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July 1, 2013
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The findings of the latest Pew Research Center survey paint an impressive picture of the economic divergences within the euro area. The share of respondents in Germany assessing the current situation as “good”, for instance, has risen from 63% in 2007 to 75% currently, while this share has slumped heavily in all other European countries included in the survey. German companies have made particular use of the opening up of eastern Europe and the emerging markets to establish global production chains and thereby strengthen their competitive position. Policymakers should therefore do their utmost to reduce the impediments to the international division of labour. Has the east German housing market turned the corner? We find positive price-income relations in growing towns and – somewhat surprisingly – a negative relationship in shrinking towns. Our forecasts indicate a further differentiation among towns in east Germany in the years ahead. The following economic reasons may explain the finding: higher cost per capita of infrastructure in growing towns, path dependency of building costs and domestic migration. [more]
Focus Germany: Structural improvements support exceptional position Current Issues Business cycle Does Germany's special situation pose a risk to the euro? The findings of the latest Pew Research Center survey paint an impressive picture of the economic divergences within the euro area. We compare the economic development of the euro-area member states with that of the US federal states over a longer time horizon. While we find no significant differences between the euro-area members and the US states in terms of growth and inflation, unemployment rates differ considerably more in the EMU countries. This suggests that local labour markets are more flexible in the US than in Euroland, and that labour force mobility is higher state-side. Provided there is sufficient political will, labour market reforms could create greater incentives for increased cross-border labour mobility. Moreover, labour market reforms boost labour market flexibility as a whole – with Germany's Hartz reforms representing a case in point. Greater flexibility regarding wages and employment would in turn reduce the need for adjustment via cross-border labour mobility and thus take some of the pressure off migration, which is hampered by language barriers anyhow. Global value chains secure competitive advantages for German companies. Global production chains are becoming increasingly important. This can be seen in the considerable increase in the foreign value added content of exports that has occurred worldwide since the mid-1990s – from 20% in 1995 to 25% in 2009. German companies have made particular use of the opening up of eastern Europe and the emerging markets to establish global production chains and thereby strengthen their competitive position. The foreign value added share of exports was still slightly below average in the mid-1990s, whereas in 2009 it was slightly above average. The beneficiaries have been higher-skilled workers in Germany thanks to an increased demand for labour that is less susceptible to the business cycle. Moreover, the purchasing power of German consumers rises as a result of lower end product prices. The adjustment costs borne by less skilled workers are eased by a rising demand for services, especially in the transport and logistics sector. Despite the increasing criticism of globalisation, not least as a result of the global economic and financial crisis, it does benefit Germany. Policymakers should therefore do their utmost to reduce the impediments to the international division of labour. Has the east German housing market turned the corner? We analyse and forecast prices of existing apartments in 24 towns located in east Germany. As we identify structural differences between growing and shrinking towns, the full sample is divided into two subsamples to investigate both groups separately. The main determinants of apartment prices are the disposable income and the age dependency ratio. We find positive price-income relations in growing towns and – somewhat surprisingly – a negative relationship in shrinking towns. Our forecasts indicate a further differentiation among towns in east Germany in the years ahead. The following economic reasons may explain the finding: higher cost per capita of infrastructure in growing towns, path dependency of building costs and domestic migration. Author s Bernhard Gräf +49 69 910-31738 bernhard.graef@db.com Jochen Möbert +49 69 910-31727 jochen.moebert@db.com Heiko Peters +49 69 910-21548 heiko.peters@db.com Stefan Schneider +49 69 910-31790 stefan-b.schneider@db.com 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 | Bernhard Speyer Content Page Forecast tables ...............................................2 Does Germany's special situation pose a risk to the euro? ...........................................3 Global value chains secure competitive advantages for German companies ................9 Has the east German housing market turned the corner? ........................................ 16 Chart of the month ........................................ 25 Chartbook: Business cycle ............................ 27 Chartbook: Sectors ....................................... 30 Chartbook: Financial markets ....................... 31 Chartbook: Economic policy .......................... 36 Event calendar .............................................. 37 Data calendar ............................................... 38 Financial forecasts ........................................ 38 Data monitor ................................................. 39 July 1, 2013 Focus Germ any Structural improvements support exceptional position Focus Germany 2 | July 1, 2013 Current Issues Economic forecasts DX Real GDP Consumer Prices* Current Account Fiscal Balance (% growth) (% growth) (% of GDP) (% of GDP) 2012 2013F 2014F 2012 2013F 2014F 2012 2013F 2014F 2012 2013F 2014F Euroland - 0.5 - 0.6 1.0 2.5 1.5 1.5 1.2 1.6 1.6 - 3.7 - 3.0 - 2.5 Germany 0.7 0.1 1.5 2.0 1.4 1.6 7.0 7.0 6.9 0.2 - 0.3 - 0.1 France 0.0 - 0.2 1.1 2.2 1.1 1.5 - 2.3 - 2.2 - 1.9 - 4.6 - 3.9 - 3.3 Italy - 2.4 - 2.0 0.5 3.3 1.6 1.5 - 0.5 0.6 0.9 - 3.0 - 3.4 - 3.0 Spain - 1.4 - 1.5 0.5 2.4 1.6 1.6 - 1.1 0.5 0.3 - 10.0 - 6.2 - 5.3 Netherlands - 1.3 - 0.7 0.8 2.8 2.6 1.7 8.4 8.2 8.0 - 4.1 - 3.8 - 3.0 Belgium - 0.3 - 0.1 0.9 2.6 1.2 1.5 - 1.4 0.5 1.0 - 3.9 - 3.0 - 3.0 Austria 0.8 0.4 1.4 2.6 2.0 1.8 1.8 2.5 2.8 - 2.5 - 2.1 - 1.8 Finland - 0.2 - 0.7 1.1 3.2 2.3 2.1 - 1.9 - 1.0 - 1.0 - 1.9 - 2.3 - 1.8 Greece - 6.4 - 4.5 0.5 1.0 - 0.5 - 0.2 - 3.0 - 1.0 0.0 - 10.0 - 4.9 - 3.7 Portugal - 3.2 - 2.6 0.5 2.8 0.6 1.1 - 1.5 0.5 1.5 - 6.4 - 5.7 - 4.6 Ireland 0.2 0.7 1.8 1.9 0.8 1.3 4.4 4.0 4.0 - 7.6 - 7.6 - 5.3 UK 0.2 1.1 1.8 2.8 2.7 2.1 - 3.8 - 2.8 - 2.4 - 5.5 - 6.5 - 6.0 Denmark - 0.5 0.4 1.5 2.4 1.1 1.8 5.8 5.0 5.0 - 4.4 - 2.0 - 2.0 Norway 3.0 2.3 2.6 0.7 1.8 1.9 14.1 13.0 12.5 10.1 12.0 12.0 Sweden 1.1 1.5 2.0 0.9 0.2 1.4 6.9 7.0 7.0 - 0.7 - 1.0 - 0.5 Switzerland 1.0 1.5 1.5 - 0.7 - 0.4 0.5 13.6 13.0 13.0 0.4 0.3 0.3 Czech Republic - 1.2 0.0 2.0 3.3 1.5 1.8 - 2.4 - 2.3 - 2.4 - 4.4 - 3.1 - 2.7 Hungary - 1.7 0.4 1.1 5.7 1.8 2.4 1.6 1.2 0.5 - 2.0 - 2.7 - 2.6 Poland 1.9 0.8 2.5 3.7 1.3 2.2 - 3.5 - 2.3 - 3.1 - 3.9 - 3.6 - 3.3 United States 2.2 2.2 3.2 2.1 1.7 2.3 - 2.8 - 3.0 - 3.2 - 6.8 - 3.9 - 3.2 Japan 1.9 2.0 0.6 0.0 - 0.1 2.3 1.1 1.2 2.4 - 9.5 - 9.3 - 7.4 World 2.9 3.0 3.9 3.3 3.0 3.5 *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. Forecasts: German GDP growth by components, % qoq, annual data % yoy DX 2012 2013 2010 2011 2012 2013F 2014F Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F Real GDP 4.2 3.0 0.7 0.1 1.5 0.6 0.2 0.2 - 0.7 0.1 0.5 0.3 0.3 Private consumption 0.9 1.7 0.8 1.0 1.0 0.4 0.1 0.1 - 0.3 0.8 0.3 0.4 0.3 Gov't expenditure 1.7 1.0 1.2 0.3 0.6 0.5 - 0.4 0.7 0.1 - 0.1 0.1 0.1 0.1 Fixed investment 5.9 6.2 - 2.5 - 1.7 3.1 - 0.9 - 1.9 - 0.4 - 1.1 - 1.5 1.7 0.4 0.6 Investment in M&E 10.3 7.0 - 4.8 - 3.2 4.0 - 1.1 - 3.0 - 2.2 - 2.0 - 0.6 0.3 0.5 1.0 Construction 3.2 5.8 - 1.5 - 0.2 2.3 - 0.6 - 1.4 0.5 - 0.7 - 2.1 3.0 0.3 0.3 Inventories, pp 0.6 0.2 - 0.4 0.0 0.0 - 0.2 - 0.1 - 0.3 0.4 - 0.1 - 0.1 - 0.1 0.0 Exports 13.7 7.8 3.8 0.7 6.5 1.2 3.1 1.4 - 2.4 - 1.8 2.0 2.0 2.3 Imports 11.1 7.4 2.2 1.1 6.8 - 0.2 2.3 0.6 - 1.3 - 2.1 2.2 2.3 2.7 Net exports, pp 1.7 0.6 0.9 - 0.1 0.3 0.7 0.6 0.4 - 0.7 0.1 0.1 0.0 0.0 C onsumer prices* 1.1 2.1 2.0 1.4 1.6 2.1 1.9 2.0 2.0 1.5 1.3 1.4 1.5 Unemployment rate, % 7.7 7.1 6.8 6.9 6.7 6.8 6.8 6.8 6.9 6.9 6.8 6.8 6.8 Budget balance, % GDP - 4.1 - 0.8 0.2 - 0.3 - 0.1 Balance on current account, % GDP 6.2 6.2 7.0 7.0 6.9 *Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Focus Germany 3 | July 1, 2013 Current Issues Does Germany's special situation pose a risk to the euro? — The findings of the latest Pew Research Center survey paint an impressive picture of the economic divergences within the euro area. — We compare the economic development of the euro-area member states with that of the US federal states over a longer time horizon. While we find no significant differences between the euro-area members and the US states in terms of growth and inflation, unemployment rates differ consider- ably more in the EMU countries. — This suggests that local labour markets are more flexible in the US than in Euroland, and that labour force mobility is higher state-side. Provided there is sufficient political will, labour market reforms could create greater incentives for increased cross-border labour mobility. — Moreover, labour market reforms boost labour market flexibility as a whole - with Germany's Hartz reforms representing a case in point. Greater flexibility regarding wages and employment would in turn reduce the need for adjust- ment via cross-border labour mobility and thus take some of the pressure off migration, which is hampered by language barriers anyhow. The findings of the latest Pew Research Center survey paint an impressive picture of the economic divergences within the euro area. The share of respondents in Germany assessing the current situation as “good”, for instance, has risen from 63% in 2007 to 75% currently, while this share has slumped heavily in all other European countries included in the survey 1 . A mere 3% of respondents in Italy consider the current situation to be good (2007: 25%), while the corresponding figures are no more than 4% in Spain after a still strong 65% in 2007 and only 9% in France (down from 30% in 2007, see chart 1). The special situation in Germany can probably be explained by the stable labour market and wage developments in Germany, whereas the dramatic rise in unemployment in some of the other euro-area states probably led to the drastic collapse in ratings. The unemployment rate in Spain, for instance, has risen from over 8% in 2007 to nearly 27% at last count, but – in the harmonised International Labour Office (ILO) definition – has remained at 5.4% (chart 2) in Germany since August 2012. The situation is even more dramatic for youth unemployment. While the unemployment rate of persons under the age of 25 has been on the decline in Germany since about the middle of 2009 and currently stands at approx. 7 ½% (together with Austria this is the lowest reading in Europe), it has roughly doubled during that period in both Spain and Greece, to over 56% and 62%, respectively. However, economic growth in Germany is also diametrically opposed to the trend in other euro-area countries. While the German economy grew again slightly already in Q1 2013, after the slump in Q4 2012, many euro-area countries have remained in recession. The French economy, for example, shrank for the second consecutive time in Q1 2013. In Spain, economic output was down for the fifth time in a row, and in Italy even for the sixth time. In addition, the German economy has picked up speed noticeably in the second quarter. Hence there is a lot to suggest that Germany will at least manage a growth rate “just above zero” (our forecast is for +0.1% following +0.7% in 2012), while GDP in real terms in the rest of the euro area looks set to shrink by approx. 1% once again (chart 3). Considering the difficult European environ- ment this is a remarkable achievement for Germany. At the end of the 1990s, 1 Pew Research Center (2013). The New Sick Man of Europe: the European Union. May 13, 2013. See also: Deutsche Bank Research (2013). Focus Germany: The brave new world of monetary policy. Current Issues, June 4, 2013. - 60 - 40 - 20 0 20 40 60 80 ES GB IT CZ FR PL DE 2007 2013 Change 2007 - 13, pp Economic condition assessment 1 Source: Pew Research Center % share of respondents who think that the economic conditions are good 0 4 8 12 16 20 24 28 07 08 09 10 11 12 13 DE ES GR IE PT IT EMU Unemployment rates 2 % Source: ILO - 3 - 2 - 1 0 1 2 3 4 2011 2012 2013 DE EMU ex DE FR IT ES NL EMU: Economic growth 3 Real GDP , % yoy Sources: Eurostat, DB Research Focus Germany 4 | July 1, 2013 Current Issues Germany was still referred to as the “sick man of Europe” given its growth weakness. Economic divergences – not only in the euro area Have there been similarly strong divergences in the euro area in the past which could have laid the foundation for the distortions witnessed today? In order to answer this question, we compare the economic development of the euro-area member states with that of the US federal states. While we find no significant differences between the euro-area members and the US states in terms of growth and inflation, unemployment rates differ considerably more in the EMU countries. This suggests that local labour markets are more flexible in the US than in Euroland, and that labour force mobility is higher state-side. Empirical research, albeit referring to the pre-2000 period, shows that labour mobility is roughly two to three times as high in the US as in the euro area 2 . To conclude, however, that the euro area is not an optimum currency area and that failure is inevitable – as critics claim – would be going too far. Recent immigration numbers to Germany, for instance, show that cross-border labour mobility within EMU has already increased slightly. Moreover, external shocks can also be cushioned by internal adjustments, which is evident in Germany's labour market reforms. This aspect shows that many euro-area members are on the right track with the labour market reforms already introduced. However, German experience with the so-called Hartz reforms, implemented between 2003 and 2005, has shown that it can take years for reforms to pay off. Empirical research also concludes that the US is by no means an optimum currency area as postulated by Mundell 3 . When is a currency area an optimum one? 4 Exchange rates can absorb shocks and facilitate adjustment due to different economic developments of individual countries. Hence they are an instrument of economic policy of which many countries of today's euro area have made frequent and intensive use in the past. With the increasing problems of the Bretton-Woods system (fixed exchange rates versus the US dollar, which in turn was pegged to the price of gold) at the end of the 1950s and particularly during the 1960s, exchange rates and currency regimes became the focus of academic research. While Milton Friedman 5 advocated flexible exchange rates in 1953, Robert Mundell 6 sought to determine if and when two or more countries could forego their own currencies and, in 1963, developed the theory of optimum currency areas. Roughly speaking, he found that a currency area is an optimum one if there is sufficient factor mobility to cushion shocks, i.e. if labour markets in particular are sufficiently flexible. Mundell also criticised the claim that a state within its political borders already represents an optimum currency area. 2 See Mongelli, F.P. (2002). "New" views on the optimum currency area theory: What is EMU telling us? ECB Working Paper No. 138. 