Taking the pulse of the German economy · Executive summary 2 2/5/2020 Taking the pulse of the German economy - The German economy has shown a growth rate of only 0.6% in 2019 and

Taking the pulseof the German economyGrowth is bottoming out at low levels. Downside risks due to the outbreak of a new coronavirus.

Economics, February 2020

Executive summary

2/5/2020 Taking the pulse of the German economy2

- The German economy has shown a growth rate of only 0.6% in 2019 and will continue to grow at a similar rate this year

(0.6%, working-day adjusted; 1.0%, not working-day adjusted)

- The global growth environment has been characterised by a slow pace. Now, there are some signs of bottoming out. The

hard data for the global industry indicate that the global recession of this sector may have ended in Q4-2019.

- The main risk factor for the global environment is currently the new coronavirus, especially for China, which is among the top

3 destinations for exports in general and cars in particular.

- The main drivers of the German downturn of last year have been net exports, a lower build up of inventories and weak

investment spending. While some leading indicators point to a stabilization, there are no signs of a significant rebound in

exports and investment spending.

- Sectorwise we can see a two-speed economy with the manufacturing sector in recession since mid-2018 and the service

sector solidly growing (with some moderation). The construction sector has lost some dynamic. However, its activity level

remains elevated.

- The labor market shows some signs of a weakening: While the unemployment rate has remained rather low at 5%, ‚short-

time work‘ has increased significantly which is usually a sign of some deterioration.

- Consumer price inflation has picked up a little bit during the upturn of the last years und is higher than the euro area

average. However, inflation is still below the euro area target of below, but close to 2%.

- Credit growth has been rather healthy at around 4% YoY, while the bank lending survey indicates that banks are reluctant to

tighten credit conditions.

- Yields should increase only very moderately meaning that financial conditions should remain very accommodative.

Global environment

Taking the pulse of the German economy2/5/20203

50.043.1.0 45.1 47.1 49.1 51.1 53.1 55.1 57.1 100.0

Source: Bloomberg, Markit, HCOB Economics

Global view: no clear signs of an end to weakness in the manufacturing sector

ISM/PMI-Indices manufacturing sector in Jan (Index > 50 = Improvement of economic situation in comparison to month before, Index < 50 = worsening)


45

45,2

45,2

45,2

45,4

46,2

47,2

47,4

47,9

48,2

48,5

48,8

48,8

49,2

49,3

49,3

49,8

49,8

49,9

50,2

50,3

50,6

50,6

50,92

51

51

51,1

51,3

51,4

51,5

51,8

52,5

52,7

53,3

54,4

55,3

56,8

40 45 50 55 60

Mexico

Germany

Czech Republic

South Africa

Australia

Italy

USA

Poland

Russia

Egypt

Spain

Japan

Malaysia

Austria

Indonesia

New Zealand

UK

South Korea

Netherlands

Switzerland

Singapore

Canada

Vietnam

Norway

France

Brazil

China

Turkey

Ireland

Sweden

Taiwan

Hungary

Myanmar

Kenya

Greece

India

Nigeria

World GDP: growth is slowing down. Neither signs of near-term rebound nor a free fall. GDP growth is decelerating since six quarters in a row.

Note: The 28 countries + EU cover almost 90% of World GDP. Therefore, they show quite accurately the growth dynamics of the global economy. However, when these figures are used to derive annual

growth rates from them, some deviations occur compared to figures published by the IMF.


Global industrial sector more or less in stagnation. While global industry is showing some improvement in Q4, global trade has shrinked during this period, very likely.


Global PMI: Services still show some robustness in comparison toindustrial sector.There are tentative signs of stabilisation in the manufacturing sector at a low level.

2/5/20207 Taking the pulse of the German economy

Taking the pulse of the German economy

Source: HCOB Economics, Macrobond, IWF

2/5/20208

Historical GDP growth rates and forecasts

1,5

0,6 0,6

1,2

2018 2019 2020 2021

Germany

1,9

1,21,0

1,3

2018 2019 2020 2021

Euro Area

6,6 6,25,6 5,6

2018 2019 2020 2021

China

0,90,7

0,4 0,5

2018 2019 2020 2021

Japan

1,0

0,6

1,6

2,3

2018 2019 2020 2021

Latin America

2,9

2,2

1,0

1,9

2018 2019 2020 2021

USA2,0 1,7

3,0 3,3

2018 2019 2020 2021

Africa + Middle East

6,2

5,8

5,5

5,3

2018 2019 2020 2021

Emerging Asia ex China

3,6

3,0 3,03,3

2018 2019 2020 2021

World

Global growth seems to stabilize on lower levels in almost all regions.The most important risk factor is currently the impact of the new coronavirus. We have adjusted China growth to 5.6% (from 5.8%).

