Demand-led German recovery

March 6, 2015

The factory of the company Kronospan is pictured during sunset at the east German town Lampertswalde

An economic trend, like a battle plan, often doesn’t survive the first engagement. Data from euro zone countries has generally surprised on the upside since the turn of the year with Germany leading the way. German growth was robust in Q4, with domestic demand to the fore.

IG Metall, Germany’s biggest union, has negotiated an inflation-busting pay rise of 3.4 percent for its members, which tends to set the bar for other sectors’ wage deals and should further propel consumer spending.

But to muddy the waters, German industry orders were reported yesterday to have plunged 3.9 percent on the month. That led to a bit of head-scratching.

Industry output figures just out have partially balanced that, rising 0.6 percent on the month in January, a little more than forecast. December’s figure was also revised up.

So to tweak the theory, German and therefore euro zone growth could well surprise on the upside this year but in the case of Europe’s largest economy it may be rooted more firmly in burgeoning domestic demand rather than its powerhouse industry base.

The European Central Bank reflected that yesterday, significantly increasing its growth forecasts for this year and next but pressing on with its bond-buying programme with new money which will start on Monday. The aim is to pump more than 1 trillion euros into the euro zone economy over the next 18 months.

The question is whether, after so much anticipation, that is now thoroughly priced into the bond market where yields in Italy, Spain and Portugal dropped to record lows this week and investors pay for the privilege of lending to Germany for five years.

It remains to be seen whether banks will use the money to lend to businesses and households although there are signs of life there too. And there is a real question about whether this policy setting is appropriate for Germany, by far the bloc’s largest economy, if its recovery continues at its current pace. Because of the relative size of Germany, more of its bonds will be bought than anybody else’s.

For the markets, all eyes will be on the latest monthly U.S. jobs report. Last month’s came in very strong, firming expectations of a first U.S. interest rate rise around mid-year.

There are some potentially interesting credit rating reviews today – S&P will opine on Greece and Sweden and Moody’s is due to run the rule over the EU and Switzerland.

EU foreign ministers meet in Riga with Ukraine yet again top of the agenda. Parallel talks will be held in Berlin between senior Russian, Ukrainian, German and French officials to discuss steps needed to shore up a peace accord struck three weeks ago in Minsk.

Kiev accused rebels on Thursday of repeated violations of the ceasefire deal, and said they were building up forces in the southern Donetsk province, near the Ukrainian-held port city of Mariupol.

Russian gas exporter Gazprom said late on Thursday it had received a $15 million prepayment from Ukrainian state energy firm Naftogaz, averting a possible cut in supply, at least for now.

Any possible cuts in gas supplies to Ukraine could have a knock-on effect for the European Union, where Russia meets one third of the fuel demand. Around 40 percent of Russian gas to the EU goes via Ukraine. However, with winter ending there is no prospect of an immediate crunch.

Having initially rejected Barack Obama’s demand (delivered via Reuters) that Iran must commit to a verifiable freeze of at least 10 years on sensitive nuclear activity to strike a landmark atomic deal, Iran’s foreign minister on Thursday suggested that a 10-year moratorium on some aspects of the country’s nuclear programme might be acceptable to Tehran.
Mohammad Javad Zarif didn’t go into detail but said “certain limitations” were possible.

Iran, the United States, Britain, France, Germany, Russia and China have given themselves an end-June deadline to reach an agreement that curbs sensitive Iranian nuclear work in exchange for sanctions relief. The Western powers hope to have a broad framework agreement by the end of March.

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