Market Economics | Interest Rate Strategy - BNP PARIBAS ...

The European Commission’s measure of consumer
sentiment in Germany, meanwhile, has risen to its
highest level ever. The equivalent survey for the
eurozone as a whole is only marginally above its
historical average and has stalled in recent months,
at the same time as the survey for Germany has
powered ahead.
The differentials between the German and eurozone
consumer sentiment surveys are at, or near to, their
record highs across a range of the sub-components
compiled by the European Commission. Looking
specifically at consumers’ opinions on the general
economic outlook, the German survey has surged to
its highest ever level, with the gap to the equivalent
survey for the eurozone at about thirty points, a
record high by a huge margin (Chart 6).
The EC survey of consumers’ assessment of the
financial outlook also shows the differential relative to
the eurozone at an all-time high in Germany’s favour.
This reinforces the point made earlier that not only do
German consumers feel that the economy is doing
exceptionally well, they also feel more confident that
they will benefit from the improvement, much more
than they did in the prior upswing. This is positive
from the perspective of the consumer contribution to
future growth.
This is not the case elsewhere. Despite the pick-up in
economic conditions in the eurozone since spring
2009, the purchasing intentions survey compiled by
the EC has been close to its record lows. The
equivalent survey in Germany has been increasingly
steadily. The differential between the two is, like the
rest of the sub-surveys, at an all-time high currently,
having turned positive in Germany’s favour last year
for the first time in its history.
Confirmation required
There is a caveat with the survey data. Though the
figures are remarkably strong, they have often been
a poor guide to spending trends in the past. This is
illustrated in the dynamic correlation analysis in the
article Germany: Consumer Clues in the Market
Mover of 4 November 2010. Even the highest of the
correlations are not that impressive.
Most consumer sentiment surveys in Germany have
persistently over-predicted consumption growth since
the upturn in the economy began in spring 2009, as
they did in the last expansion. But this time should be
different.
The unemployment rate is near 20-year lows, wage
growth is likely to pick up and monetary policy
conditions are very loose. The longer the German
economy does well, the higher the likelihood of a rise
in permanent income expectations in the household
30
25
20
15
10
5
0
-5
-10
-15
-20
Chart 6: Consumer Sentiment
EC Consumer Survey:
Economic Outlook
86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Reuters EcoWin Pro
Germany less Eurozone
sector in Germany and, in turn, the higher will be the
probability of a change in attitudes to spending and
saving. This may not be immediate but a combination
of very loose monetary policy, strength in the labour
market and record-high confidence right across the
economy must surely have an effect over time.
Our feeling is that the circumstances in Germany
were very much moving in this direction during the
prior expansion, only to be brought to a shuddering
halt by the massive fall-out from the financial crisis.
This hit the German economy especially hard given
its unusually high export-to-GDP ratio and sensitivity
to global trade.
There is considerable potential for a larger growth
contribution in Germany from private consumption
given that it accounts for a relatively low share of
GDP – 56% as of Q3 2010 on a constant price basis.
Our forecasts for stronger spending growth in coming
years are based mainly on our prediction of higher
household real income growth. A sustained shift
down in the savings rate, which is relatively high in
Germany, is an additional source of upward risk to
our growth forecast.
In perspective
Note that, despite the recovery, levels of output in
Germany remain below their pre-crisis peaks. On the
basis of our revised forecasts, we now expect GDP
on a constant price basis to surpass its pre-crisis
peak level (set in Q1 2008) in Q2 2011.
We end with a warning about cold weather-related
complications with the data around the turn of the
year. This regularly plays havoc with the data flow in
Germany, leading to confusion over the underlying
state of the economy. Extreme cold in December last
year has already seen unemployment unexpectedly
rise. But this is merely a temporary disruption. Any
data weakness near-term should be followed by a
compensating rebound thereafter.
Ken Wattret 13 January 2011
Market Mover
12
www.GlobalMarkets.bnpparibas.com