- Germany’s ZEW economic sentiment hit by the rising tensions in Russia/Ukraine…
- …sound economic fundamentals to support German economy in second half of the year
- Yellen’s dashboard of labour market indicators improves with job survey (JOLTS)
ZEW economic sentiment lowest since end-2012
Germany’s ZEW economic sentiment dropped from 27.1 in July to 8.6 in August, reaching its lowest level since December 2012. The consensus forecast was for a decline to 17. The ZEW indicator is purely sentiment driven and probably was hit by rising geopolitical tensions related to Ukraine/Russia and the fears of escalation of the conflict.
Direct impact of Russian conflict not to be exaggerated
Within the eurozone, the German economy is one of the more exposed countries to Russia, but the direct impact of the Ukrainian/Russian crisis on the German economy should not be exaggerated. Merely 3% of German exports are going to Russia, which is equal to only 1.3% of German GDP. Although, Germany has a relatively high dependence on Russian energy (around one third of its gas and oil imports originate from Russia), we think it is unlikely that the crisis will escalate into a disruption of Russia’s energy supply to Europe. The details of the ZEW report show that participants to the survey not only became more negative about the German economy, but also about the eurozone economy as a whole (sentiment declined from 48.1 to 23.7). That said, the majority of the respondents still expect economic conditions in Germany as well as the eurozone to remain the same during the next six months, while the share of the respondents that expect improvement in conditions still is higher than the share that expects deterioration.
Sound fundamentals to support economy in H2
Meanwhile, the fundamentals of the German economy are sound and we expect GDP growth to pick up in the second half of this year, following what probably was a very weak Q2 (partly as payback for an exceptionally strong Q1). Private consumption growth will continue to be supported by robustly growing employment and rising real wages, while fixed investment should benefit from high profitability and historically low interest rates. Finally, the strengthening of the global economy and a weaker euro should support export growth during the coming quarters. Therefore, if tensions in Ukraine/Russia fade, the German economy seems to be heading for solid growth in the remainder of the year.
Upswing in US labour data signals slack is ebbing away
Yesterday’s June Job Openings and Labor Turnover Survey (JOLTS) was released. Although this report lags the official labour market report by one month, it has acquired significance since the Fed’s Chairman Janet Yellen uses some of the data, including the amount of job openings and separations, as part of the metrics of labour slack. The Chairman argues strongly that much of the weakness in the labour market is cyclical and can, therefore, be tackled by loose monetary policy. In June, the job openings rate edged up to 3.3% from 3.2%, while the pace of hiring rose to 3.5% from 3.4%. The separations rate remained unchanged (3.3%). As for the July NFIB survey (small business optimism) released earlier yesterday, 13% of firms reported that they were adding an average of 2.9 workers per firm each month. This is a 1 percentage point increase from the prior month. This suggests that the recent upsurge in job openings will continue in July. From a broader prospective, the recent influx in job openings should be positive for wage growth. Job openings is, to some degree, a measure of labour demand and the recent increase in job openings suggest that demand for labour is improving. All in all, the labour market recovery is strengthening, and slack is ebbing away. This could prompt the FOMC to gradually move towards raising rates next year, probably around June.