Euro Politics: Debt brake is a key constraint on spending – During the weekend, the leadership of Germany’s government coalition partner SPD changed. Before the leadership vote, the newly elected SPD leaders, Norbert Walter-Borjans and Saskia Esken, had been critical about the party’s coalition with the CDU/CSU and said they wanted to renegotiate the coalition deal. They were in favour of raising the minimum wage and wanted more investment in infrastructure and climate protection, if needed by raising government debt and breaking the zero-deficit rule that is written into Germany’s constitution. Leaving the coalition would also be an option, in case renegotiation of the coalition deal were not feasible. This has fuelled speculation about the possibility of a big fiscal boost in Germany.
Still, comments to the press since the change of leadership at the SPD suggest that the chances of this happening are slim. To begin with, one of the two new leaders, Mr Walter-Borjans, has said that his prime goal is not to break up the coalition, but merely to change the coalition contract. Next, prominent members and regional leaders of the SPD have urged the two new leaders to prevent a split within the SPD, which could happen if the current coalition government collapses. On the other hand, CDU/CSU officials, including Chancellor Angela Merkel, have mentioned that they will not renegotiate the coalition agreement, but that they are open to discussing tweaks and adjustments, which would be in line with the German tradition of the ‘keeping things together’ style of policy making. All in all, it seems the probability of a breakup of the coalition, which would result in either early elections or a minority government still, are limited. The SPD will hold a party conference on 6-8 December, when they will have to approve the new leadership and vote on the continuation of the government coalition.
Even in the unlikely event that early elections were held, the chances of a big fiscal boost seem low. To begin with, according to current government plans, the general budget surplus would decline from around 1.2% GDP in 2019 to 0.2% in 2021. This means that, staying within the rules of the debt-brake, extra spending of around EUR 15-20bn would be possible during the next few years, which would raise annual GDP growth by roughly 0.2-0.3pp. Alternatively, a bigger fiscal boost would mean that the debt-brake rule needs to be changed, which would require two-thirds majorities in each of the two chambers of parliament. Looking at the current distributions of the seats in parliament as well as recent polls for new elections, the parties in favour of changing the debt-brake rule would miss the two-thirds majority by a wide margin. (Aline Schuiling)
US Macro: ISM points to further investment and jobs weakness – The November manufacturing ISM PMI unexpectedly fell back yesterday, with the weakness concentrated in the forward-looking new orders index – which was back at the August low of 47.2 – and the employment index, which was not far off the recent low at 46.6 (September: 46.3). The data suggests that, in contrast to China, manufacturing has yet to find a bottom in the US, and points to continued weakness in investment and jobs growth. The new orders index is a strong leading indicator for fixed investment in the US, and suggests flat to mildly negative growth over the next two quarters. The employment index tracks the manufacturing payrolls, and suggests an additional leg lower in Friday’s November jobs data. Indeed, looking at the slowdown in payrolls growth over the past year – which has fallen from an average 223k per month in 2018 to 156k over the past six months – the bulk of this is explained by the weakness in manufacturing, which went from adding 53k in jobs per month on average in 2018 to just 2.2k per month in the past 6 months (the October reading was negative for the first time since 2016). We expect this weakness to ultimately hit consumption, which has thus far been resilient to the industrial sector downturn. As such, our growth forecast for 2020 remains well below consensus at 1.3% (consensus: 1.8%), and we expect this to drive another Fed rate cut in Q1 2020. (Bill Diviney)