Claims that the German economy is overheating have been simmering for months now. FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad, discusses recent warnings by the German Council of Economic Experts that tough times could be on the cards for Germany.
Jameel Ahmad, FXTM
At the beginning of this year, fund managers looking to switch money from US equities to European shares set their sights on Germany, thanks to increasingly strong economic data. In August, Deutsche Bank tarnished this rosy outlook, announcing that German markets had peaked, and hinted that investors should steer clear of Frankfurt. Analysts were even quoted likening the Eurozone to a party coming to an end.
In September, researchers from the Kiel Institute for World Economy added their voice to the argument, warning of a pending German economic boom. Production capabilities were noted to be in excess of normal limits, and unemployment at a record low.
At the beginning of November, the conversation stepped up a gear. The five-member German Council of Economic Experts (SVR) – flatteringly referred to as the ‘Wise Men’ – published their annual report, warning that the country’s economy is at risk from overheating. The risk is not imminent, but Germany certainly seems to be heading for a boom. The SVR revised their earlier prediction of economic expansion upwards by 0.6%, predicting a 2% expansion for 2017, followed by 2.2% next year. The group’s previous projection for 2018 was 1.6%.
The SVR echoed earlier warnings by the Kiel Institute, suggesting there were signs that production capacity is currently over-utilized. Although, on the flip side, the council expects the unemployment rate to fall to 5.5% in 2018, as the economy expands.
November’s SVR report cites ECB’s monetary policy as a threat to German financial stability and suggests it could, potentially create market volatility. The Wise Men have made a recommendation for the ECB to “reduce purchases” and have suggested that the central bank “significantly tighten” its monetary policy.
The European Central Bank’s (ECB) monetary policy has long been a bugbear for Germany, with the trading bloc’s largest economy highly critical of the ECB bond-buying programme in particular. The bank’s expansive measures may have been instrumental in preventing a period of disinflation from spiraling into inflation, but Germany has far less to gain from low interest rates than fellow members such as Spain or Italy. A senior government official even warned recently that low interest rates would not be tolerated by German savers for much longer.
As Germany flirts with a possible boom, market experts have become increasingly skeptical of its long-term prospects. Strong growth in the Eurozone’s largest economy bodes well for the Euro in the short-term, but Germany plays a major role in the currency’s stability, and fears of overheating could play out in the markets in the long, or even medium -term.
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