• False start. It is difficult to imagine a worse start to the year in Germany: Foreign demand basically collapsed, construction activity plummeted because of both a harsh winter as well as falling investment, and industrial production remains in free fall (pages 3-6 & chart below).
  • Scrapping premium. The situation would have been even worse had it not been for the old car scrapping premium! The German success in terms of economic stimulus ensured private consumption was able to post tangible growth in the first quarter. And even the second quarter should still profit from this.
  • Low point. But even the billions in public incentives failed to prevent real GDP from contracting by roughly 2½% q-o-q in Q1 (IV/08: -2.1%). A similarly strong decline has been reported only once in the last 40 years. The miserable start to the year also means we have to lower our annual GDP forecast from so far -3.5% to -5%.
  • Hope. This does imply that the worst is now probably behind us and that the pace of the recession is slowing. There can, however, be no talk of the economy stabilizing any time soon. Despite some glimmers of hope coming from sentiment and leading indicators, they remain deep in recession territory. And the trend reversal in the (EMU-wide) growth of M1 should be interpreted with caution (pages 7-8).

Further topics:

  • Weekly Comment: Could economists possibly be wrong (again)?
  • EMU (I): M1 – signaling an economic turnaround (page 7)?
  • EMU (II): Credit cycle – the ECB must react (page 9)!
  • US: Labor market misery will last up to the end of the year (page 12).
  • Data outlook: Global industrial production to plummet further (p. 15).
  • Market outlook: EUR to weaken; little demand for bonds (page 20).

Could economists possibly be wrong (again)?

Equity markets are taking a reality check after a month-long bullish run that lasted into the first days of this month, defying the ever gloomier mood of economists. In all likelihood, it will prove to have been a bear market rally driven by a closing of short positions. I think it will take several more months before a more durable improvement in investor confidence can emerge.

Investor confidence will face some formidable headwinds in the coming months: even the more optimistic forecasts envision a significant rise in corporate defaults and unemployment rates. Consumers will get a measure of relief from decelerating inflation, but this will not be able to offset the greater sense of job insecurity and financial uncertainty. Against this background, it will be hard to see the more mixed tone of the macro data as anything more than a statistical correction after the precipitous drop of the last two quarters – as the assumption, in other words, will be that the economy is hitting the bottom with a “thud” rather than a “boing”. Believing in the effectiveness of policy measures will still seem more like an act of faith than a rational expectation.