On the Wednesday before Easter, there came an Easter egg in the basket for the German economy. In February, the factory orders jumped to a 4.8 percent growth compared to January, as graph one shows. This was much higher than the expected increase of 0.3 percent for February. This kind of figure undeniably gives hope for a positive spring for the German economy, and it is possible to push in that direction if hard work is put into the project and the right decisions are taken.
It should be mentioned that the monthly factory orders traditionally fluctuate quite a lot. The increase in January was adjusted down to plus 0.5 percent, and a good bet is that the upbeat figure in February will also be adjusted down.
Anyway, even if these adjustments are subtracted, I note that the factory orders during the last three months have shown a positive development. It follows suit with the important IFO index where optimism among German companies also has shown progress in recent months.
Difficulty of adding more Easter eggs
Ahead of 2023, many European (including German) business leaders expressed great uncertainty about their expectations for this year which we are now well into. I have never agreed with the bleak view of 2023, especially because a large part of the global economy will experience economic progress to a greater or lesser extent this year. Though, in the global picture, my biggest concern is precisely Europe, and clearly, including Germany.
For Germany to surprise with a positive economic spring, more Easter eggs would have been needed in the basket, but this is exactly where the difficulties become obvious. Sometimes, it feels like many people are tired of hearing about inflation, which I understand very well. But one cannot hide from the problem, which applies to private households, investors, companies, etc.
On that front in Germany, the bad news is, that the development is actually worsening instead of mitigating. Graph two shows the development of the overall price inflation in Germany where one can recognize some of the energy price increases as an explanation for the high inflation. It is partly an explanation that has been valid since inflation started to skyrocket but the core reality is now looking grimmer.
The core inflation, also shown in graph two, is rising every month which was the only development that should have been avoided. Putting it quite bluntly, and unfortunately also harshly, for every month the core inflation increases, the risk of increased instability in the economy and in society grows.
Increases in core inflation really put pressure on households and force companies to pass on price increases – it is unhealthy cost-push inflation that is very difficult to get under control.
Perhaps the biggest challenge in combating inflation is actually who is going to bring inflation down. Another unpleasantness is of course the economic slowdown that combating inflation almost inevitably will mean.
I basically argue that economic history shows those who created inflation must acknowledge what they have caused, search back to the original roots of the inflation, and subsequently change these conditions.
Expressed more operationally, it is my position that the majority of inflation in the Western economies can be explained by public overspending, such as the economic stimulus due to the Covid-19 crisis.
The correction — and thus, the economic cure — is to take the steam out of public consumption and fiscal stimulus. The right solution package also includes seizing the economy after the slowdown that comes and having a plan to get the economy back on track after a possible downturn.
That is why I thought it was very interesting that the German government decided to hold a large-scale coalition meeting on 2nd April. It was necessary as the disagreements within the government are so big that the current government is as dysfunctional as the previous government.
I will by no means downplay the importance of the work with the climate challenges, which also took up the full meeting time that most of the following day had to be included as well. The marathon negotiations confirmed the planned expansion of the German highway network, and an agreement was reached to provide subsidies for new forms of heating in private homes.
For the German economy, private households, business enterprises, and investors, I say it would have been fantastic if the same politicians had spent time on how they will roll back inflation. But unfortunately, that did not happen, and therefore my assessment remains that Germany is one of the countries that still should be underweighted in the investment portfolios.
It may seem like a negative assessment. But my position is actually that not so many additional initiatives are needed to get more Easter eggs in the German economic basket because my assessment of the global economy is fundamentally reasonably optimistic. For one like the German economy, it is largely about correcting a range of conditions, and thus exploiting the global economic progress that exists after all. That possibility has once again been put on hold, and inflation will rage in Germany instead.