 110.1 112.6 102.5 110.4 103.0 107.9 111.3 111.9 109.2 Inflation expectations EC household survey 31.2 26.6 22.5 26.2 20.6 23.5 28.2 26.8 26.5 24.6 EC industrial survey 2.9 3.7 - 0.6 2.8 0.5 1.3 2.8 4.3 3.8 5.8 Unit labour cost (% yoy) Unit labour cost 3.1 4.1 1.6 1.1 Compensation 2.8 2.2 1.8 1.8 Hourly labour costs 3.7 4.7 1.3 1.0 Money (% yoy) M3 7.0 5.4 3.8 2.4 3.8 2.9 3.1 2.4 M3 trend (3m cma) 4.0 3.2 2.8 Credit - private - 0.4 - 0.2 1.3 1.3 - 0.5 - 4.2 Credit - public 13.5 - 18.7 - 22.4 - 22.4 - 25.1 - 24.1 % pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HW WI, ifo, Markit Focus Germany Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E - mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Mai n Fax: +49 69 910 - 31877 E - m ail: marketing.dbr@db.com Available faster by E - mail: marketing.dbr@db.com Focus Germany is part of the Current Issues series and deals with macroeconomic and economic policy issues in Germany. Each issue also contains a timetable of financial and economic policy events as well as a detaile d data m onitor of German economic indicators. Focus Germany is a monthly publication.  Exuberance and fear ................................ ................... October 31, 2013  Germany after the elections ................................ .......... October 1, 2013  German GDP up 0.5% in 2013 – despite slowdown in H2 ................................ ........... September 3, 2013  Structural growth limitations ................................ .............. July 31, 2013  Structural improvements support exceptional position ....... July 1, 2013  The brave new world of monetary policy ........................... June 4, 2013  GDP forecast: Uptick in Q1, slippage in Q2 ...................... April 30, 2013  Sentiment indicators – another setback in spring ............... April 2, 2013  The worst is (probably) over ................................ ............. March 1, 2013  Gradual improvement in 2013 ................................ ..... January 28, 2013  German business cycle at the turning point? ............ December 3, 2012  Euro crisis brings economy to a standstill in the winter half ................................ ......... November 2, 2012  A giant leap or the “Hopping procession of Echternach”? ................................ ............................. October 1, 2012  Euro crisis tightening its grip ................................ ......... August 24 , 201 2  Global economy hurts - no quick fix ................................ .. July 25 , 201 2  How d o you feel about the euro? Tell me, pray ................................ ................................ .... June 17 , 201 2  The austerity versus growth debate – what can be learned from Germany ................................ .... May 9 , 201 2  Cautious GDP call maintained, despite some upside risks ................................ ................. April 11 , 201 2  Recession risk has receded – 2012 GDP forecast now 0.5% ................................ ........ March 13, 201 2  Flatlining ................................ ................................ ...... February 7 , 201 2 © Copyright 2013. Deutsche Bank AG, DB Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. 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