Implications from new coronavirusfor the German export sector


Around 7% of total exports from Germany go to China.The export structure of Germany is well diversified in geografic terms.


German exports to China correspond to almost 3% of German GDP. The indirect effect (main export destinations with high exposure towards China) is moderate.


Machinery & transport equipment is the main sector which would sufferfrom a slowdown in China.


German economy



‚Consensus Economics‘ forecasts show a slight uptick in GDP growth.However, pessimism prevails with regard to the manufacturing sector including machinery & equipment. Stabilization comes fromprivate consumption.

Jan 2019 Jan 2020 Jan 2019 Jan 2020 Jan 2019 Jan 2020

Source: HCOB Economics, Macrobond, Consensus Economics

German economy has escaped barely a technical recession.Dynamics will continue to be weak. Growth over the whole year 2020 should be at around 0,6 % (working day adjusted).


Exports, capital spending, private consumption and public spending


Growth has been dragged down by a weak performance of exports and a low level of inventory build-up.


Private consumption and public spending stabilized GDP growth, whileinvestment spending has cooled down significantly.



Exports: some stabilizationThere has been some stabilization in current figures as well as early indicators, like Ifo survey and new orders. The fading risks fromthe US-China trade war and Brexit are positive news. However, as long as the weakness in the global industrial sector goes on, itwill be difficult for the German export sector to regain strength. Some uncertainty stems also from the possibility of a US-EU tradewar and, more importantly, the new coronavirus.


Exports: „only moderate help from our friends“.Main trading partners should show similar growth as last year which means that no significant acceleration in German exports shouldbe on the cards. Obviously, the export channel is the most vulnerable one with respect to the new coronavirus, which is about to curbChinese growth in a noticeable way.


Capital spending: no stimulus from this side.A third of capital spending goes into machinery and equipment, which obviously suffer from global industrial recession. Construction related capital spending should be helpful to avoid a steep fall in overall capital spending.


Capital spending: intentions to invest have fallen significantly.Profits have gone down in H1-2019 which does not bode well for capital spending.


Private consumption: consumer spending should remain rather robust. Robustness is based on high consumer confidence, still positive employment development, a solid wage increase, low debt ratiosand rather high saving ratios of private households, the latter both constituting a buffer against any upcoming negative incomeshock.


Public spending: plenty of room to spend more (theoretically)However, the ruling coalition will not make use of the fiscal leeway unless Germany falls into recession (which is not our base casescenario).

Sectorwise: which sectors aredrivers of economic activity?


Expectations have worsened in almost all sectors according to Ifo.The current situation is better than the expectations of surveys.



Manufacturing: broad weaknessThe machinery and the motor vehicles sectors haven been in recession since 2018/2019. Bottoming out in 2020 to be expected.

Change in output, QoQ. Pink shaded areas = recession defined as two quarter in a row shrinking output. The latest monthly figures are taken as estimate basis for the last Quarter


Services sector: Services hold up quite well. Services will take advantage from relatively robust private consumption.


Construction: Still in good shape


Machinery & equipment: Stabilization at low levelsWhile a free fall has been stopped, the signs of a rebound cannot be seen.


Automotives sector: production going down since end 2018The car sector indicators sends some mixed and partly contradicting signals.


Automotive sector: German cars are imported increasingly from abroad.One part of explanation is that SUVs are increasingly wanted, but not produced at home.


Chemical sector: clear signs of a bottoming outThere are many signs of stabilization. However, it would be premature to bet on a strong recovery, as new orders remain modest and capacity utilization is not particularly low.


Data processing, electronig & optical devices: Order situation looks goodWhile Ifo business confidence has deteriorated, the level of new orders look okay and exports remain at a high level.


Construction / real estate: Ifo survey data exhibit some deceleration.


Construction / real estate: Some slowing down, but activity remainingon a high level

Construction / real estate: In the commercial real estate sector pricesand rents continue to increase in most segmentsAffordability in the residential sector has worsened mostly, but annuity-to-income ratio does look fine.


