Summary of the March Monthly Report
Germany’s balance of payments in 2013
The German economy ran a current account surplus of €206 billion in 2013, which equates to 7½% of gross domestic product (GDP). This represents a moderate rise of €7½ billion on the same period last year. The tendency observed since 2010 continued, with the reduction in the current account surplus vis-à-vis euro-area partner countries being more than compensated for by a sharp increase in net income from non-European transactions. Meanwhile, Germany’s surplus no longer represents a major imbalance within the euro area. The adjustment processes have already had a noticeable effect, with the German economy once more making a significant contribution in the form of robust import growth during the reporting period, in contrast to 2012.
The increase in the current account surplus vis-à-vis non-euro-area countries in 2013 was caused by the fact that the economic upturn in Germany was not reflected by an increase in the demand for goods outside the euro area. Owing to a considerable fall in prices for internationally traded commodities and semi-finished products, the German economy also profited considerably from the terms of trade. Exports remained listless in 2013. This was mainly due to the fact that demand for German-made high-quality capital and consumer goods in the emerging market economies was more subdued during the reporting period than in the preceding years, during which it had expanded sharply.
In 2013, Germany’s financial account with the rest of the world continued to be influenced by the financial and sovereign debt crisis. However, it also reflected Germany’s current account surplus. On balance, net capital exports in 2013 were high (€250½ billion). These were primarily accounted for by German portfolio investment abroad and unsecuritised credit transactions by credit institutions. German banks recorded a strong outflow of short-term foreign funds, some of which had been received at the height of the financial crisis. This was counterbalanced, in part, by the sharp decline in the Bundesbank’s cross-border exposures as part of the TARGET2 payment system. The direct investment sub-account – which is generally guided by longer-term considerations – likewise recorded capital outflows. Moves by German firms to further expand their presence abroad were the main reason for this.
Shadow banking in the euro area: outline and monetary policy implications
From an economic perspective, one of the financial system’s key tasks is to provide the non-financial sector with suitable options for funding and acquiring financial assets. This intermediary role is increasingly also being fulfilled by the shadow banking system, ie by financial enterprises that operate outside the regular commercial banking system. This includes financial special purpose vehicles and funds (money market, investment and hedge funds). In addition, specific activities (including securitisations and securities financing transactions) also count as shadow banking.
The growing importance of shadow banking entities is often analysed from a financial stability perspective. However, it is also relevant from a monetary policy stance as it affects monetary analysis on the one hand and because it can impact on the effectiveness of monetary policy measures on the other. For instance, the provision of bank-like services by shadow banking entities or greater interaction between shadow banks and commercial banks may imply an incomplete or distorted representation of the money and credit supply, which is relevant for assessing economic activity and the trends in the price of goods. So far, in its monetary analysis, the Eurosystem has addressed the risk that increased shadow banking activity could reduce the informational content of monetary indicators by incorporating selected shadow banking entities (money market funds) into the calculation of monetary aggregates and by adjusting these aggregates for certain transactions (eg securitisation). These corrections – in combination with an increase in the analysis of sectoral shifts in money holding – currently ensure that the data on monetary aggregates are sufficiently robust.
Given the financial sector’s central role in the transmission of monetary policy, the greater importance of shadow banks could, in principle, also change the way in which monetary policy works. As the corresponding research for the euro area is still in its early stages – which is likely to be due to the insufficient availability of statistical data on the shadow banking system – it is only possible at this point to bring forward some conceptual considerations. First, the increase in shadow banking activity is likely to expand the non-financial sector’s range of financing and investment opportunities, which, by itself, tends to weaken the transmission of monetary policy measures via commercial banks. Second, an increase in shadow banking also implies that market-based variables have become more important in monetary policy transmission, in particular asset prices, which, taken in isolation, increases the effectiveness of monetary policy measures. Overall, it is therefore not necessary to assume that the greater importance of shadow banks will change the effectiveness of monetary policy but rather the relative importance of individual transmission channels.
Manufacturing enterprises in Germany: their vulnerability to crises – findings of a risk analysis using year-end data
The longer the financial and economic crisis goes on, the greater becomes the awareness of the need for systematic observation and periodic analysis of the risk potential in economic systems. While studies are conducted regularly in the banking sector, say, in the form of stress tests at least of the largest institutions, there have so far been only a few cross-enterprise approaches to measuring and evaluating risk for the real sector, even though the existing close links between the real economy and the financial system mean that macroeconomically relevant interactions are quite possible.
This Monthly Report article systematises the determinants of the risk of non-financial enterprises and studies them on the basis of corresponding risk ratios using a comprehensive dataset from the Bundesbank's Financial Statements Data Pool. The focus is on the enterprises’ vulnerability to crises, which reveals itself in poor results and which can often provide important clues about shortcomings and structural irregularities in the corporate sector long before enforced market exits.
The empirical analysis makes it clear that enterprises which are vulnerable to crises are to be found mainly in industries where demand is highly sensitive to the business cycles and in sectors of the economy with structural problems. Particular drivers of risk in the financial sector are a high level of debt, which places a strain on profitability through the negative leverage effect, and, in operations, relatively rigid cost structures in the case of staff costs and other operating income and charges. Evidently, considerable cost stickiness arises initially in crisis situations if shortfalls in demand means the affected enterprises have to cut back their output, leading to a further deterioration in profitability and liquidity.
The findings of the study also suggest, however, that German industry possesses a high risk absorption potential. As a result of this, not only has it come through the financial crisis quite well so far; it is also more the case that it has stabilised the financial system, rather than placing a further strain on it owing to adverse feedback effects. Even in the case of most of the enterprises that were rated as vulnerable, it has been possible to remedy the weaknesses in profitability that had become apparent within a short space of time. Although a very open economy, such as Germany’s, has a generally high risk exposure, a large and key part in this is likely to have been played by the German economy’s sound price competitiveness and cost-oriented flexibility in production as well with its high degree of regional sales diversification.