3 Cf. Kouparitsas, M.A. (2001). Is the United States an optimum currency area? An empirical analysis of regional business cycles. Federal Reserve Bank of Chicago. Working Paper 2001-22. 4 For an overview of the emergence and development of the theory of optimum currency areas as well as the findings of empirial analyses on the eurozone, see Mongellie, F.P. (2002). “New” views on the optimum currency area theory: What is EMU telling us? ECB Working Paper No. 138. 5 Cf. Friedman, M. (1953). The Case for Flexible Exchange Rates. In: Essays in Positive Economics. 6 Cf. Mundell, R. (1961). A Theory of Optimum Currency Areas. American Economic Review. Vol. 51. Focus Germany 5 | July 1, 2013 Current Issues Adjustment to a supply-side shock occurs as follows: in the course of declining production, unemployment in a country rises. An individual country with its own currency now has the opportunity to boost its price competitiveness by a devaluation of its currency. As a result, foreign demand for domestic goods would rise, production increase and unemployment fall. In a currency union, however, there is no such exchange-rate mechanism, so adjustment will have to take place through factor mobility and/or factor flexibility. Workers who cannot find employment in their home country will emigrate to a country with stable demand and higher wages – and continue to do so until unit labour costs and price levels in the two countries are equal. In order for this to happen, labour mobility must be sufficiently high, and wages and prices within and between the countries forming the monetary union must be flexible. Other ways of absorbing shocks are based on the mobility of other production factors such as capital, as proposed by James Ingram 7 in his extension of the theory. Stronger integration of financial markets, according to Ingram, could markedly reduce the need for exchange-rate adjustments. For Ronald McKinnon 8 , by contrast, the openness of the member states of a currency union was the factor responsible for its success. According to McKinnon, two countries will be all the more suited to form an optimum currency area the more trade they conduct with one another. By contrast, Peter Kenen 9 believes that countries with strongly diversified external trade and production structures are better equipped to do without the exchange rate as an adjustment tool than those with one-sided production structures. His work focuses on shocks affecting certain sectors rather than the entire economy. Correspondingly, the effects of such a shock would be smaller the lower the sector's share in the country's gross value added. The theory of optimum currency areas has triggered sometimes fierce contro- versy among academics and especially in political discourse. Critics of the common currency, for instance, point out that regarding most of the criteria used for analysis the euro area is not an optimum currency area, and as a conse- quence must fail or can only be kept afloat at extremely high costs. Nonethe- less, experience in the US has shown that the federal states seem to be doing fine with their common currency even though the US is not an optimum currency area. It should be borne in mind, however, that the US is one country with the required fiscal resources to absorb shocks while the eurozone consists of 17 individual states. Despite well-founded theory and in-depth empirical studies, there is no simple test to determine whether a currency area is an optimum one. Moreover, there is an ex-post/ex-ante problem. Even if it is found that a certain alliance of states forming a common currency area has functioned as an optimum currency area in the past does not guarantee that this will also apply in the future. Similarly, if optimality is not given, as found when applying Mundell's criteria of optimality to the eurozone, it does not necessarily follow that the currency area and consequently the euro will fail. In the following, we analyse three important indicators for the euro area – economic growth, inflation and unemployment. In this context, the development of the euro area as a whole plays a subordinated role. Instead we focus on the divergences between the 17 member states as well the differences compared with regional developments in the US states – as a quasi-benchmark for a functioning, albeit not optimum currency area. The underlying theory that stark regional differences are problematic for a currency union seems plausible. 7 See Ingram, J. (1969). Comment: The Currency Area Problem. In: Mundell, R., Swoboda, A. (publisher) Monetary Problems of the International Economy. 8 See McKinnon, R. (1963). Optimum Currency Areas. American Economic Review. Vol. 53. 9 See Kenen, P. (1969). The Theory of Optimum Currency Areas: An Eclectic View. In: Mundell, R., Swoboda, A. (Hrsg.) Monetary Problems of the International Economy. 0 1 2 3 4 5 IE EE SK LU CY MT ES AT SI NL FI BE PT FR GR DE IT EMU - 17: Economic growth 4 Real GDP, 1991 - 2012, % p.a. Source: European Commission Focus Germany 6 | July 1, 2013 Current Issues However, an optimum currency in fact necessitates major adjustments – at least temporarily – and according to Mundell particularly in the labour markets – which lead to regional divergences and hence represent a normal reaction to shocks within a currency union. If these divergences persist, though, there may have been insufficient adjustment (in the sense of an optimum currency area) so that the ongoing differences may represent a tinderbox for a monetary union. Strong growth divergence within the eurozone ... Over the past decade, there have been stark differences as regards national growth rates among the member states. While the Irish economy, for instance, expanded by just under 5% p.a. on average between 1991 and 2012, real GDP in Italy, which brought up the rear in the eurozone's growth table, only grew by ¾% p.a. (chart 4). The growth league is dominated primarily by the smaller euro area members such as Ireland, Estonia, Slovakia, Luxembourg, Cyprus and Malta. Among the larger member states, Spain was the one posting the strongest growth. Germany, by contrast, only came in second last at 1.3% p.a. However, it should be noted that Spain's economic growth was driven strongly by residential construction, which is now undergoing a protracted process of consolidation, which implies that past success stories say little about future growth prospects. Annual growth rates for the euro-area members differ even more strongly. Over the past years, a gap of a remarkable 9 percentage points was recorded between the most strongly growing countries and the ones registering the weakest growth rates. ... is even exceeded by the growth gaps between US states While the gap between annual average growth rates of the US states from 1991 to 2011 was roughly in line with that registered in the euro area – Oregon showed the strongest growth with annual average growth of more than 5% between 1991 and 2011, while Alaska brought up the rear with 3/4% p.a. – annual growth differences in the US exceeded those among the euro members in almost every year. On average, the growth gap between the strongest and the weakest-growing US state was in excess of 12 pp and thus approx. a good 3 pp wider than in the European Monetary Union (chart 6). Distribution of growth more even in the US, however However, growth is more evenly distributed in the US than in Euroland, as is reflected in the US in almost identical median and average values of 2.4% and 2.6% p.a., respectively, while those two figures differ considerably in the euro area, at 2.1% p.a. and 3.4% p.a. Hence, despite the strong annual divergence, the standard deviation of annual average growth rates of the US states is roughly the same as that of the euro area members (chart 7). Only recently has growth in the US states been more uniform than in the euro area, which is suggested by the divergence of the standard deviations. While the standard deviation of growth has recently declined noticeably in the US states, it has risen in the eurozone, which is to a large extent attributable to the dramatic developments in Greece, though. In 2011 and 2012, the Greek economy shrank by 7% and 6 ½%, respectively. Without this slump in Greece's economic performance, the standard deviation of Euroland growth would have followed the same pattern as in the US. -20 -15 -10 -5 0 5 10 15 1.0 1.5 2.0 2.5 3.0 3.5 4.0 95 97 99 01 03 05 07 09 11 Standard deviation (left) Minimum (right) Maximum (right) EMU-17: Economic growth 5 Real GDP of EMU member countries, standard deviation (left), % yoy (right) Source: European Commission 0 2 4 6 8 10 12 14 16 18 95 97 99 01 03 05 07 09 11 EMU - 17 US states Economic growth 6 Sources: BEA, European Commission Gap between minimum und maximum growth of EMU member countries and US states, pp 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 95 97 99 01 03 05 07 09 11 EMU - 17 US states EMU - 17 ex GR Economic growth 7 Real GDP of EMU member countries and US States, % yoy, standard deviation Sources: BEA, European Commission Focus Germany 7 | July 1, 2013 Current Issues A ranking of economic growth rates for the last 18 years shows that euro-area growth has been dominated by the smaller member states. In 8 of these 18 years, Estonia ranked first, with Ireland and Slovakia both coming in as No 1 four times apiece. Four times in the last 18 years Germany brought up the rear, followed by Greece, which for three years during that period posted the weakest growth rate. The situation is similar in the US, with Alaska being the poorest growth performer among the US states for five times. By contrast, there was no obvious front-runner (chart 8) and even Alaska came in at the top in 2009. Inflation rates differ only marginally in Euroland In the run-up to and especially since the introduction of the euro, inflation rates of the individual member states have converged noticeably. Having amounted to almost 30 percentage points in 1995, the gap between the highest inflation rate (Estonia, which only joined the euro in 2011, though) and the lowest rate (Finland), only came to 10 ½ percentage points in 2000 and fell further to 2 1/2 pp by 2012 (chart 9). The convergence of inflation rates in the EMU countries was hardly surprising, however, as price developments are a convergence criterion and hence one of the preconditions for joining the monetary union. According to the Maastricht Treaty, a country's inflation rate must not exceed that of the three countries with the most stable prices by more than 1.5 percent- age points. A comparison of euro-area inflation with regional price developments in the US is difficult as there are no consumer price data at the state level in the US. The available US inflation data for four regions show considerably less divergence than in the euro area. But this comparison is not particularly meaningful as local divergences fail to be reflected in the statistical averages given the small number and hence the large size of the regions (Northeast, Midwest, South and West). Correspondingly, the standard deviation of 14 selected local areas in the US is higher and the gap towards the euro members smaller (chart 10). Suboptimal Eurozone labour markets While regional divergences regarding economic growth and inflation develop- ments in the euro area are very limited compared with the US states, there have been pronounced differences in the development of unemployment, particularly since the outbreak of the financial crisis. Only in Germany, Belgium, Finland and Estonia did average unemployment rates in 2012 remain below the multi-year average recorded since 1995 (chart 11). In all other euro-area countries unemployment has been on the rise, in some cases massively. As a result regional divergences – measured by the standard deviation of unemployment rates of the 17 euro-area countries – have widened massively since the outbreak of the financial crisis and the subsequent deep recession, after falling appreciably between 2000 and 2007 (chart 12). Countries/States with fastest/slowest economic growth (1995-2012*) 8 Eurozone US Slowest No. of years Fastest No. of years Slowest No. of years Fastest No. of years Germany 4 Estonia 8 Alaska 5 Idaho 3 Greece 3 Ireland 4 Louisiana 3 Nevada 2 Estonia 3 Slovakia 4 Michigan 3 North Dakota 2 