Commerzbank Research Economic Outlook: Finally More Growth in Germany and the Eurozone

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  • 11.05.2021 09:30 am

Economists at Commerzbank have raised their 2021 growth forecast for Germany from 3.5% to 4.0%. They expect a strong economic recovery more than ever. “The peak of the pandemic seems to be behind us. More and more counties are loosening restrictions. The rapid pace of vaccinations indicates this as well”, said Chief Economist Dr Jörg Krämer. That means public life in Germany will gradually return to normal. “I expect a post-pandemic boom,” Krämer said, supported in part by a catch-up in spending by private households to make up for some of the consumption they had to forego during the pandemic. “Even if people spend only a portion of their coronavirus-related savings, this will give consumption a decent extra boost.” Industry, which has recently been held back by a lack of materials, should soon contribute to the strong recovery too. Despite this positive outlook, Commerzbank economists see a significant increase in corporate insolvencies. “We anticipate the long lockdown will cause a wave of bankruptcies, but not a bankruptcy tsunami similar to what we saw a good 20 years ago when the equity bubble burst,” Krämer said. The wave of bankruptcies is of course a burden, but it will not stop the economic recovery.

In the eurozone, too, Commerzbank economists believe the progress of the vaccination programmes and rising temperatures will cause incidence levels to fall for the foreseeable future and allow noticeable easing starting from the end of May. “The better-than-expected start to the year indicates the eurozone economy is set to grow by 4.5% in 2021,” Krämer said. Despite this strong economic recovery, Commerzbank economists do not yet expect a genuine inflation problem this year or next. Although producer prices are now rising significantly, they anticipate this increase will have little impact on the consumer price index. “Inflation is no longer dominated by goods, rather by services,” Krämer said. These are linked to labour costs, which, however, have risen only moderately due to the problems on the labour markets. Commerzbank economists therefore expect

a core inflation rate of only 1.1% for this year in the eurozone. In the long run, though, they see considerable inflation risks. “Countries’ hunger for credit remains just as high as the ECB’s willingness to satisfy it through bond purchases,” Krämer explained. As a result, too much money continues to circulate, which will be reflected in higher inflation when the labour markets tighten again in a few years’ time.

The ECB is increasingly coming under the influence of the highly indebted countries, according to Krämer. In his view, the bank has been pursuing a policy of implicit yield curve management, which is not a problem as long as inflation remains low. “But if inflation rises, then yield curve management forces a central bank to put out fires with gasoline,” says Krämer. Commerzbank economists continue to anticipate that the ECB in the autumn will reaffirm its expectation that the bond purchases under the PEPP programme will be phased out by the spring. “The ECB, however, has come to love the PEPP bond-buying programme, so the doves on the ECB Governing Council won’t end it next spring without a safety net. I expect the PEPP volume will be increased by a further €250 billion,” says Krämer.

We have been concerned for some time about some of the consequences of loose monetary policy, namely the overvaluation of many assets. The excess money will continue to inflate asset prices until consumer price inflation picks up in a few years,” Krämer explains. The best example is real estate prices. Real estate is highly valued, although the peak has probably not yet been reached. “The risk is real that we will have a real estate bubble in a few years, Krämer explains. According to Commerzbank economists, equities are affected by this liquidity effect too. But unlike real estate, whose prices currently know only one direction, equities also react to real economic and other circumstances. In addition, equities can be traded more quickly than real estate. The risk of setbacks on the stock markets will increase in the second half of the year, according to Commerzbank economists.

In the USA, the economic outlook has continued to brighten thanks to the advanced vaccination process and the trillions of US dollars being spent on the economic stimulus programme of the new US President Joe Biden. As a result, Commerzbank economists have raised their growth forecast for the US economy in 2021 even further, from 6.5% to 6.8%. The Fed is likely to begin tapering its bond purchases in the first quarter of 2022 – one quarter earlier than previously assumed. Commerzbank economists anticipate this move later than most economists. “The idea behind this expectation is that the Fed is under greater political pressure than it used to be,” Krämer explains. An increase in the Fed’s key lending rate is not forecast until 2024 at the earliest.

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