Eurozone Watch

Internationally, there was quite a lot of controversy about the ECB's hike in July. The Munich ifo institute hence asked a handful of German experts in their latest ifo-Schnelldienst for their assessment, among others me. I was happy to contribute.

Last week, the issue was published and I was a little surprised to read that I was the only one really criticising the step. Jörg Krämer from the Commerzbank, Ulrich Kater from the Dekabank and Werner Becker from the Deutsche Bank – while not all enthusiastic about the interest rate hike – were at least to a certain extent justifying the rate increase. I, in contrast, strongly criticised this step, as I had done earlier on Eurozone Watch (here and here).

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Today's data releases have shown that the state of the German economy is worse than even the pessimists have thought so far. Details from Q2 GDP data revealed that there were fundamental rather than merely technical factors behind the siginificant drop of GDP in the second quarter (0.5 percent quarter-on-quarter or 2.0 percent in annualized terms). Even taking out the drop in construction activity (which was a technical reaction to an extremely strong increase in Q1) and the inventory correction, economic growth basically came to a standstill this spring. Private consumption has now been contracting three quarters in a row and investment in equipment and software contracted sharply (possibly as a side effect of the corporate tax reform which was enacted on January 1 as has been criticised on Eurozone watch for its contractionary effects before – see here and here).

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