Mr. Burkert, in recent months the German economy has proven more robust than many people anticipated. With growth recently coming in at 0.1 percent, the downturn forecast by LBBW failed to materialize. Is a recession off the cards after all?
Uwe Burkert: With the economy having seen negative growth in the summer for the first time in almost ten years, we had expected things to be worse. The mini-upturn in recent months has been driven by consumer spending in particular. The genuinely stable situation on the employment market has made it possible, while construction activity also remains extremely active. And it is true that the German economy is experiencing a downturn.
In other words, the widely discussed political risks like Brexit and the simmering trade war are yet to have an impact? Or has their impact been overstated by economists?
Burkert: The consequences can already be seen when it comes to incoming orders. Exports are also lagging. The impact of these factors is being felt, and this is also reflected in companies’ balance sheets. In December 2018, LBBW Research predicted growth of 1.4 percent for the German economy for the current year. This was too optimistic, and we lowered our forecast considerably after the first half of the year.
Your outlook for 2019 was entitled “Reasons for Caution”. Do you feel vindicated?
Burkert: Sadly, yes. The year that is coming to a close has been characterized by global economic weakness. Globalization has been shackled. In this era of “my country first”, trade barriers are being erected all over the world, whether in the form of tariffs or other non-tariff obstacles. In any case, the impact is the same: Trade is being restricted or prevented. All in all, this has put a significant brake on the global economy. This is one of the reasons we have entitled our new 2020 outlook “Reason to Rethink”.
The United Kingdom will elect a new parliament on December 12. It remains to be seen what happens with the Brexit process after that. In the US, the impeachment proceedings are expected to be passed by the House of Representatives before being blocked in the Senate with its Republican majority…
Burkert: … meaning the trade dispute between the US and Europe, as well as the US and China, will continue. The uncertainty will remain, becoming a constant presence for companies and something they have to include in their planning.
How can you plan for uncertainty?
Burkert: Investment decisions are being put on the back burner. Export planning has become more conservative. It is a bit like doing a foxtrot on raw eggs.
What is LBBW’s forecast for the year ahead?
Burkert: We do not anticipate any significant growth impetus for the world economy. If anything, the Chinese economy is losing momentum and the US appears to be heading toward a slowdown. All in all, we are forecasting global economic growth of 3.1 percent in 2020.
And what about Germany? Will the German economy slip into recession in the next year?
Burkert: As things stand, we are forecasting mini-growth of 0.6 percent. The upside potential of our forecast is limited, whereas the aforementioned political risks could lead to a significant downturn if their impact materializes in full. As such, our view is broadly in line with that of the German Council of Economic Experts.
So the sky is no longer the limit?
Burkert: The near-decade-long boom is over. One might sarcastically say that we have politicians to thank for providing turbulence instead of a clear guiding hand.
As a political economist, how do you interpret the latest election results in Germany and other European nations? Is the stable center of old now drifting to the extremes? And what does this mean for companies and their business?
Burkert: In the state elections in Thuringia, the major parties failed to unite a majority of the voters behind them for the first time. This is a situation we have seen in one form or another for some time now in Poland, Hungary, Spain, and the Netherlands. In many cases, voters are using their trip to the ballot box as an opportunity to register a protest against the established parties. The fundamental shift in mood is a cause for concern when it comes to the undeniable advantages of the global distribution of work and resources. The “my country first” mentality can only end in tears. If we turn back the clock on globalization, the consequences for each and every one of us will be disastrous.
So more global action is required, not less?
Burkert: If we are thinking in terms of global economic growth, another wave of globalization is the only way to deliver sustainable impetus for the world economy.
Many people are placing their hopes in digitalization and Industry 4.0 when it comes to achieving this.
Burkert: And rightly so. Industry 4.0, i.e., machine-to-machine communication, is also dissolving the last traditional clusters. The physical proximity of producers is no longer the most important thing, but the communication between their machines – whether they are located in California, Taiwan, or Italy. I expect the structural change in the economy to provide a major surge in growth in the medium to long term.
Even for the labor market? Not every employee will be able to ride the Google bandwagon …
Burkert: There will be new professions, new jobs. Labor market studies suggest that 60 percent of future jobs do not even exist yet.
Will sentiment remain so robust in light of the near-full employment in Germany?
Burkert: The skills shortage in Germany has been more of a barrier to growth lately, and there are no indications that this situation will change significantly in the near future. However, we are currently seeing the leading indicators of structural change starting to take hold in some industries. The prime example is the German automotive industry, which is working hard to diversify its business model beyond the combustion engine.
There has been fierce criticism of the European Central Bank’s monetary policy lately, even from within the ECB Governing Council. Do you endorse their arguments?
Burkert: As always, there are two sides to this debate. Obviously, the ECB’s monetary policy is not helping savers. And the current interest rate is not useful to banks either. But we are Europe. And without this monetary policy, the nations of southern Europe in particular would be having a far harder time than they are right now – with consequences for the euro and the European economy. And that in turn would have a direct impact on the German economy.
In other words, you do not expect to see a turnaround in interest rate policy for the time being?
Burkert: If anything, based on what Christine Lagarde has had to say at the ECB in Frankfurt of late, a further relaxation of monetary policy is more likely than a policy turnaround. The new president will stick to her guns and continue to demand reform at a political level. This is something that is being neglected in the wider debate. For a long time now, the message emanating from the tower in Frankfurt has been that monetary policy alone cannot fix things in the long term. Financial and economic policy needs to finally offer solutions for the structural weakness in some EU countries.
Are monetary policy and the availability of cheap money also fueling the stock market? The DAX recently climbed to almost 13,300 points.
Burkert: All investment asset classes are currently enjoying huge demand thanks to the high level of liquidity. Equities, real estate, private equity …
Are these highs justified? After all, we began by talking about a whole bundle of risks.
Burkert: It is certainly possible to question the fundamental data, especially the absurd entry prices in some cases. But as long as the supply of money from the central banks in the US and Europe remains wide open, capital will continue to seek out the best host.
Are you willing to make a forecast for the DAX?
Burkert: Looking into the economists’ crystal ball, the stock market is expected to remain stable. The market is being driven by utilities and telecommunications, pharmaceutical, and technology companies in particular. In the long term, we expect the DAX to rise by seven percent per year over the next five years. My forecast for the end of 2020 is 13,500 points.