Malta 2 Oregon 2 *US 1995 - 2011 Sources: BEA, European Commission, DB Research -10 0 10 20 30 40 0 1 2 3 4 5 6 7 8 95 97 99 01 03 05 07 09 11 Standard deviation (left) Minimum (right) Maximum (right) EMU-17: Inflation 9 Inflation in EMU member countries, Standard deviation (left), % yoy (right) Source: OECD 0 1 2 3 4 5 6 7 8 95 97 99 01 03 05 07 09 11 US: 14 selected local areas EMU - 17 US: 4 regions Inflation 10 Standard deviation Sources: BLS, OECD 0 5 10 15 20 25 ES SK GR EE FI FR IT DE PT BE IE SI MT CY NL AT LU 2012 1995 - 2012 EMU: Unemployment rates 11 % Source: ILO Focus Germany 8 | July 1, 2013 Current Issues In the US, too, unemployment rose markedly by 5.4 percentage points after the beginning of the financial crisis and reached its second-highest level in the post- war period in October 2009, at 10%. It has since fallen to 7.5% lately. In the euro area, unemployment rose much more moderately, even though the slump in economic output in 2009 was markedly steeper, at -4.4%, than in the US (-3.1%). However, regional labour market divergences were clearly less pronounced in the US than in the euro area, which is confirmed by the noticeably weaker increase in the standard deviation of unemployment rates in the US states (chart 13). This shows that adjustment to shocks occurs faster and more intensively in the US and that factor mobility is correspondingly higher than in the euro area. Surely, what also plays a part is the fact that US monetary policy has no regional transmission problems and that the federal arm of fiscal policy is considerably stronger in the US than in the eurozone. Conclusion: Nothing's impossible – but a lot remains to be done! Obviously, the eurozone is not an optimum currency area as it does not fulfil the criterion of sufficiently high factor mobility. To be sure, migration to Germany from EMU countries hit particularly hard by the financial and sovereign debt crisis rose by 40-45% last year. However, the absolute figures still look relatively modest: 10,000 more persons than in 2011 moved to Germany from Greece, 9,000 from Spain and 4,000 from Portugal. Increasing migration from the southern peripheral countries to Germany over the last few years, though, is a sign that behavioural patterns can be changed. Provided there is sufficient political will, labour market reforms could create greater incentives for increased cross-border labour mobility. Moreover, labour market reforms boost labour market flexibility as a whole – with Germany's Hartz reforms representing a case in point. Greater flexibility regarding wages and employment would in turn reduce the need for adjustment via cross-border labour mobility and thus take some of the pressure off migration, which is hampered by language barriers anyhow. The existing language barriers suggest that labour mobility within the euro area will remain low over the coming years. The US states are at an advantage in this respect, too, as they not only form one country but also speak the same language. Bernhard Gräf (+49 69 910-31738, bernhard.graef@db.com) 0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 95 97 99 01 03 05 07 09 11 Standard deviation (left) Minimum (right) Maximum (right) EMU-17: Unemployment rates 12 Stardard deviation (left), % (right) Source: ILO 0 1 2 3 4 5 6 7 95 97 99 01 03 05 07 09 11 EMU - 17 US Unemployment rates 13 %, standard deviation Sources: ILO, BLS Focus Germany 9 | July 1, 2013 Current Issues Global value chains secure competitive advantages for German companies — Global production chains are becoming increasingly important. This can be seen in the considerable increase in the foreign value added content of exports that has occurred worldwide since the mid-1990s – from 20% in 1995 to 25% in 2009. — German companies have made particular use of the opening up of eastern Europe and the emerging markets to establish global production chains and thereby strengthen their competitive position. The foreign value added share of exports was still slightly below average in the mid-1990s, whereas in 2009 it was slightly above average. — The beneficiaries have been higher-skilled workers in Germany thanks to an increased demand for labour that is less susceptible to the business cycle. Moreover, the purchasing power of German consumers rises as result of lower end product prices. — The adjustment costs borne by less skilled workers are eased by a rising demand for services, especially in the transport and logistics sector. — Despite the increasing criticism of globalisation – not least as a result of the global economic and financial crisis, it does benefit Germany. Policymakers should therefore do their utmost to reduce the impediments to the international division of labour. Global trade has risen much faster than the global economy (chart 1) in the past decades – especially since the integration of the major emerging markets. Above all, open and flexible economies benefit from this thanks to stronger economic growth. 10 This was made possible by far-reaching trade liberalisation measures – reduction in tariffs (chart 2), dismantling of non-tariff trade barriers, declining transport costs 11 (chart 3) and the continuing improvements in information and communications technologies (ICT). Whereas foreign trade traditionally took the form of an exchange of finished products, the availability of ICT since the 1990s has revolutionised company production processes, enabling them to divide up their manufacturing into different stages across a number of countries. 12 Multinational firms optimise their production processes using global value chains. Specialised small and medium-sized enterprises (SMEs) are contracted as niche manufacturers for individual production stages and benefit from economies of scale. For instance, the trade in intermediates rose from around 54% of the global goods trade in 2000 to 58% (chart 4). By dividing up value chains and outsourcing parts of the value chain to other countries, either by establishing subsidiaries, acquiring stakes in foreign companies or contracting third parties, firms can boost their competitiveness considerably. 13 Multinational firms profit from lower prices as a consequence of more intense competition between the producers of intermediates, from a broader range of intermediates and from more efficient production. Since production for example is contracted out to specialised manufacturers, 10 See for an overview Newfarmer, R., Sztajerowska M. (2012), Trade and employment in a fast- changing world, in Lippoldt, D., Policy Priorities for International Trade and Jobs, OECD. 11 Arvis, J.-F. et al. (2013), Trade Costs in the Developing World 1995-2010, Policy Research Working Paper 6309, World Bank; Novy, D. (2013), Gravity redux: Measuring international trade costs with panel data, Economic Inquiry, 51 (1), pp. 101-121. 12 Baldwin, R. (2009), Integration of the North American economy and new-paradigm globalisation, CEPR Discussion Papers 7523. 13 Grossman, G., Rossi-Hansberg, E. (2008), Trading Tasks: A Simple Theory of Offshoring, American Economic Review, 98 (5), pp. 1978-1997; Cadot, O. et al. (2011), Trade Diversification: Drivers and Impacts, in Jansen M., Peters, R., Salazar-Xirinachs, J.M., Trade and Employment: from Myths to cts, ILO. 0 2 4 6 8 10 80 84 88 92 96 00 04 08 12 GDP Trade Index, 1980 = 1 Sources: IMF, DB Research Global trade has grown faster than the global economy since the early 1990s 1 0 5 10 15 20 25 30 35 40 0 1 2 3 4 5 6 7 88 92 96 00 04 08 CA (left) JP (left) US (left) EU (left) CN (right) Source: UNCTADstat Tariffs have fallen steadily 2 Average tariff applied to countries with most favoured nation status 80 85 90 95 100 105 96 98 00 02 04 06 08 High income Low income Lower middle income Upper middle income Trade costs fell 3 1996=100, Average trade costs for manufactured goods Source: Arvis, J. - F. et al. (2013) Focus Germany 10 | July 1, 2013 Current Issues multinational groups can gain access to expertise that they have hitherto not had in-house. In addition, access to foreign markets is made considerably easier by manufacturing locally. The volume of global trade is rising faster than average due to the growing importance of global value chains and thus of intermediates, as the imported intermediates and then the end product are booked as trade flows in the foreign trade statistics. This double counting is avoided when added value streams are the measurements under observation. 14 The difference between foreign trade statistics and the observation of added value streams is clearly illustrated using a simple example: 15 A Chinese company exports one intermediate worth EUR 2,000 to Germany, which is then used during the manufacturing of the finished product in Germany and the finished product is exported to the US for EUR 22,000 (chart 5). In the foreign trade statistics the global trade volume would amount to EUR 24,000, although the global added value would only be EUR 22,000. In the foreign trade statistics the US has a trade deficit of EUR 22,000 and no trade relations with China. Germany books a trade surplus of EUR 22,000 with the US and a deficit of EUR 2,000 with China. When observing the added value streams the US trade deficit is divided up into added value contributions. The US has a deficit of EUR 20,000 with Germany and a deficit of EUR 2,000 with China. The total deficit remains the same, but the global interdependence of the companies is revealed by the bilateral items. When companies are integrated into global value chains changes in demand in one country are not only transmitted to a single country but to several countries. The business cycles of different countries can thus correlate considerably, even though the supply 14 On the basis of linked Input-Output tables of 57 countries (all OECD countries, BRIC, Indonesia and South Africa) the OECD and the WTO have compiled a data set with international added value streams for the years 1995, 2000, 2005, 2008 and 2009 (“Trade in Value Added – TiVA”, data as of June 2013). Data on international added value streams are also available in the “World Input-Output Database (WIOD)”. See Aichele, R. Felbermayr, G., Heiland, I. (2013), Der Wertschöpfungsgehalt des Außenhandels: Neue Daten, neue Perspektiven, ifo Schnelldienst 5/2013. 15 For detailed illustrations with several added value steps see OECD (2013), Interconnected Economies – Benefitting from Global Value Chains. Bilateral surpluses/deficits differ for goods flows in the foreign trade statistics and for international added value streams 5 Source: DB Research 49 50 51 52 53 54 55 56 57 58 59 90 94 98 02 06 10 Source: OECD Intermediates as % of global trade Intermediate goods share in global trade becoming more significant 4 Focus Germany 11 | July 1, 2013 Current Issues links/relations reported in the trade balance are comparatively limited. If sales in the US declined, this would reduce demand not only in Germany but also in China. In the example it also becomes clear that German exports are dependent on the supply of Chinese intermediates. Protectionist measures on German imports would – with a lack of options for switching to alternative intermediates – also constrain the manufacturing of the end products and thus reduce their competitiveness. The sensitivity of trade flows of intermediates to a change in trading costs is much greater for global value chains than for national ones. Tariffs and other trade barriers make imported intermediates more expensive – especially if these go through several production steps in different countries and thus also the exports of a country. Multilateral trade agreements, legal certainty, the presence of specialist service providers, especially in the transport and logistics sector, trade financing and communication are prerequisites for efficient global value chains. The change from a purely national to a global value chain results in imported intermediates constituting an increasing value added share of the exports of a country (bazaar economy 16 ). This applies in particular to smaller countries, whose integration in global production chains is frequently more advanced than in larger countries whose domestic markets have a correspondingly high absorption. Companies in larger countries can, by contrast, fall back on a broader choice of domestic intermediates (chart 6). In addition, the foreign value added share at commodities producers such as Australia is comparatively small as mining – relative to added value – requires a small share of intermediates. Worldwide, the imported intermediates share of exports rose from 20% in 1995 to 27% in 2008 and fell in the wake of the global economic meltdown in 2009 to 25%. As “the world's workbench” and with a rapidly expanding intra-Asian value chain Asia has the highest share at more than 30% and the Africa, Arab countries (commodity exporters) and Middle East region (MEA) has the lowest at about 10% due to relatively high trading costs and a lack of legal certainty in some cases (chart 7). German companies increasingly firmly integrated in global value chains German companies are successfully participating in international competition and have barely lost global trade share, despite the aspiring emerging markets – and especially China (chart 8). In 2012 Germany had a share of about 8%, just behind the US (8.5%) and China (11.2%). With relatively high and rigid wages for simple work in the mid-1990s, the increasing integration of German companies in global value chains played a decisive role in keeping them internationally competitive. Whereas the foreign value added share of German exports of 19% was just below the global average in the mid-1990s, the share was slightly higher than the average in 2009 at 27% (chart 9). 16 Sinn, H.