Construction / real estate: Low vacancy rates point to strong demandfor office space. However, some deterioration in the labor market means that we should expect a bottoming out followed by an increase, assumingeconomic growth to accelerate in 2021 at the earliest.



Services: mood in the services sector has cooled somewhat.However, optimism still prevails in most sectors, as most ifo-survey balances are strongly in positive territory.


Labor market and inflation


Labor market: overall the labor market looks rather robust. Employment is still increasing and so do wages. However, not all is rosy (next slide).


Labor market: some signs of deteriorationShort-time work (Kurzarbeit) and unemployment have increased while unfilled vacancies have fallen. However, unfilled vacanciesare on a rather high level. Therefore, to expect a steep increase in unemployment does not look to be justified.


Inflation: prices have increased at a higher rate, but inflation remainssubdued.Given the weak growth environment and structural factors at work (demografics and digitalization) inflation will remain low for theforeseeable future.


Loan activity, interest rates


Loan activity: credit growth above euro area average.German banks are neither tightening nor loosening credit standards according to latest bank lending survey.


Interest rates: Bund yields will remain below zero at least during 2020.


Policy rates: ECB will stay put for the time being.ECB-president Christine Lagarde will continue the accomodative monetary policy of its predecessor.

2/5/202048

EUR/USD should appreciate in our base scenario of two further Fed rate cuts in 2020.


2/5/202049

Agenda 2020



ForecastsGDP change Inflation

Economic activity 2019 2020 2021 2019 2020 2021

Euro area 1,2 1,0 1,3 1,5 1,2 1,4

Germany 0,6 0,6 1,2 1,7 1,3 1,4

United States* 2,2 1,0 1,9 2,0 1,2 1,5

China 6,2 5,6 5,6 2,3 2,5 2,6

World 3,0 3,0 3,3 - - -

Interest rates (eop) 04.02.2020 Jun 20 Dez 20 Jun 20 Dez 21

Euro area

Policy rate 0,00 0,00 0,00 0,00 0,00

Deposit rate -0,50 -0,50 -0,50 -0,50 -0,50

3 months Euribor -0,40 -0,45 -0,45 -0,45 -0,40

2 year Bunds -0,66 -0,65 -0,60 -0,53 -0,50

10 year Bunds -0,40 -0,40 -0,15 0,15 0,28

USA

Fed funds target rate (upper bound) 1,75 1,50 1,25 1,25 1,75

3 months Libor 1,75 1,50 1,35 1,50 1,95

2 year T-Notes 1,41 1,40 1,20 1,30 1,80

10 year T-Notes 1,59 1,65 1,80 2,00 2,15

FX 04.02.2020 Jun 20 Dez 20 Jun 21 Dez 21

EUR/USD 1,10 1,16 1,19 1,20 1,21

EUR/GBP 0,85 0,85 0,86 0,87 0,88

USD/JPY 109,19 108 105 107 109

USD/CNY 7,00 7,10 7,20 7,20 7,30

Stocks 04.02.2020 Jun 20 Dez 20 Jun 21 Dez 21

Dax 13240 13100 13600 13700 14000

Stoxx Europe 600 418 406 422 425 434

S&P500 3249 2900 2900 3050 3250

Commodities 04.02.2020 Jun 20 Dez 20 Jun 21 Dez 21

Oil (Brent) in USD/USD 55,40 55 58 65 65

Oil (WTI) in USD/Barrel 51,35 50 53 61 61

Source: Bloomberg, Hamburg Commercial Bank Economics *As inflation index the PCE core rate is considered

Contact

Editing

Economics

Dr. Cyrus de la Rubia

Chief Economist

Phone: 040-3333-15260

Editorial deadline: February 04, 2020

Gerhart-Hauptmann-Platz 50, 20095 Hamburg, Phone: +49 (0)

40-3333-0, Fax 040-3333-34001

Other contact persons at the Hamburg Commercial Bank

Saving institutions & Financial Institutions

Thomas Benthien

Phone: +49 (0)431-900-25000

Sales Corporates & Real Estate

Stefan Masannek

Phone: +49 (0)431-900-25550

Sales Shipping, Energy & Infrastructure

Stefan Masannek

Phone: +49 (0)431-900-25550

Debt Capital Markets

Tim Boltzen

Phone: +49 (0)40-3333-13765


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Taking the pulse of the German economy · Executive summary 2 2/5/2020 Taking the pulse of the German economy - The German economy has shown a growth rate of only 0.6% in 2019 and