Summary of the June Monthly Report
Outlook for the German economy – macroeconomic projections up to 2016
The German economy made a very buoyant start to 2014. Although it is unlikely to maintain the high rate of growth seen in the first quarter, there is a good prospect of fairly strong economic growth over the forecast horizon. This is predicated on Germany's strengthened domestic economy as well as the ongoing improvement in the economic situation of the industrial countries and the gradual recovery of the euro area. Germany's domestic economy is reaping the rewards of low unemployment, strong immigration, households' and governments' comparatively strong financial situation, elevated consumer sentiment, low corporate leverage and balanced price-cost ratios as well as very favourable funding conditions. By contrast, a tighter labour market going forward, which will be aggravated by measures such as the option of drawing a full pension at 63, will weigh on economic growth.
Under these conditions, the German economy is likely to expand by almost 2% this year in calendar-adjusted terms, followed by a gradually declining pace of growth over the next two years; in terms of unadjusted data, this would translate into growth rates for gross domestic product (GDP) of 1.9% in 2014, 2.0% in 2015 and 1.8% in 2016, as calendar effects are fairly pronounced in some cases. As these rates of expansion significantly outstrip potential growth, aggregate capacity utilisation will rise noticeably. The increase in employment needed to lift economic output this much would have to be fed primarily from immigration, given that unemployment has largely been reduced to a frictional and structural core and labour market participation is already fairly high. The anticipated tensions on the labour market are likely to be accompanied by an acceleration of wage growth, with the new general minimum wage another contributory factor.
The steeper wage growth will be reflected in higher rates of inflation. As measured by the Harmonised Index of Consumer Prices (HICP), inflation could rise from 1.1% this year to 1.5% in 2015 and 1.9% in 2016. This forecast assumes unchanged exchange rates and easing crude oil prices. Excluding energy, the rate of price increase could climb to more than 2% in 2016.
On the demand side, the main risks relate to the external environment. Heightened geopolitical tensions or a renewed flare-up of the crises in the euro area would dampen GDP growth not only through the external trade channel, but also by affecting confidence. On the supply side, there is considerable uncertainty as to the scale of future migration flows, the reserves that could still be mobilised on the domestic labour market as well as the effects of the minimum wage and the option of retiring on a full pension at 63. If supply-side conditions prove more favourable than assumed here, GDP growth is likely to be stronger and wage pressure weaker. In a scenario in which shortages increase more rapidly, wages and prices, at least, would rise more quickly and real economic growth could fall short of the path outlined in the Bundesbank's macroeconomic projections.
Europe's new recovery and resolution regime for credit institutions
Ever since the onset of the financial crisis back in 2007, governments looking to preserve financial stability have repeatedly been forced to use public funds to bail out credit institutions that had run into difficulties. In an effort to prevent such bail-outs going forward, and also to facilitate the resolution of more complex banks without resorting to tax resources, policymakers joined forces at the global level to define a set of key attributes for resolution regimes. In the European Union (EU), two legislative projects were rolled out to put this initiative into practice – first, the Bank Recovery and Resolution Directive (BRRD), a piece of legislation which applies across the entire EU and harmonises the recovery and resolution toolkit but leaves its use at the discretion of national resolution authorities, and second, the Single Resolution Mechanism (SRM). The latter builds on the tools created by the BRRD and augments the establishment of the Single Supervisory Mechanism (SSM) for banks, a process which is already well on the way to completion. Banks in member states participating in the SSM – ie member states which have adopted the euro as their currency as well as any non-euro-area member states that “opt in” to the SSM – are subject to the SRM, an institutional mechanism with a Single Resolution Board (SRB) at the European level as well as a Single Resolution Fund (SRF). Contributions to the SRF raised at the national level will be progressively mutualised over a transitional period of eight years.
The BRRD represents a major step towards restoring the principles of the market economy, which dictate that if a credit institution fails, its shareholders and creditors should be first in line to absorb the attendant risks and losses before a dedicated resolution fund financed by the banking industry steps in. This is an objective which the BRRD chiefly seeks to achieve through the new bail-in tool, though it does allow exceptions to the rule that losses should be absorbed primarily by shareholders and creditors.