-W. (2005), Die Basar-Ökonomie: Deutschland: Exportweltmeister oder Schlusslicht?, Econ, 2nd edition. Aichele, R., Felbermayr, G. and Heiland, I. (2013), Neues aus der Basar- ökonomie, ifo Schnelldienst 6/2013. DE 09 US 09 CN 09 DE 95 US 95 0 5 10 15 20 25 30 0 20 40 60 2009 1995 Linear (2009) Linear (1995) Sources: OECD - WTO TiVA database, IMF, DB Research x - axis: foreign value added content of gross exports, y - axis: % of world GDP Foreign value added share lower for lager countries 6 10 15 20 25 30 35 EU Asia Total DE Latin America Dollar bloc MEA 1995 2008 2009 % of exports Sources: OECD - WTO TiVA database, DB Research Foreign value added share of exports 7 Focus Germany 12 | July 1, 2013 Current Issues By transferring parts of the production chain – mostly of simple and stand- ardised procedures – to countries with lower wage levels or by purchasing foreign intermediates German firms boosted their productivity and reduced their average wage costs. Germany, by contrast, remained the location for company head offices, research and development and activities that require highly qualified, highly specialised and well paid staff. A shining example of this is provided by the big automakers with their modular manufacturing. Integration in global production chains is often the only way for Germany's SMEs with highly specialised niche products to generate economies of scale. The functioning of global production chains requires specialised service providers, especially in the logistics sector. In 2009 for instance the services value added share of exports was 48% (domestic share 36% and foreign share 12%) and thus around 10 percentage points higher than in 1995. German firms almost quadrupled their direct investments between the mid- 1990s and 2011 to a total of EUR 1,144 bn. The number of employees in foreign subsidiaries or at affiliated foreign companies doubled roughly between the mid- 1990s and 2011 to 6.3 million (chart 10). More than half of these were accounted for in eastern Europe and Asia. German companies used the opening of countries in eastern Europe after the Iron Curtain fell as did the emerging markets to strengthen their competitive position by opening up production facilities there and tapping into new markets. With parts of the production process increasingly being outsourced to eastern Europe and Asia, the share of imported intermediates from these countries and thus the foreign value added share from these regions is rising (chart 11). The foreign value added share is particularly pronounced in sectors that require imported raw materials, such as the chemicals industry and metal production, and that use modular production techniques, such as the German automakers and the manufacturers of electrical appliances, machinery and equipment (chart 12). With increased international competitive intensity German companies have cut their domestic production costs despite relatively high and downwardly rigid wages. 17 17 Marin, D. (2010), Germany’s super competitiveness: A helping hand from Eastern Europe, voxeu. 0 2 4 6 8 10 12 14 95 97 99 01 03 05 07 09 11 CN FR DE IT JP UK US Share in world trade, volume, % Source: UNCTAD Germany with substantial share in world trade 8 80% 75% 73% 71% 72% 19% 24% 26% 28% 27% - 100 100 300 500 700 900 1100 1300 1500 1995 2000 2005 2008 2009 Domestic value added Re - imported Foreign value added USD bn Source: OECD - WTO TiVA database Foreign value added content of German gross exports has risen 9 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 96 98 00 02 04 06 08 10 EMU Other EU countries Other Europe Africa Americas Oceania and the polar regions Asia Source: Deutsche Bundesbank Number of persons, million Employees at companies outside Germany in which German companies hold a stake 10 Focus Germany 13 | July 1, 2013 Current Issues Looking at the added value streams the aggregate German surplus does not deviate from that of the goods flows, but the bilateral items change considerably in some cases (see further up in chart 5). While France is the most important destination country for exports and imports in the foreign trade statistics, for the added value streams in both cases it is the US, since in the case of the US the intermediates from German companies are mainly included in imports from third countries and the linkage with the US via production chains is relatively low (charts 13 and 14). The German surplus with the US increases the added value streams as a result. Relative to France the surplus narrows due to the relatively close ties between the two economies (chart 15). There are major changes also in the deficits with the Netherlands and Ireland (chart 16). Imports from the Netherlands contain a relatively high added value share of German inter- mediates and imports from Ireland have a relatively low Irish added value content. 0 10 20 30 40 50 60 70 80 90 100 1995 2000 2005 2008 2009 EMU EU ex EMU Other Europe Asia Dollar bloc Latin America MEA Other Source: OECD - WTO TiVA database % of foreign value added EMU becoming less important for foreign value added share of German exports 11 0 10 20 30 40 Basic metals, fabricated metal products Chemicals, non - metallic mineral products Transport equipment Textiles, leather, footwear Total Electrical and optical equipment Machinery and equipment Food, beverages, tobacco Manufacturing, recycling Wood, paper, printing, publishing Transport and storage, post and telecommunication Agriculture Electricity, gas and water supply Mining and quarrying Construction Wholesale and retail trade, Hotels and restaurants Business services Financial intermediation Other services %, 2009 Source: OECD - WTO TiVA database Foreign value added share particularly pronounced in sectors with modular manufacturing and heavy use of commodities 12 0 2 4 6 8 10 12 FR US IT GB CN CH AT NL ES BE Export share Added value share US most important destination country for added value exports 13 % of exports and of added value, 2009 Source: OECD - WTO TiVA database 0 2 4 6 8 10 12 FR US CN NL IT GB AT CH PL ES Import share Added value share US most important country of origin for added value imports 14 % of exports and of added value, 2009 Source: OECD - WTO TiVA database 0 5 10 15 20 25 30 35 US FR GB CH IT AU SA MX ES SE Trade Added value 2009, USD bn Bilateral German surpluses 15 Source: OECD - WTO TiVA database - 16 - 14 - 12 - 10 - 8 - 6 - 4 - 2 0 ID HU SK JP NO PL CN CZ IE NL Trade Added value 2009, USD bn Source: OECD - WTO TiVA database Bilateral German deficits 16 Focus Germany 14 | July 1, 2013 Current Issues Minimising the adjustment costs borne by less skilled workers via labour market and education policies The reorganisation of production processes across borders triggers redistribution effects for domestic workers. With company headquarters and activities that require inputs from highly qualified and highly specialised personnel remaining in the home market and simple and standardised tasks moving abroad the demand for labour shifts from lower skilled personnel to the higher skilled. This demand shift is intensified by the skill-biased technological change. 18 Workers who perform simple and standardised tasks are thus exposed to considerable negative wage pressure. With wages that are much higher than the world market prices and are downwardly inflexible there is a risk that jobs disappear in these segments due to outsourcing of production steps abroad or alternatively via imports of similar products. Employees may, in the worst case, have to write off all the human capital they have acquired to date and take up a new occupation. This effect is softened, though, by the higher demand for services, especially in the transport and logistics sector. International wage pressure together with the then difficult situation in the domestic German labour market resulted in the implementation of comprehen- sive labour market reforms in the mid-2000s as well as employers and unions embarking on a common, employment-friendly course. It is mainly in manufact- uring that companies have since then had the possibility of reacting to tempor- ary slumps in demand by making downward adjustments in labour inputs via working time reductions. Such adjustments cushioned the impact of the slump in global demand in 2009 and kept employment impressively stable. Real wages also climbed only moderately, but labour costs were still the highest of all the G7 countries (chart 17). As a result the manufacturing employment share of total employment stabilised in recent years at just under 19% and has currently halted the downtrend (chart 18). The comparatively moderate wage settlements – even after unemployment fell – are probably due in part to the additional potential labour market competition from abroad. These structural changes in the labour market brought about a huge decline in the jobless rate from its peak of nearly 12% in 2005 to under 7% in 2012. However, whereas there is full employment among university graduates with a reading of less than 3%, the jobless rate for people without vocational training is roughly 20%. The situation for less skilled workers is likely to remain acute. Labour market policy therefore needs to improve employability via for example occupational integration measures, training and mobility support. It is worrying that the share of people without vocational qualifications and without a general school-leaving certificate is rising again among younger birth cohorts (chart 19). Education policy needs to lay the foundations for successful lifelong learning at an early stage – especially via early learning. Higher skilled workers benefit from higher and less cyclically sensitive labour demand More highly qualified workers are, by contrast, in greater demand and employment is becoming more steady over the business cycle. 19 In addition, foreign companies are optimising their production chains and relocating activities of higher skilled personnel such as research and development or 18 See Acemoglu, D. (2002), Technical Change, Inequality and the Labor Market, Journal of Economic Literature 40(1), pp. 7-72 19 Peters, H.; Weigert, B. (2013), Beschäftigungsentwicklung innerhalb multinationaler Unter- nehmen während der globalen Rezession 2008/2009, Jahrbücher für Nationalökonomie und Statistik, 4/2013, to be published soon. 0 5 10 15 20 25 30 35 DE FR IT CA US JP GB BR CN IN Data for CN (2009) and IN (2007) are not directly comparable to each other or with the data for other countries . Sources: BLS, DB Research Hourly compensation costs (EUR) 2011 Germany's hourly compensation costs are the highest among the G7 countries 17 0 10 20 30 40 50 60 70 80 90 100 70 74 78 82 86 90 94 98 02 06 10 Agriculture, forestry and fisheries Manufacturing ex construction Construction Services % of the entire workforce Before 1991 only west Germany Stabilisation of the employment share in manufacturing sector 18 Source: Federal Statistical Office 0 5 10 15 20 25 30 35 30 - 35 35 - 40 40 - 45 45 - 50 50 - 55 55 - 60 60 - 65 >65 Total Share of people without vocational qualifications is rising again among younger cohorts 19 % of the respective age group, 2011 Source: Federal Statistical Office Focus Germany 15 | July 1, 2013 Current Issues regional company head offices. Employment in German companies that are partly foreign owned rose by 1.5 times since the mid-1990s to 2.8 million in 2011 (chart 20). Around 60% work in companies that are partly owned by companies from other EMU states – in the mid-1990s the figure was only about 40%. Boosting the international competitiveness of German firms by optimising global production chains should not be impeded By constantly optimising the global value chain German companies can strengthen their competitive position on the international stage. The overall effect probably benefits not only companies but also the domestic workforce overall. The clear beneficiaries are higher skilled workers whose share has risen steadily for decades – from 8.8% in 1991 to 13.2% in 2011 (university graduates). In addition, employment is currently at record levels. The number of employees obliged to make social security contributions has risen since the mid- 2000s by about 3 million, a larger increase than in the number of persons in the workforce. The negative impact on less skilled workers is being reduced by higher labour demand from service providers especially in the transport and logistics sector and should be further diminished via education and labour market policies. In order to continue benefiting from the positive overall effects of the expansion of global production chains, trade barriers should be dismantled and the liberalisation of services accelerated further. 20 Heiko Peters (+49 69 910-21548, heiko.peters@db.com) 20 OECD (2013), Trade Policy Implications of Global Value Chains. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 96 98 00 02 04 06 08 10 EMU Other EU countries Other Europe Africa Americas Oceania and the polar regions Asia Number of persons, million Source: Deutsche Bundesbank Employees at companies in Germany in which foreign companies hold a stake 20 Focus Germany 16 | July 1, 2013 Current Issues Has the east German housing market turned the corner? — We analyze supply and demand on east German housing markets on the city level. Subsequently, we estimate determinants of the market equilibrium and predict the price development of existing dwellings until 2030. — In our analysis disposable income is the most robust variable with a high explanatory power. Accordingly, the price of existing dwellings increases by EUR 80 per square meter when disposable income increases by EUR 1,000 in growing cities. — Using external predictions for the age ratio as well as our own trend projections for disposable income in the future we estimate a further differentiation of the price development in east German cities. While prices will increase in some cities they will decline further in others. Therefore the question posed in the title “Is the trend reversal in the east German housing market already accomplished?” cannot be answered uniformly. 1. The latest developments Prices trending up since 2009 In east Germany, the housing market has experienced a resurgence of interest. The mid-1990s had seen a phase of overheating that subsided over time on account of years of stagnating or falling nominal prices. Over the past few years the prices of existing houses have even started to increase again, in fact dynamically in some cities. These include Erfurt, Jena, Potsdam, Rostock and Weimar, in particular. But lately prices have started to stabilise even in the structurally weaker cities of east Germany (charts 1 and 2). Slight improvement in permits and completions In tandem with the rising prices, building permit issuance has also increased in large cities as well as in small cities of east Germany in recent years. However, permits continue to fall far short of the levels of earlier years (chart 3). Housing completions have recovered only a bit so far and continue to lag behind new permits (chart 4). 