Ursula Walther

The external environment as well as monetary and fiscal policy should provide strong headwinds. Sentiment will likely be dragged lower by the increasingly evident structural problems. We anticipate a modest recession during the winter half to be followed by a gradual recovery from spring onwards. We expect the government to survive the internal quarrels with respect to the 2024 budget, following the constitutional court ruling. Debt brake reform is unlikely in the short run. A cross-party consensus for a Transformation Fund 2.0 might emerge before September regional elections. [more]

A double-dip recession. Hard and soft data point to a GDP contraction of about 0.3% in Q3. Despite receding inflation,we expect that private consumption will only gradually come out of its rut, as consumer confidence has remained depressed. While the overall decline in GDP over the double-dip recession (Q4 22/Q1 23 and Q3 23) will probably be less than 1 percentage point, a renewed fall in GDP provides another blow to already downbeat German confidence. This negative feedback loop will likely weigh on the economy in 2024. In particular, structural supply bottlenecks look set to hamper growth opportunities and the energy transition is likely to slow potential growth in Germany towards 0.5% and keep the inflation rate above 2%. [more]

In this report, we provide an update on key developments in German politics:
#1 How to tackle the growth malaise - tax reform and cutting red tape as first steps. Despite dwindling poll numbers and weak growth prospects, the government’s appetite for sweeping structural reforms appears limited. We take a look at the government’s “10 point action plan”, the proposed corporate tax reform, and renewed efforts to cut red tape.
#2 Rise of the far-right. Sticky inflation, change-fatigue and rising immigration have contributed to rising approval rates of the far-right AfD, reaching an all-time high at 21.5% in opinion polls in recent weeks. We analyze what that means for coalition building in the upcoming regional elections (both this weekend and next year) and how this might influence the overall policy debate at the federal level.
#3 Polls suggest conservatives set to win regional elections in Bavaria and Hesse on October 8. We give an update on how Sunday’s regional elections in two of Germany’s most populous states might impact national policy-making and the likelihood of agreeing on a new set of EU fiscal rules by year-end. [more]

Germany’s growth is under pressure from renewed cyclical and structural headwinds. In this edition of Focus Germany we introduce our new Nowcast Model for German GDP, predicting that the German economy should have expanded in Q2, but that risks for activity in H2 are increasing. We take the summer break in Berlin as an opportunity for a midterm review of the traffic-light coalition’s work. In a historic flashback we revisit the challenges Germany was facing when the Economist called it the sick man of the euro and which policy measures transformed the country into an Economic superstar a decade later. We find interesting parallels to today’s situation. [more]

With Q1 GDP growth revised to -0.3% we now expect annual GDP to shrink by 0.3% in 2023. With the expected US recession weighing on German economic momentum towards year end we have cut our annual forecast for GDP growth in 2024 to 0.5% from 1.0%. Meanwhile, the energy transition policy is putting strains on government cohesion, as can be seen from the failure to agree on a piece of climate legislation this week. Spending pressures and debt-brake limits add to tensions. Still, none of the three ruling parties has an incentive to trigger early elections. [more]

The German economy – one year after. With surprisingly strong hard data for January, chances are rising that GDP might be saved from another decline in Q1. Although not yet our baseline call, this would prevent Germany from going through a technical recession. However, still heightened uncertainty and real income losses due to high inflation will likely keep investment spending and private consumption flatlining in the first half of the year. Hence, we maintain our 0% forecast for 2023 German GDP growth, although upside risks have increased since the start of the year. [more]

London continues to be the leading trading hub for OTC interest rate derivatives with a market share of 46% and an average daily turnover of USD 2.6 tr. However, the UK has lost ground since 2019 when its market share was still 51%. This is due to the transition away from Libor as well as the ongoing efforts of EU authorities to bring more derivatives clearing into the bloc. [more]

Climate stress tests have emerged as a key tool for looking into the financial system’s vulnerability to climate risks. Banks’ exposure to climate risks stems from (1) physical risks that are closely related to geography, and (2) transition risks mainly from loans to carbon-intensive sectors. Exercises by the ECB and BoE suggest that banks’ credit losses in a disorderly transition would be higher than in an orderly transition scenario, and even higher in a “hot house world” with unabated global warming. Banks would be able to absorb climate-related losses due to strong capital buffers. Results are subject to data limitations and modelling constraints. So far, climate stress tests are declared learning exercises with no direct implications for capital requirements. However, supervisors are urging banks to set up a comprehensive climate risk management. [more]

For the financial sector, sustainable finance is steadily moving up the priority list. It is about incorporating environmental, social and governance (ESG) considerations into finance. The global volume of ESG-labelled assets grew to USD 35 tr in 2020 and may reach USD 41 tr by the end of this year. Despite strong growth, sustainable finance still faces obstacles such as the absence of a universally accepted definition of ESG and a lack of data on ESG metrics. Regulation is trying to keep pace with market dynamics to facilitate the flow of funds into sustainable activities. Key initiatives include the establishment of taxonomies, disclosure rules and product-related regulation. In the short term, sustainable finance faces headwinds from adverse macroeconomic conditions and emerging regulatory requirements, but the fundamental growth drivers remain intact. [more]

For the German federal elections in September, about 60m voters are called to cast their ballot. Despite more than half of voters being 50 years and above, it would still be too far-fetched to say that Germany has become a so-called gerontocracy, where the interests of the older dominate the political process. Moreover, the pandemic could curb participation among all age groups. [more]

At the onset of this decisive election year, Germany finds itself confronted with an increasingly multipolar world, a weakened liberal, rule-based world order and rapid technological change. By applying the concept of a SWOT analysis, we aim at kicking off a debate about possible trajectories for the German economy in the post-Merkel era. As key threats to Germany’s "business model" (export-driven with a strong innovative industrial base), we identify (i) a continued erosion of the liberal rule-based trading and investment order and (ii) the falling behind in the global tech race with respect to Green-tech, AI and IoT. By plotting these two threats on separate axes, we then develop four scenarios and identify key drivers that will define Germany‘s position on these axes. For the new government complacency or reactive policies are no options – "High-Tech Made in Germany" might turn out to be an upside scenario. Strong reform effort of both the government and corporate sector is needed in order to secure Germany’s place in the "best-of-all-worlds" scenario. This requires a proper allocation of R&D investments, reaping the benefits of industrial data and an accelerated diffusion of cross-sectoral technologies like AI. [more]