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Source: FRED, Fed, St. Louis

The central bank turnaround

The German government started the year by lowering the expectations for the GDP growth this year to 1 pct. It comes after several economic organizations have corrected and lowered their expectations. However, 1 pct. is remarkable, as the German central bank has announced shortly before Christmas of a somewhat higher estimate and even predicted rising growth GDP growth rates this year and next year – the central bank’s expectation is nothing less than something of a mishap, which is unusual.

On the 1 pct. in growth, there is another remarkable aspect which also has a link to the forecast from Bundesbank. One main reason behind the central bank’s expectation of solid growth in 2019 is the new public economic stimulus that will be pumped into the economy this year.

When the new German government coalition was negotiated and agreed from about a year ago, an economic stimulus package for 2019 was a part of the agreement. Without this additional stimulus, the consequence would have been that Germany’s GDP growth would have dropped to almost zero pct. this year, which alone is not only very significant but also alarming. The downwards revision of growth is fully in-line with the factory orders for December (graphic one) that was published last Wednesday. The factory orders fell 1.6 pct. compared to the month before, though the financial markets actually had expected a small plus in December.

The President of the European Central Bank (ECB), Mario Draghi, has visited the European Parliament a few times in January to give testimonies. Not that it is unusual, but his comments were very interesting and mirrored the economic headwind blowing across Europe, including the one from Germany. Draghi surely seems to be somewhat more concerned about the Eurozone’s economy compared to just a few months ago. Until the end of last year, most participants in the financial markets expected the ECB to raise interest rates towards the end of this year. This is only by 0.10 or 0.15 percentage points, but the first in many years, thus resulting to the start of a new interest rate cycle. On the comments to judge, the rate hike is postponed indefinitely, so instead, Draghi now talks about the fact that the monetary weapons are still intact – I take it as a clear indication that the ECB does not consider any rate hike or tightening of the monetary policy this year.

In the midst of all the focus on macroeconomic pressure and lower growth in several countries, the United States still appears as a macroeconomic sweet spot, where for example, the labour market shows an impressive strength. For me, it was quite surprising when the US Federal Reserve Bank (Fed) recently announced that the prospect of more rate hikes this year is close to the unlikely. It represents quite a dramatic turn for the central bank in the world’s largest economy. I think it’s worrying, because it seems like Fed is trying to satisfy a disgruntled President Trump, and also to please the financial markets. I argue that the American economy still needs more interest rate hikes, given the current strength.

Source: Statischisches Bundesamt, Wiesbaden, Germany

It is not solely the labour market that is a sunshine story. As graphic two shows, companies are still very optimistic based on the survey in January. According to the research institution responsible for the survey, the current index corresponds to an annual GDP growth of about 4 pct.

Naturally, the financial markets responded very positively to Fed’s message. Concerning my own view on investment allocations, the changed position from Fed had a consequence as well. I am looking to increase allocations to the Emerging Markets countries already now, instead of at the end of this quarter, which was my original assessment at the start of the year.

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