75 100 125 150 175 90 94 98 02 06 10 Apartment, new Apartment, existing stock Single - family dwelling Terraced house, new Terraced house, existing stock Residential property prices in east Germany 1 1990=100 Sources: BulwienGesa, DB Research 500 1,000 1,500 2,000 90 94 98 02 06 10 0.8 Max Median 0.2 Min Existing homes (ex Berlin & Potsdam) 2 EUR/sqm Sources: BulwienGesa, DB Research Focus Germany 17 | July 1, 2013 Current Issues 2. Which market powers are at play? Our objective is to analyse supply and demand in the east German housing markets at the city level. Subsequently, we shall derive determinants from this analysis that influence market equilibrium and forecast the price trends for existing houses up to 2030. Demand factor 1: Population growth – several cities are growing again Over the past 20 years the population numbers in east German cities have declined by roughly 13%, while in west Germany there has been roughly 6.5% growth. The population of Berlin is up 2% (chart 5). Relative to 1990, nearly all of east Germany's cities have posted declines. Only Dresden, Jena, Potsdam and Weimar have more inhabitants today than they did then. All of the 24 cities we analysed initially shrank directly following German unification. However, Dresden, Erfurt, Greifswald, Jena, Magdeburg, Leipzig, Potsdam, Rostock and Weimar already started to post growing population figures around the year 2000. Since then, these cities have continued to grow fairly steadily. Over the past few years, the populations of Chemnitz, Cottbus and Halle have also picked up, although the increase may be only temporary as it is due to a higher number of students. In 12 other cities that we analysed, though, the population readings have fallen nearly constantly (chart 6). 0 1,000 2,000 3,000 4,000 5,000 93 95 97 99 01 03 05 07 09 11 B - cities C - cities D - cities Building permits in east German cities 3 Number Sources: BulwienGesa, DB Research 0 2 4 6 8 10 12 14 16 93 95 97 99 01 03 05 07 09 11 Permits Completions Residential buildings in east Germany 4 Number (’000) Sources: BulwienGesa, DB Research 80 90 100 110 90 93 96 99 02 05 08 11 East Germany (ex Berlin) West Germany (ex Berlin) Berlin +6.5% +2.0% - 13.2% Population 5 1990=100 N.B.: Chart does not include latest microcensus data. Sources: Federal Statistical Office, DB Research - 2.5 - 2.0 - 1.5 - 1.0 - 0.5 0.0 0.5 1.0 1.5 91 93 95 97 99 01 03 05 07 09 11 ... cities starting to grow again ... still shrinking cities Population growth in ... 6 % yoy Sources: Federal Statistical Office, DB Research Focus Germany 18 | July 1, 2013 Current Issues Demand factor 2: Increasing heterogeneity in age structure After 1990, it was mainly younger inhabitants who moved away from the east German cities. The old-age dependency ratio quickly rose accordingly. It is defined here as the ratio of those over 60 years of age to those aged 20-60 (chart 7). As in the case of population growth, the old-age dependency ratios in the cities of east Germany are also diverging more and more (chart 8). Since 2005, the ratio in Brandenburg an der Havel, Eisenach, Erfurt, Greifswald, Jena, Magdeburg, Potsdam, Rostock, Stralsund and Weimar has only edged up a bit, and in Dresden and Leipzig it has even declined in some years. Demand factor 3: Positive growth of disposable income Incomes have picked up considerably over the past few years. While they are growing in east Germany, they are still failing to keep pace with incomes in west Germany. However, the 2008 financial crisis caused disposable incomes to slump more in west Germany than in east Germany. East Germany's economy is not as dependent on global trends as say that of Germany's major cities or the manufacturing sector in southern Germany. Given the income development and correspondingly more stable demand, real estate investments in several east German cities could generally help to minimise risk in Germany portfolios (chart 9). Not very surprisingly, incomes rose faster in cities posting population growth than in those posting a decline (chart 10). 10% 25% 40% 55% 70% 90 92 94 96 98 00 02 04 06 08 10 12 Max Min Median Sources: Federal Statistical Office, BBSR, DB Research Old - age dependency ratio in east Germany: 60 - plus age cohort to 20 - 60 cohort 7 0% 20% 40% 60% 80% 90 91 92 93 94 95 96 97 98 99 00 1 02 3 04 5 06 7 08 9 10 11 12 ... with trend reversal ... without trend reversal Sources: Federal Statistical Office, BBSR, DB Research Average old - age dependency ratios in east German cities ... 8 - 2 - 1 0 1 2 3 4 96 98 00 02 04 06 08 10 12 West Germany East Germany excl. Berlin Disposable income 9 % yoy N.B.: Based on 124 cities Sources: Statistisches Bundesamt, DB Research - 2 - 1 0 1 2 3 4 96 98 00 02 04 06 08 10 12 ... shrinking cities ... growing cities Disposable income in east Germany’s ... 10 % yoy N.B.: Based on 24 east German cities Sources: Federal Statistical Office, DB Research Focus Germany 19 | July 1, 2013 Current Issues How elastic is the supply? The large number of vacancies in east Germany (chart 11) suggests that the housing supply is pretty elastic. However, the high vacancy rate has existed for years and presumably it is always the same homes that have remained un- occupied for years. In the same breath, one may ask to what extent these houses are still on the market at all if there is no demand for them. The actual urban housing supply in east Germany might thus be more or less as inelastic as in west Germany. This argumentation is underpinned by the fact that related building activity differs only little between east and west Germany. If the existing housing stock in east Germany were more elastic, there would likely be less building activity (chart 12). Greater elasticity of supply in expensive cities In the east German cities, the mean ratio of housing completions to existing housing stock has ranged around 120 completions per 100,000 houses, with the maximum number of completions totalling close to 400. As to be expected, completions rose particularly rapidly in areas with particularly high affordability indices, that is mainly in large cities and growing ones (chart 13). 3. What influences market equilibrium? The interplay of supply and demand Finding causal relationships between real estate prices and potential explanatory variables is a very complex undertaking. Assuming supply is inelastic, it is possible to identify the influence of demand variables on the price using standard procedures. One key analytical step in this regard, however, is to examine the data on shrinking cities separately from the data on growing cities. After all, the population of a city not only has an influence per se on the price of existing houses, but also impacts the explanatory structure (chart 16). Chief determinant: Disposable income The most robust variable with high explanatory power in our analysis is disposable income. In the growing cities we found that the price of existing stock increases by roughly EUR 80 per square metre if households' disposable income increases by EUR 1,000 (chart 16, model 1). In the shrinking cities, too, disposable income has a significant influence; surprisingly, however, the polarity 2 4 6 8 10 2007 2008 2009 2010 2011 WG BB MV SA ST TH Vacancy rates in east Germany vs west Germany 11 % Sources: CBRE, Empirica, DB Research 0 100 200 300 400 500 600 700 Min 20% Median 80% Max West Germany East Germany Completions in 2011 12 Per 100,000 homes N.B.: Evalulation covering 125 cities Sources: BulwienGesa, Statistisches Bundesamt, DB Research 0 100 200 300 400 2 3 4 5 6 East German cities: Building output in 2011 and affordability (existing stock) 13 Y - axis: completions / 100,000 homes X - axis: affordability index Sources: BulwienGesa, Federal Statistical Office, DB Research Focus Germany 20 | July 1, 2013 Current Issues sign is negative. This produces the result that when disposable income increases by EUR 1,000, house prices fall by around EUR 50 per square metre. Do house prices really decline as incomes increase in shrinking cities? To analyse the robustness of the negative income coefficient more closely, we split the overall sample into five partial samples on the basis of the old-age dependency ratio. We looked at all the cities in the following groups: ratio of less than 45, 45-50, 50-55, 55-60 and over 60. Regressions for the partial samples show that the income coefficient is significant across the board and declines successively from over EUR 100 to minus EUR 40 on a EUR 1,000 increase in income. In the last two partial samples, the cities with a relatively old population structure, the coefficient is indeed negative. So the result appears to be valid (chart 14 and 15). Furthermore, the result is generally also confirmed if the price is regressed to the old-age coefficient (chart 16, models 2 and 3). An economic explanation for the negative price-income ratio The increasing average age of the population in shrinking cities could reduce the propensity to invest in housing as well as the propensity to consume “housing” as an economic good. A more restrictive approach to credit demand and issuance as people grow older also reduces transaction volumes in the housing market. Any additional income in the shrinking cities is then more likely to flow into modernisation and maintenance, and our market data only capture real estate purchases. Are numbers of overnight stays and centrality further explanatory variables? In the debate over important determinants of housing prices one continually hears reference to variables such as the number of overnight stays or the centrality of retail trade, defined as retail turnover relative to retail-relevant purchasing power. In pooled regressions these are significant variables (chart 16, model 6), both in the overall sample as well as in the partial samples. However, in panel estimates all of these variables are insignificant (model 3). This implies that these variables are not the cause of the price hikes, but instead are merely correlated with an unobserved variable, the actual price driver. Does a larger proportion of students boost prices? Contrary to the widespread hypothesis that a large share of students in a city increases the price of local housing, there is no indication of this in our data collection. The student share is only significant in the pooled regression (chart 16, model 5) and only for the overall sample. In the partial samples and in model 6 the student variable is insignificant, though, and in the panel estimates the variable is insignificant and has a negative polarity sign across the board. Our data only has the student share on record up to 2010, however. The explanatory power of the student share might increase on more recent observations. Total sample by age cohort 15 Old age Coeffi - t - Sta - Obser - within depen - dency cient tistic vations R 2 - 45 117.9 4.78 17 0.700 45 - 50 48.3 1.3 25 0.09 50 - 55 33.1 2.31 18 0.34 55 - 60 - 38.1 - 2.35 15 0.44 60+ - 42.3 - 2.89 21 0.41 N.B.: Fixed - effects estimation Source: DB Research - 60 - 40 - 20 0 20 40 60 80 100 120 140 - 45 45 - 50 50 - 55 55 - 60 60+ Partial samples based on old - age dependency ratio Source: DB Research Income coefficients in partial samples 14 Increase of existing stock when disp. income rises by EUR 1,000 Focus Germany 21 | July 1, 2013 Current Issues Regressions Dependent variable: Prices of existing stock 16 Fixed - effects specifications Pooled specifications Model 1 2 3 4 5 6 7 8 Coefficients - *significant at 5% - t - Statistics in parenthesis Total sample (N=24) Disposable income 12.8 46.1* 12.0 10.1 - 10.7 39.9 72.1* EUR ('000) (1.02) (2.20) (0.56) (0.44) ( - 0.81) ( - 1.21) (3.50) Old - age dep. ratio (BBSR) - 9.3* - 16.8* 60+ per hundred aged 20 - 60 ( - 3.27) ( - 3.83) Student share - 24.6 - 26.3 5.3* 0.8 (%) ( - 1.10) (0.27) (2.21) (0.42) Overnight stays - 139.5 100.1* (million) (0.45) (3.66) Centrality index - 2.28 - 11.3* ( - 0.62) ( - 4.82) Constant 676.5 1556.5* 533.7 1020.8 1454.5 1391.6* - 155.8 242.5 (1.77) (9.81) (1.12) (1.66) (1.55) (3.59) ( - 0.16) (0.45) (within) R 2 0.36 0.00 0.08 0.14 0.15 0.14 0.15 0.56 Sample: Growing cities (N=12) Disposable income 77.8* 104.0* 57.4 58.6 66.4* 69.8 97.8* EUR ('000) (4.41) (6.45) (1.84) (1.68) (2.12) - 1.97 (5.82) Old - age dep. ratio (BBSR) - 3.7 - 21.7* 60+ per hundred aged 20 - 60 ( - 0.36) ( - 2.12) Student share - 28.1 - 25.6 2.1 0.96 (%) ( - 1.00) ( - 0.81) (0.96) (0.56) Overnight stays - 82.3 67.5* (million) ( - 0.37) (2.39) Centrality index 0.4 - 12.6* - 0.07 ( - 4.25) Constant - 1109.0* 1382.2* - 882.7 - 24.9 - 68.3 - 769.7 910.4 - 321 ( - 2.11) (2.99) ( - 1.63) ( - 0.03) ( - 0.04) ( - 0.85) ( - 0.89) ( - 0.52) (within) R 2 0.36 0.11 0.33 0.14 0.15 0.14 0.15 0.56 Sample: Shrinking cities (N=12) Disposable income - 48.6* - 24.1* - 43.8 - 50.1 - 23.7* - 53.1* 20.5 EUR ('000) ( - 4.76) ( - 2.32) ( - 1.88) ( - 1.67) ( - 3.46) (2.70) (0.85) Old - age dep. ratio (BBSR) - 8.0* - 4.1 60+ per hundred aged 20 - 60 ( - 3.41) ( - 1.89) Student share - 20.5 - 16.3 - 5.2 3.75 (%) ( - 0.65) ( - 0.48) ( - 0.58) (0.39) Overnight stays 32.7 1096.6* (million) (0.07) (4.42) Centrality index - 4.0 - 2.67* - 0.72 ( - 1.29) Constant 2436.6* 1387.1* 1909.6* 2336.5* 3012.6* 1664.0* 2552.0* 449.4 (7.68) (10.95) (6.67) (3.56) (2.45) (7.35) (4.27) (0.55) (within) R 2 0.39 0.31 0.41 0.27 0.30 0.16 0.18 0.51 Source: DB Research Focus Germany 22 | July 1, 2013 Current Issues 4. Projections of existing stock prices up to 2030 First model projection on the basis of a population forecast Simple models are in most cases incomplete. Here, too, unobserved variables or ones unknown to us presumably have an influence on the prices of existing stock. Sparingly parameterised models often deliver better forecasts because of their robustness. Price forecasts on the basis of population forecasts In this case we take the regression model covering old-age dependency ratios (chart 16, model 2) and feed it with the findings for old-age dependency ratios as forecast by Germany's Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR) up to the year 2030. This enables us to forecast existing stock prices. Charts 17 and 18 show the square metre price for the particularly expensive cities and the average annual increase for the cities where prices are rising particularly rapidly in the period up to 2030. Alternative model: Extrapolation of income trend As the basis of calculations for a second model, we assume that disposable income will continue to grow until 2030 as extrapolated from the trend observed over the past few years. Here, too, we divide the sample into shrinking and growing cities in accordance with the calculations discussed above. Charts 19 and 20 show the forecasts of this approach in comparison with those of the baseline scenario, with the two approaches delivering similar results. 