The SRM forms part of the broader banking union reform project and is a crucial pillar complementing the SSM, which, having already been adopted, is set to take charge of supervising euro-area banks in November 2014. The introduction of the SRM means that liability and control are two sides of the same coin once more. However, the set-up which legislators have now arrived at has a complex set of institutional decision-making mechanisms, and the prevailing primary law framework means that it involves legal risk. The SRM in its current form should therefore merely be a stepping stone towards creating a robust foundation under primary law. It remains a matter for policymakers to do what is necessary to encourage permanently sustainable policymaking going forward. This presupposes that the scope for influencing the quality of bank balance sheets on the one hand and responsibility for the repercussions of bank insolvencies on the other are aligned at the same level – not just for bank failures that lie ahead, but equally so for the legacy assets which already exist in the banking sectors.
Changes in the methodology and classifications of the balance of payments and the international investment position
The German balance of payments statistics provide a detailed statistical statement that summarises the economic transactions between residents and non-residents during a reporting period. The methodological framework for these statistics will be brought into line with the revised standard of the International Monetary Fund (IMF) when the data for the reporting month of May are published in July 2014. The balance of payment statistics will then be consistent with the framework set out in the sixth edition of the Balance of Payment and International Investment Position Manual (BPM6). The new rules are binding for the EU member states by virtue of a regulation passed by the European Commission.
Moreover, the reporting requirements for Eurosystem national central banks vis-à-vis the European Central Bank (ECB) are stipulated in detail in an ECB guideline. Although the basic structure of the balance of payments, which includes the current account, the accumulation account and the financial account, will be retained under the new regulations, the existing framework for recording and reflecting international economic relationships has been modified in many respects in order to take account of economic and technical changes. New sub-account classifications, more detailed breakdowns and the inclusion of transactions that were not previously recorded will increase the informative value of the statistical accounting system. All in all, the methodological frameworks for the national accounts and the balance of payments have now been fully harmonised.
This first fully integrated system of accounts reflects the greater emphasis on the connection between the flow variables in the financial account and the stock variables in the international investment position. As a result, it can also reveal whether changes in the individual positions are based on transactions, valuation effects or other adjustments. Following this logic, the use of signs in the financial account has now changed. Net capital exports will now be viewed as an increase in net external assets and therefore – in a change to previous practice – recorded with a positive sign. The relationship between cross-border assets and the resulting income flows will also be a prominent aspect. The quantitative impact of the methodological changes on the balances of the major sub-accounts is relatively small.
The amount by which the current account balance has been lowered for purely methodological reasons is on a similar scale to the normal annual revisions. As a result, the ratio of the current account to gross domestic product (GDP) monitored by the European Commission as part of the Macroeconomic Imbalance Procedure has been revised downwards slightly. It is now no longer above the indicative threshold, as it had been previously since 2007.
Cash withdrawals at the point of sale: implications for cash holding
This article in the June Monthly Report aims to investigate the role played by point-of-sale (POS) withdrawals – ie withdrawals of cash at supermarket and filling station checkouts – for consumers in Germany when obtaining cash and the implications that this has for their cash holding. The empirical analysis is based on data from the Bundesbank's 2011 study on payment behaviour, which was the first time that questions were asked specifically about this new option for withdrawing cash.
A descriptive analysis of the data shows that POS withdrawals are being used only to a small extent in Germany at present. An average consumer in Germany covers no more than 1% of his or her annual cash requirements using this form of cash withdrawal. Of those surveyed, 92% stated that they had not made use of this option at all so far. Persons making POS cash withdrawals do so mainly because they have forgotten to obtain cash elsewhere in another way. The most commonly cited reasons for not making POS withdrawals were a sufficiently large number of available automated teller machines (ATMs) located nearby, a lack of confidence in retailers, and not being aware of the existence of this facility.
The probability of making a POS withdrawal is higher for persons living in rural areas and who hold an account with a bank which has a low ATM coverage. Furthermore, it is evident that persons making more frequent use of POS withdrawals keep a lower stock of cash on average. The resulting effects on the amounts of cash held for transaction purposes in Germany are, however, negligible in macroeconomic terms – and would remain so even if this facility were to be used more widely in future.