18 February 2013

Bundesbank: The current economic situation in Germany

Global economic growth remained subdued in the fourth quarter of 2012. In regional terms, emerging market economies appear to have stepped up the pace of their economic activity to a marked degree, while the already weak growth in the industrial countries gave way to a significant decline in output.

Market participants in the international financial markets had a perceptibly stronger appetite for risk in the autumn and winter months of 2012-13, their sentiment being buoyed chiefly by the slightly brighter economic outlook for the current year and by the crisis management measures taken by the central banks in the major currency areas. In the euro area, the potentially unlimited bond purchase programme referred to as Outright Monetary Transactions (OMT), which has not yet been activated, boosted financial market prices. The Ecofin agreement to establish the Single  Supervisory Mechanism (SSM) for banks at the European Central Bank, and the conclusion of a debt buy-back operation which cleared the way for further financial assistance for Greece also bolstered the markets.

The growth in overall German economic output was interrupted at the end of 2012. According to the Federal Statistical Office, real GDP growth in the fourth quarter of 2012 diminished by 0.6 per cent quarter on quarter following adjustment for seasonal and calendar factors. The slowdown in demand that had begun to unfold over a year ago on the back of flattening global growth, recessionary tendencies in the euro area, and considerable uncertainties associated with the resolution of the debt crises together ended up putting a noticeable damper on German economic activity. Nonetheless, aggregate capacity utilisation in Germany remained just about within the range of normal.

The conditions for public finances in Germany remained favourable in the past year. The general government budget recorded a narrow surplus of +0.1 per cent of GDP (2011: -0.8 per cent), the still perceptible deficit posted by central, state and local government being more than offset by the surplus run by the social security funds. According to Bundesbank calculations, the cyclical influence on the general government budget remained positive year on year, which meant that a (limited) deficit remained in structural terms.

The reformed national and European budget rules provide a more robust foundation for achieving sound public finances. Under the favourable current conditions, Germany complied with these rules, and the underlying objective of achieving a structurally balanced general government budget is increasingly being used in the public debate as a benchmark for evaluating budgetary policy. However, the touchstone for fiscal policy will ultimately be whether the upward trend shown by the debt ratio is reversed on a lasting basis and the rules are rigorously implemented even when general conditions are less favourable.

At its latest meeting, the ECB Governing Council took note of the remarks by the Governor of the Central Bank of Ireland regarding the treatment of the state-owned Irish Bank Resolution Corporation (IBRC), which the Irish government had liquidated shortly beforehand. The Irish central bank had granted emergency liquidity assistance to IBRC and, following its liquidation, assumed full ownership of the relevant collateral. Among other things, the Irish government and central bank subsequently agreed that the Irish government’s promissory notes which formed part of the collateral would be exchanged for longer-term Irish government bonds with lower coupons. The Irish central bank ultimately pays interest on the new bonds to the rest of the Eurosystem at the main refinancing rate, while the Irish government’s interest payments are collected as net income by the Irish central bank and can be used for distributions to the government at a later date. This approach underlines the increasingly close and problematic ties between monetary and fiscal policy in the European monetary union. Responsibility for providing any assistance to individual member states in servicing their sovereign debts should lie with the European Stability Mechanism (ESM), which was established for this purpose.

Full document (from Monthly Report)

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