800 1,200 1,600 2,000 2,400 P CB DD HRO J EF GW WE L HAL MD C City ranking 2030: Prices 17 EUR/sqm Source: DB Research N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz, Cottbus and Halle. 0 1 2 3 4 C CB MD HAL GW EF HRO WE L DD P J City ranking 2030: Price change 18 % p.a. Source: DB Research N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz, Cottbus and Halle. 800 1,200 1,600 2,000 2,400 2,800 P J EF DD CB WE L HRO GW C MD HAL ... disposable income ... old - age dependency ratio City ranking 2030: Prices estimated by ... 19 EUR/sqm N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz, Cottbus and Halle. Source: DB Research 0 1 2 3 4 C CB MD EF WE J L HAL DD P HRO GW ... disposable income ... old - age dependency ratio City ranking 2030: Prices change estimated by ... 20 % p.a. N.B.: Rising number of inhabitants assumed. Might be particularly challenging for Chemnitz, Cottbus and Halle. Source: DB Research Focus Germany 23 | July 1, 2013 Current Issues Price deterioration in structurally weak cities Both models also deliver forecasts for a host of cities in which prices are set to decline sharply up to 2030. This is likely to go hand in hand with a decline in the standard of living, inducing the government to launch counteraction as prescribed by Germany's Basic Law, which requires the establishment of equivalent living conditions across the country. However, some cities were unable to stop the price and population declines of the past 20 years despite intensive promotion of urban development in east Germany (chart 22), and especially not in the income-poorer cities (chart 23). This raises the question why that should change by 2030, particularly if the solidarity surcharge is eliminated or reduced. A raft of economic reasons would seem to lend plausibility to the strong divergence of real estate prices: 1. Costs of infrastructure The per capita costs of maintaining the infrastructure are growing dispro- portionately rapidly in the face of a declining population. The willingness of households to invest their money will probably also decline as they grow older. Both arguments suggest that the number of cities in which it is worthwhile to invest in infrastructure is on the decrease. 2. Path dependency of building cost trend Average building costs in east Germany currently outstrip market prices in structurally weak regions (chart 24) and building costs vary only little over the years (chart 25). This means that new investments are loss-makers and real estate loses its investment quality in the structurally weak regions, which could trigger a rapid decline in newbuild numbers. 3. Increased internal migration i. The trends depicted could unleash further migration trends, since owners in shrinking cities have incentives to sell their property early. Otherwise, they expose themselves to the risk of attaining an even lower selling price at a later juncture. Abbreviations 21 Chemnitz C Cottbus CB Magdeburg MD Erfurt EF Weimar WE Jena J Leipzig L Halle HAL Dresden DD Potsdam P Rostock HRO Greifswald GW Source: DB Research 0 100 200 300 400 Long - term Short - term 1996 to 2010 2005 to 2010 East Germany West Germany Urban development promotion 22 EUR/inhabitant Sources: INKAR, DB Research 200 250 300 350 400 21 22 23 24 25 26 Urban development promotion by regional planning unit 23 Y - axis: EUR per inhabitant X - axis: 2010 median income in EUR ’000 Sources: INKAR, DB Research 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 91 93 95 97 99 01 03 05 07 09 11 Building costs Max 80% Median 20% Min EUR/sqm East Germany excl. Berlin and Potsdam: Building costs vs market prices (newbuild) 24 Sources: Federal Statistical Office, DB Research Focus Germany 24 | July 1, 2013 Current Issues ii. One variable that our projections do not capture is population development in the rather rural areas of east Germany. Only around 3 ½ million of east Germany's 16 million inhabitants live in the cities we analysed. The question is where the people who now live in rural areas will go if the outlook for the labour market and the quality of the infrastructure continues to decline in rural areas? A certain share could move to the cities in the vicinity and thus curb the population decline in some cities. However, it is to be presumed that many will head for the growing cities and thus intensify the existing divergence. Couldn't shrinking cities develop a new phase of economic growth? Our findings are without doubt only rough estimates based on the underlying economic conditions at present. Over the coming decades a few cities might succeed in re-attracting lost industries, benefiting especially from low real estate prices and wage levels. Successful, dynamically expanding companies could also significantly improve the prospects for some cities. However, it is to be expected that such developments will improve the growth of certain cities but not the overall picture in east Germany. Are both forecasts too optimistic? The demographics could have a more negative impact than assumed in the forecasts above. In this event, the urban populations will age more rapidly and, given a lower trend growth rate, incomes will increase more slowly than assumed. However, the two effects – ageing and feeble income growth – might in turn boost the pace of internal migration, since structurally weak regions will then experience difficulties in maintaining their infrastructure at an even earlier stage. As the migrants are expected to head for the growing cities, these should benefit all the same. So even in this negative scenario it could be of interest to target housing investment opportunities in the cities that have been expanding to date. 5. Conclusion As we have discussed, the east German market presents a very mixed picture. So there is no simple answer to the question asked at the outset: “Has the east German housing market turned the corner?” Based on the BBSR population forecasts and extrapolation of household income trends it is possible to determine a marked divergence between further growing and further shrinking cities. Some of the growing and already prospering cities appear likely to offer solid potential returns also in future. As they are less dependent on the global economy – a factor which affects major west German cities, for instance – they could help to reduce risk in a Germany portfolio. In our opinion, investments in the currently shrinking cities will be rewarded only in isolated cases. Jochen Möbert (+49 69 910-31727, jochen.moebert@db.com) 900 1,000 1,100 1,200 BB MV SA ST TH 2008 2011 Building costs: Residential buildings 25 EUR/sqm Sources: Federal Statistical Office, DB Research Focus Germany 25 | July 1, 2013 Current Issues Chart of the month Germany: Household debt continues to decline Private household debt rose only marginally by EUR 15 bn to just under EUR 1.6 tr last year, according to recently published Bundesbank data. In relation to GDP – the common definition – household debt even fell slightly from 59.8% to 59.2%. This represented a continuation of the downward trend witnessed since 2003 (73.1%), albeit at a markedly slower pace. Household debt is now back at levels last seen in the mid-1990s. This is a result of very weak growth (relative to GDP) of mortgage and consumer loans as well as the decline in other lending. The period until the end of the 1990s had still been characterised primarily by the post-unification boom in the property and construction sectors, which pushed up mortgage lending considerably. Compared with the situation of households in other EMU member states, those in Germany are less deeply indebted. Household debt in EMU stood at 69.1% of GDP at end-2011 (latest available data), which is almost 10 percentage points higher than in Germany. Coming in considerably above the EMU average were Spain (2012: 86%), Portugal (100%) and Ireland (112%), i.e. current crisis countries, but also the Netherlands (139%), for instance. These are mostly countries that experienced a major bubble in the real estate sector before the outbreak of the financial crisis, which in the case of Ireland resulted in house- hold debt more than doubling (compared with 2001). Household debt in Greece and France recently stood at approximately the euro-area average, with Greek households more than trebling their debt levels from a low level, however. But there is a lot to suggest that private indebtedness has peaked, especially in countries with above-average debt levels. In Portugal and Ireland, for instance, debt levels have come down noticeably over the last three years and in Spain in the last two years. The strong increase in private debt in the years prior to the crisis has allowed these crisis countries to markedly expand domestic demand (residential construction investment and consumption). But the level reached could not be sustained over a longer period given the countries' economic performance. Hence there is further need for adjustment despite the reduction in debt ratios witnessed already. This will dampen domestic demand in these countries also over the coming years, as households will hardly (be able to) take up new debt and are likely to spend larger parts of their disposable income on debt redemption rather than consumption. 0 200 400 600 800 1000 1200 1400 1600 1800 30 35 40 45 50 55 60 65 70 75 80 91 95 99 03 07 11 bn EUR (left) % GDP (right) Germany: Household debt relative to GDP on the decline... DX Germany, liabilities of private households Source: Deutsche Bundesbank 0 20 40 60 80 100 120 140 95 97 99 01 03 05 07 09 11 DE FR GR IE IT PT ES EMU ...and low by international standards DX Liabilities of private households, % GDP Sources: Deutsche Bundesbank, Eurostat, Banco de Espana, National Authorities Focus Germany 26 | July 1, 2013 Current Issues By contrast, the situation in Germany is exactly the opposite. In light of the historic and – by international standards – relatively low indebtedness of German households, there is little call for further reduction. Moreover, in recent issues of “Focus Germany” we have repeatedly pointed out that disposable incomes look set to rise appreciably in 2013 as employment will likely rise moderately and wages noticeably again. 21 This argument supports our forecast of considerably stronger consumption more than offsetting the weakness of investment and export activity in the current year, so that the (meagre) GDP growth rate of 0.1% in Germany is likely to be driven entirely by domestic demand. Oliver Rakau (+49 69 910-31875, oliver.rakau@db.com) 21 See “The 2013 pay round: Major increase in real terms” in Focus Germany of June 4, 2013 and “Sentiment indicators – another setback in spring” in the April 2, 2013 edition for a discussion of wage and income developments. Focus Germany 27 | July 1, 2013 Current Issues Chartbook: Business cycle (1) — In Q1 GDP expanded by a lower than expected 0.1% qoq. Still, following - 0.7% in Q4 this should have marked the trough. The negative yoy rate in Q1 was due to a working day effect. We expect an acceleration of GDP growth in the course of the year, but due to the statistical underhang ou r GDP forecast for 2013 is only +0.1%. — GDP growth will probably accelerate relatively strongl y to 0.5% qoq in Q2 thanks to a weather - related rebound of construction investments and robust consumption. — Economic growth in 2013 is likely to be supported by consumption. Net exports and investment in machinery & equipment will weigh on growth. — Despite weakening GDP growth during 2012 the German economy fared fairly well compared to other EMU countries which experienced stagnation or even recession. — Considering the remaining adjustment needs in several EMU countries the EMU economy should remain in recession in H1 2013 and set out on a very low growth trajectory thereafter. Despite the recovery in H2 EMU GDP should decline by 0.6% in 2013 compared to - 0.5% last year while marked downside risks persist. — In June the ifo business climate recorded its second consecutive rise, but has not recovered to the high levels seen earlier this year, which were driven by optimistic expectations. Still, the index is above its long term average. At its curre nt level it points to a GDP growth rate of about ½% qoq in Q2. — The index increased in June mainly due to higher (export) expectations in the manufacturing sector, while the domestic sectors (construction and retail) showed a modest decline in sentiment . However, the two sub - indices are markedly above their lon g - term averages, which points to robust domestic demand growth. — The Composite Purchasing Manager Indices (PMI), like the ifo index, rose slightly in May and June, but remained below its Q1 average. The better overall results were driven by the higher se rvices PMI (51.3 vs 49.7 prev.), while the manufacturing PMI got somewhat more negative (48.7 vs 49.4 prev.). — The composite PMI is barely above the 50 - growth - threshold, which gives a much more pessimistic picture than the ifo index. Our preferred indicator is the ifo index since it seems much more in line with hard economic data (e.g. GDP and industrial production). - 2 - 1 0 1 2 3 4 5 6 - 1.0 - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 11 12 13 % 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 28 | July 1, 2013 Current Issues Chartbook: Business cycle (2) — Growing by 2.2% mom each month in February and March new orders fell by 2.3% mom in April bringing he order level back to its Q1 average. April’s decline was strongly influenced by the volatile airplane orders, which enjoyed big increases in the previous months. Compared to the previous year orders remained slightly in the red. — Business surveys (ifo, PMI) point to further moderate order increases. However, especially the PMIs painted a too rosy picture lately. Therefore, we expect that the increase will be more muted. — Industrial production rose by 1.8% mom in April boosted by a weather related surge in c onstruction (+6.7%). However, manufacturing also recorded a solid increase of 1.2% due to the strong output of investment goods (+4.0%). — The third consecutive monthly plus in industrial output has brought the production index above its previous year’s level for the first time since June 2012. This adds to hopes of a recovery of the industrial sector. — However, the order level remains negative yoy and ifo/PMI only point to a temporary acceleration in Q2, followed by a more modest activity thereafter. — T he weak economic development in the winter half (GDP growth Q4 - 0.7% qoq; Q1 +0.1% qoq) currently weighs on the labour market since it is lagging economic activity . — While employment grew by 1.2% yoy in May 2012, there was only an increase of 0.6% in May 20 13. The level of employees subject to social security payments is up 1.3% yoy. — With 41.8 m employment marks a record high. — In June the number of unemployed persons fell by 12k after having increased by 11k on average in the previous three months. Despit e the small increase over the past months the unemployment rate stood at 6.8% in May and June compared to 6.9% before. The decline was due to the annual update of the labour force (the basis of the rate) resulting in an increase of 580k on a year ago. — Lead ing indicators were mixed in June, more or less pointing to a sideways trend in the coming months. We expect the labour market to improve in autumn 2013. Still, the unemployment rate should increase slightly to 6.9% in 2013 after 6.8% in 2012. -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 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 Employment (left) ifo employment barometer (6M lag, right) % yoy (left), 2005=100 (right) Employment and ifo employment baromter - 100 - 50 0 50 100 150 200 4 5 6 7 8 9 10 08 09 10 11 12 13 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 29 | July 1, 2013 Current Issues Chartbook: Business cycle (3) — Inflation rose to 1.8% yoy in June from 1.5% in May, which is well above the low of only 1.2% in April. The increase in June came on back of energy inflation picking up from 1.6% to 3.0%. That increase was due to a base effect, though, as oil as well as energy prices actually fell in June compared to May. Food price inflation stayed at the previous month’s high rate of 5.4%. Contrary to that core inflation (excl. energy and food) likely remained low at 1.2%. — Given the moderate growth and the stabilisation of oil prices, consumer price inflation will probably be muted over the coming month. We expect an average inflation rate of 1.4% yoy in 2013. — In April imports rose by 2.2% mom and exports by 1.9% – the second consecutive increase for both numbers. The trade balance surplus was nearly unchanged at EUR 17.7 bn. Both exports and imports are barely above previous year’s levels. — The weakness in imports in Q1 ( - 1.4% qoq) was likely in part due to lower commodity pric es and a drawdown of inventories as suggested by the PMI survey. Export growth (+0.4% qoq) was hampered by low global trade growth (Q1: +0.7% qoq). — In the wake of the euro crisis and the recession in several EMU countries exports to EMU have fallen below their pre - year level, which has reduced Germany’s trade surplus with these countries. — So far, exports to Asia and the US – automobiles in particular – have managed to compensate for the declining exports to EMU. However, especially US exports have sl owed down strongly lately. — Since the onset of the euro crisis EMU’s share in German exports has dropped by almost 10 percentage points to around 37% (Asia 16% and the US 8%). — In June ifo export expectations recovered some of the previous losses. Still, they only point to a subdued export dynamic over the coming months. Furthermore the global manufacturing PMI, which is only slightly above the 50 does not herald a strong rebound in global trade. — Import growth might be slightly higher than export growth du e to the stabilisation of commodity prices, the end of destocking, the high level of employment and increases in real income fuelling private consumption. — The growth contribution from net exports was just above zero in Q1 (+0.1pp; prev. - 0.8pp), but is sti ll likely to turn negative in 2013. -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 08 10 12 Inflation Core inflation Source: Federal Statistical Office Inflation rate and core inflation rate % yoy (core inflation only available since 2011 due to alteration in statistical collection) 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 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 30 | July 1, 2013 Current Issues Chartbook: Sectors — Industrial production in Germany increased in March and April. Output was 0.8% higher in the first four months of 2013 compared to the average level of the last four months of 2012. The o rder intake was 1.1% higher than in the previous period. — German industry should receive some stimulus from non - European demand. However, orders from the EU have stabilised of late. — We still believe that industrial output is likely to stagnate in 2013 (2012: - 1% ), not least due to the weak results of Q4 2012, when production was well below the average of full year (resulting in a statistical underhang). — Production in the automotive industry has risen in the last three months including an increase by +6.4% mom in April. — Business expectations have shown a mixed develop - ment recently: they declined in March and April after having improved for three months in a row. However, they turned up again in May and June. Capacity utilisation has stabilised in Q1 2013. — Also on account of the statistical underhang we expect output in the automotive industry to fall by 2% in real terms in 2013. An upward revision has become more likely, though. — Order intakes in the mechanical engineering industry have sent mixed signals over the last few months. A gradual stabilisation of the euro area and accelerating growth in Asia could support foreign demand in 2013. — However, for 2013 as a whole we expect mechanical engineering output to decline by roughly 1% (2012: +1.3%), with output tr ending upwards in the course of the year. A gradual improvement could already be monitored in the last three months. — The early - cycle sectors currently show only restrained signs of a growth rebound in 2013. — In the first four months of 2013, plastics pr oduction exceeded the level of the previous period by 1.4%. Business expectations increased again of late. — Output in the metal industry could post a marginal increase in 2013 (2012: - 3.8%). Production tended upwards at the latest reading. — Production in the chemical industry is expected to increase by 1% in 2013 (2012: - 2.6%). Output declined again in April, though. 90 95 100 105 110 115 10 11 12 13 Orders Production 2010=100, sa Source: Federal Statistical Office Manufacturing: Output and order intake 50 60 70 80 90 100 80 90 100 110 120 130 10 11 12 13 Capacity utilisation (right) Production (left) Car industry: Output and capacity utilisation 2010=100, sa (left), capacity utilisation % (right) Sources: Federal Statistical Office , ifo 80 90 100 110 120 130 10 11 12 13 Production Order intake Mechanical engineering: Order intake and output 2010=100, sa Source: Federal Statistical Office 90 95 100 105 110 10 11 12 13 Chemicals Plastics Metal products and processing Production: Early cycle sectors 2010=100, sa Source: Federal Statistical Office Focus Germany 31 | July 1, 2013 Current Issues Chartbook: Financial markets (1) — Although the ECB lowered its EMU growth forecast modestly to - 0.6% for 2013, the ECB did not change its key rate at its meeting on June, 6 th , thanks to improved EMU sentiment indicators. Additionally, Draghi dampened imminent prospects of further unconventional measures – e.g. revitalisation of the ABS - market for SME credit. — Based on EURIBOR contracts th e market expects the ECB to keep its ultra - loose policy for an extended period of time. 3mth rates are expected to rise to 0.6% by end 2014 and to around 1% by end 2015. — Hints by Chairman Ben Bernanke that the Fed might start slowing down its monthly purchases of USD 85 bn of treasuries and MBS in the coming months (“tapering”) and that it might stop the program altogether by mid - 2014 have spooked markets. 10y treasury yields have risen from 1.6% at the beginning of May to 2.5% recently. — German bund yi elds have also been pulled higher by the US sell off. Since early May yields increased from 1.2% to 1 ¾%, during the same time the US/German yield spread has more or less doubled to stand at around 80 bp. — Concerns about the turn of the global interest rate cycle, triggered by the Fed’s tapering debate, have also resulted in higher yields for other European countries. — Since the beginning of May yields of the EMU core countries have increased by 50 to 60 bp. — Also intra - EMU bond yield spreads between the core countries have widened. Compared to Germany the spreads of the other core countries were up by 2 (Austria) to 9 bp (France). — 10y yields for Italy, Spain and Ireland have increased by around 70 bp since early May, causing spreads over German bunds t o widen by 10 to 20 bps. — Portugal was hardest hit. In early May the country successfully tapped markets with a 10y bond issue, the first for over 2 years. In the following days yields even continued to fall. However, since their low of 5.2% (May 21 st ) yiel ds have risen by 150 bps, with the country’s dismal economic outlook and renewed strikes weighing on market sentiment. 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 11 12 13 German government bonds: 10Y yields % Source: Global Insight 0 20 40 60 80 100 120 140 160 180 12 13 Netherlands Finland France Austria EMU: Bond yield spreads Versus German govt. bond yield, basis points Source: Global Insight 200 300 400 500 600 700 12 13 Spain Italy Source: Global Insight EMU: Bond yield spreads Versus German govt. bond yield, basis points Focus Germany 32 | July 1, 2013 Current Issues Chartbook: Financial markets (2) — Currently, the DAX stands at around 8,000 points. The DAX is holding up well lately, not least because of a lack of investment alternatives in the German bond market due to partly negative real interest rates. The difference between dividend and bond yield s is currently at a high level. — We expect the downgrade cycle for earnings that has lasted for more than two years to come to an end at the end of 2013. However, any disappointment regarding the recovery of the world economy will hit German companies rela tively stronger. Thus, the DAX will probably underperform. Our equity strategists have a 2013 year - end target of 8000 for the DAX and 315 for the Stoxx600. — Raw material prices – in particular metals such as aluminium and copper – have dropped strongly given concerns about Chinese growth and the debate about Fed tapering, based on the perceived link between QE and inflows into commodities. Since we expect China and the global economy to pick up somewhat in H2 raw material prices could see a modest increa se again. — Food prices increased markedly in Q3 2012 due to droughts (in the US and Eastern Europe for example) and fell markedly again, recently. In May prices are 20% below the last year’s peak. — In H2 2013 oil demand should increase in H2 2013 thanks to the recovery of the global economy. Additionally, supply - side factors (e.g. geopolitical risks, Iran) provide some upside risks. — Due to the strong increase of oil supply thanks to the expansion of production of shale oil in the US our commodities analysts lowered their oil price forecast from USD 115 to USD 107 per barrel Brent at Q4 2013. Currently, the oil price amounts to about USD 100 per barrel Brent. — Currently, the gold price stands at around USD 1,200 per fine ounce or more than 30% below the peak value of 2012 (Oct, 4, 2012). This subdued development is being triggered by the announcement of the Fed to taper off QE3 in the course of 2013, the increase of real interest rates and a stronger USD. — Our commodities analysts cut their gold price forecast from USD 1,525 to USD 1,300 per fine ounce at Q4 2013. Nevertheless, the gold price is expected to decline yoy (eop) by the fastest pace since 1997. 3000 4000 5000 6000 7000 8000 06 07 08 09 10 11 12 13 Dax 30 EuroStoxx 50 (normalised) Equity indices Sources: Global Insight, DB Research 0 20 40 60 80 100 120 140 160 08 09 10 11 12 13 Food Energy Total Industrial Raw material prices HWWI index, 2010=100, based on EUR Source: HWWI 0 20 40 60 80 100 120 140 160 02 06 10 USD per barrel EUR per barrel Sources: Global Insight, Reuters, DB Research Oil price Brent Blent, USD or EUR per barrel 0 200 400 600 800 1000 1200 1400 1600 1800 2000 02 03 04 05 06 07 08 09 10 11 12 USD per fine ounce EUR per fine ounce Sources: Global Insight, Reuters, DB Research USD or EUR per fine ounce Gold price Focus Germany 33 | July 1, 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 increase of the EMU inflation rate. Recently, the expectations for the inflation rate in 2 years and in 5 years remained stable at 1.8% and 2 .0%, respectively. — The implied inflation rate for the next 10 years – calculated as the difference between the yield of 10Y German government bonds and the yield 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 is hard to reconcile with economic considerations. On the other hand nominal bond yields are depressed by massive purchases of several major central banks and still persistent flight to quality. — After peaking at 1.37 in February EUR/USD has moved in a narrow 1.28 - 1.34 range during Q2, with improving US real economic data and no further shocks regarding the euro sovereign crisis cancelling each other more or less out. — The USD should strengthen in H2 2013 due to the higher growth rate of the US economy of around 3% and Fed tapering later this year. According to our FX strategists the USD will probably appr eciate to EUR/USD 1.23 in 6 months (1.26 in 3 months). They see the current strength of the USD as the beginning of a multiyear uptrend. -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 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 80 90 100 110 120 130 02 03 04 05 06 07 08 09 10 11 12 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 34 | July 1, 2013 Current Issues Chartbook: Financial markets (4) — Following a weak first quarter, growth in lending to German corporates has remained restrained in April as well ( - 0.2% yoy) . — While Germany’s growth remains clearly above the euro area average, the slowdown in investment activity takes its toll on lending volumes (EUR - 2.1 bn yoy in April). In addition, borrowings are partly substituted by corporate bond issuance. — Contraction of corporate lending in the euro area continues unabatedly ( - 4.6% yoy in April) – mainly reflecting the bleak macroeconomic situation and ongoing deleveraging process in countries strongly affected by the crisis. — Increase in mortgage lending growth in Germany has further accelerated in April: mortgage growth at 2.4% yoy, i.e. comparable to pre - crisis period. — Low interest rate levels and a buoyant housing market in some parts of Germany have so far had a limited effect on credit demand in Germany as real estate purchases are in part financed through a reallocation of existing capital. — German mortgage growth is above the euro area average (1.2% yoy in April) . — The ECB lowered its main refi - rate to 0.5% in May. — Interest rates for mortgages and loans to corporates have remained at historic low: 2.9% for mortgage loans in April and 3% for loans to companies. — The generally low interest rate environment has allowed banks to refinance themselves at relatively low cost, which they partly pass on to clients. — Corporates on average saw no problem with credit supply. — Share of corporates from manufacturing industries th at consider lending policies restrictive remains low despite a slight increase in May (+0.3 ppt compared to previous month). More pronounced decrease for corporates from construction industries continues ( - 1.2 ppt). -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 35 | July 1, 2013 Current Issues Chartbook: Financial markets (5) — Issuance of debt securities by German public sector has remained subdued compared to the previous two years. Germany’s Länder and the federal government issued around EUR 44 bn in April 2013. — The figures lagged last two year’s pace, amounting to EUR 163 bn in the first four months of 2013. — German public sector still enjoys the safe heaven effect resulting in all time low interest rates for long - term government bonds (1.2% in April). — Banks issued EUR 83 bn in April, the highest issuance in a month since June 2010. — Issuance of bank debt securities picked up strongly in the first four months of 2013 by reaching the second - highest four - month total on record (EUR 304 bn). — Banks in Germany continued to improve their capital structure and liquidity by ta pping the debt capital markets for funding. — Corporate bond issuance peaked in April with EUR 4.1 bn by reaching the highest issuance observed in April to date. — After a lull during the first quarter of 2013 , corporate debt security issuance gained momentum. — Pulling down the financing costs for corporations, search for yield in ultra - low interest rate environment seem to bring back the corporate bond issuance to the long term average of the last four years. — Slight increase in issuance activity in April, with a value of EUR 93 m compared to the pre - year value of 66 m. — Up to date amount raised by companies from equity capital markets remained contracted and was the lowest four - month total since 2006 with EUR 1.2 bn. 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 36 | July 1, 2013 Current Issues Chartbook: Economic policy — The EATR measures the combined effect of the nominal tax rate and the way the basis of assessment (taxable income) is calculated (as well as additional charges on investment) on the tax load for investments at the corporate level. w — The effective tax load on the corporate level is around 28% in Germany and thus higher tha n in many other European countries. — The proposed changes of the opposition parties will burden Germany with the second highest tax load in the EU (after France). The positive impact of tax reforms would be reversed in just one step. — Tax policy is not t he main issue for the electorate. More important are redistribution issues (73%, see left). But the redistribution debate, although being fuelled by the opposition parties, it is not nearly as important as in past years. Many voters consider improving the fortunes of the lower strata of society to be more important than increasing the burden on the upper strata. Only 4 out of 10 people would like to see a higher peak income tax rate or the reintroduction of wealth tax. But 7 out of 10 people would like to s ee reduced burdens on low and medium incomes. — The results of tax policy surveys particularly hinge on how the questions are worded. It emerges that the degree of approval for a higher peak tax rate declines rapidly when the threshold at which the rate is t o kick in (42% from an income level of EUR 53,000, excluding “tax on the rich”) is included in the question. In that case only 17% of voters (rather than 40%) think a further increase is necessary — Recent poll results do not show many changes. The CDU is still far ahead of the SPD. The FDP is fluctuating around the 5% hurdle. The AfD, which was founded in March and whose main topic is the reorganisation of the eurozone, is not able to increase its sh are of votes. — Chancellor Angela Merkel is still more popular than her SPD challenger Peer Steinbrück. 17.0 22.0 27.0 32.0 37.0 42.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DE FR IT ES PT GR EU - 27 in %, corporates non financial sector Effective Agerage Tax Rates (EATR) Sources: ZEW, Eurostat 81 81 76 73 73 72 68 67 0 20 40 60 80 100 Slowing the increase in energy prices Securing pensions Reducing Germany's burdens in the euro bailout Eliminating disparities between rich and poor Reducing burdens on low and medium incomes Introducing a statutory minimum wage Stepping up fight against tax evasion Cutting public debt Agenda of the electorate: What should the new government focus on in particular? %, multiple responses possible Sources: FAZ, Ifd Allensbach 0 5 10 15 20 25 30 35 40 45 Sep 2009 Feb 2012 Apr Jun Aug Oct Dec Feb Apr Jun Christian Democrats (CDU/CSU) Social Democrats (SPD) Liberals (FDP) Greens The Left AfD 14 26 7 5 38 3 Election 2009 Deutscher Bundestag, if elections were held tomorrow 2009 election results, from 2011 onwards survey results, % Source: IFD Allensbach Focus Germany 37 | July 1, 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: Antje Stobbe (+49 69 910-31847, antje.stobbe@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 4 Jul y Meeting of the ECB Council, press conference Review of the monetary policy stance. 4/5 Jul y Meeting of the federal electoral committee Decision on the admission of new/smaller parties to the federal election on Sept. 22. Among others the AfD will most likely be registered. 19/20 Jul y Meeting of the G20 Finance Ministers and Central Bank Governors in Moscow Debates on the state of the global economy and on financial market regula tion. Preparation of the Leader s ’ S ummit on September 5/6. 1 Aug Meeting of the ECB Council, press conference Review of the monetary policy stance. 5 Sep Meeting of the ECB Council, press conference Review of the monetary policy stance. 5/6 Sep G20 summit Saint Petersburg Priorities of Russia's presidency: growth and job creation through investment and effective regulation among others. This includes public debt sustain - ability and financial market regulation. 15 Sep State election in Bavaria Horst Seehofer will most likely remain prime minister, but whether the CSU will reach a majority in the state parliament is still questionable. 22 Sep State election in Hesse Even a possible change in the state government would not have a major impact on the majority in the Bundesrat (upper house). 22 Sep Federal election See chart 'Deutscher Bundestag …' in the chartbook Economic policy for results of recent surveys. Source: DB Research Focus Germany 38 | July 1, 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 5 Jul 2013 12:00 New orders manufacturing (Index, sa), pch mom May 2.0 - 2.3 8 Jul 2013 12:00 Industrial production (Index, sa), pch mom May 0.5 1.8 8 Jul 2013 8:00 Trade balance (EUR bn, sa) May 17.6 17.6 8 Jul 2013 8:00 Merchandise exports (EUR bn, sa), pch mom (yoy) May 3.9 (4.1) 1.7 (3.2) 8 Jul 2013 8:00 Merchandise imports (EUR bn, sa), pch mom (yoy) May 4.9 (1.9) 2.2 (1.9) 24 Jul 2013 9:30 Manufacturing PMI (Flash) July 49.5 48.7 24 Jul 2013 9:30 Services PMI (Flash) July 51.8 51.3 25 Jul 2013 10:30 ifo business climate (Index, sa) July 106.5 105.9 31 Jul 2013 10:00 Unemployment rate (%, sa) July 6.8 6.8 30 Jul 2013 14:00 Consumer prices preliminary (Index, sa), pch mom (yoy) July 0.3 (1.7) 0.1 (1.8) 29 Jul 2013 8:00 Import prices (Index, sa) pch mom (yoy) June - 0.6 ( - 2.0) - 0.4 ( - 2.9) 31 Jul 2013 8:00 Retail sales (Index, sa), pch mom June - 0.2 0.8 14 Aug 2013 8:00 Real GDP (Index, sa), % qoq Q2 2013 0.5 0.1 Sources: DB Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit Financial forecasts DX US JP EM U GB CH SE DK NO PL HU CZ Ke y interest rate, % Current 0.100 0.10 0.50 0.50 0.00 1.00 0.20 1.50 2.75 4.25 0.05 Jun 13 0.100 0.08 0.50 0.51 0.00 1.00 0.10 1.50 2.50 3.50 0.05 Sep 13 0.100 0.08 0.50 0.51 0.00 1.00 0.10 1.50 2.50 3.50 0.05 Mar 14 0.100 0.08 0.50 0.60 0.00 1.00 0.10 1.50 2.50 3.50 0.05 3M interest rates, % Current 0.27 0.23 0.22 0.51 Jun 13 0.10 0.30 0.50 0.51 Sep 13 0.10 0.30 0.50 0.51 Mar 14 0.10 0.30 0.50 0.60 10J government bonds yields Yields, % Spreads vs. EMU, pp Current 2.54 0.84 1.61 2.46 - 0.71 0.45 0.15 0.85 Jun 13 2 .50 0.90 1.55 2.25 - 0.70 0.25 0.25 0.65 S ep 13 2.50 1.00 1.75 2.50 - 0.65 0.20 0.30 0.70 Mar 14 3.00 0.80 2.00 2.80 - 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 1.30 97.75 0.85 1.52 1.23 8.78 7.46 7.88 4.33 294.98 25.89 Jun 13 1.26 102.00 0.86 1.61 1.25 8.45 7.46 7.35 4.13 288.57 25.41 Sep 13 1.20 110.00 0.85 1.56 1.25 8.25 7.46 7.25 4.00 282.14 25.20 Mar 14 1.18 113.00 0.84 1.49 1.24 8.00 7.46 7.15 4.00 280.00 24.85 Focus Germany 39 | July 1, 2013 Current Issues German data m onitor DX Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Business surveys and output Aggregate Ifo business climate 107.1 102.3 101.4 106.1 105.3 104.3 107.4 106.7 104.4 105.7 105.9 Ifo business expectations 100.1 94.3 95.6 103.0 101.9 100.7 104.6 103.6 101.6 101.6 102.5 PMI composite 49.3 47.9 49.1 52.8 50.1 54.4 53.3 50.6 49.2 50.2 50.9 Industry Ifo manufacturing 102.4 96.4 95.1 101.1 100.5 99.1 102.4 101.9 99.3 100.7 101.5 PMI manufacturing 45.5 45.0 46.3 49.7 48.7 49.8 50.3 49.0 48.1 49.4 48.7 Headline IP (% pop) 0.0 0.2 - 2.6 0.2 - 0.6 0.6 1.2 1.8 Orders (% pop) - 0.4 - 1.7 1.0 0.5 - 1.6 2.2 2.3 - 2.3 Capacity Utilisation 84.9 83.7 82.1 83.2 82.7 Construction Output (% pop) 2.6 0.5 - 2.3 - 6.6 - 0.5 - 0.3 - 5.8 16.8 Orders (% pop) - 5.2 - 1.3 2.1 2.6 9.5 4.4 - 5.5 1.0 Ifo construction 120.0 118.0 117.7 125.6 123.9 122.7 127.0 127.2 124.5 123.6 123.5 Services PMI services 51.3 49.4 50.0 53.8 50.2 55.7 54.7 50.9 49.6 49.7 51.3 Co nsumer demand EC consumer survey - 1.1 - 7.9 - 10.0 - 6.5 - 4.2 - 7.6 - 6.4 - 5.4 - 4.9 - 4.5 - 3.2 Retail sales (% pop) 0.9 - 0.7 - 0.6 1.8 0.0 3.3 - 0.7 - 0.1 - 0.1 0.8 New car reg. (% yoy) 0.2 - 7.0 - 6.2 - 10.5 0.0 - 10.5 - 17.1 3.8 - 9.9 Foreign sector Foreign orders (% pop) 0.1 - 1.0 2.2 - 1.0 - 2.7 2.1 2.7 - 1.5 Exports (% pop) 1.2 1.2 - 2.0 0.4 1.6 - 1.2 0.5 1.7 Imports (% pop) - 0.2 0.2 - 0.8 - 1.4 3.4 - 3.9 0.7 2.2 Net trade (sa EUR bn) 47.8 50.6 46.9 51.2 15.8 17.7 17.6 17.6 La bour market Unemployment rate (%) 6.8 6.8 6.9 6.9 6.8 6.9 6.9 6.9 6.9 6.8 6.8 Change in unemployment (k) 12.7 26.3 28.7 - 8.7 19.7 - 13.0 - 1.0 13.0 4.0 17.0 - 12.0 Employment (% yoy) 1.2 1.0 0.9 0.7 0.6 0.8 0.7 0.7 0.6 Ifo employment barometer 107.4 105.9 106.3 106.2 104.9 105.8 106.5 106.4 104.7 105.5 104.4 Pr ices, wages and costs Prices Harmonised CPI (% yoy) 2.1 2.1 2.0 1.8 1.5 1.9 1.8 1.8 1.1 1.6 1.9 Core HICP (% yoy) 1.4 1.2 1.3 1.4 1.1 1.2 1.8 0.6 1.1 Harmonised PPI (% yoy) 2.0 1.4 1.5 1.1 1.7 1.2 0.4 0.1 0.2 Commodities, ex. e nergy (% yoy) - 7.8 - 4.5 0.7 - 3.5 - 3.7 - 3.2 - 3.7 - 6.2 - 6.7 Oil price (USD) 108.2 109.7 110.1 112.6 113.1 116.3 108.4 102.0 102.6 Inflation expectations EC household survey 25.0 27.0 31.2 26.6 22.5 27.6 26.5 25.6 25.4 21.6 20.6 EC industrial survey 6.4 0.8 2.9 3.7 - 0.6 5.4 3.2 2.5 - 0.4 - 1.8 0.5 Unit labour cost (% yoy) Unit labour cost 2.8 3.3 3.2 4.1 Compensation 2.4 2.5 2.8 2.4 Hourly labour costs 3.2 3.5 3.8 4.3 Mo ney (% yoy) M3 7.0 6.8 6.0 5.3 6.1 5.8 5.3 5.6 4.7 M3 trend (3m cma) 6.0 5.7 5.6 5.2 Credit - private 0.7 0.6 - 0.4 - 0.2 - 0.3 - 0.2 - 0.2 - 0.2 Credit - public 22.0 10.4 13.5 - 18.7 - 5.4 - 13.0 - 18.7 - 13.2 % 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 Main Fax: +49 69 910 - 31877 E - Mail: marketing.dbr@db.com Available f aster 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 .  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 do 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. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienst- leistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. 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