Head of Macroeconomic Research
Summary: Yesterday's last TV debate between the three lead candidates (Spitzenkandidaten, in German) confirmed the current momentum in the German election campaign.
The centre-left SDP leads Refinitiv’s polling aggregate by four points over the CDU/CSU after rising more than nine points in the last eight weeks. Assuming there are no last-minute surprises, the SPD candidate, Olaf Scholz, is well-positioned to succeed Angela Merkel as German chancellor. Consequently, we expect the domestic fiscal policy to turn more expansionary, targeting both green investment and digitalisation. In terms of European implications, it could open the door to a reform of the rules of the Stability and Growth Pact (SGP). But a reform of the debt brake introduced in 2009 following the Global Financial Crisis is unlikely.
Two government options: The last TV debate confirmed the current trends in the German campaign. According to the latest Forsa opinion poll (see chart below), support for the SDP is at 23.6% - far ahead of the CDU/CSU (19.3%) and the Greens (17.3%). The pro-business FDP (Free Democratic Party), which could play kingmaker in this election, is stable at 12%. This confirms the trend of Refinitiv’s polling aggregate mentioned in the introduction. My non-scientific guess is that the next government will certainly be a coalition of the SPD, the Greens and the FDP – the so-called Traffic Light coalition. Another option could be a Jamaica coalition between the centre-right CDU/CSU, the Greens and the FDP. But CDU Armin Laschet’s low popularity is a major obstacle. Expect tough government-forming negotiations.
No changes to the debt brake: A reform of the debt brake, which limits the Federal Government’s structural net borrowing to 0.35% of gross domestic product, is unlikely. It would require constitutional amendments. In addition, this is one of the two red lines along with no tax hikes drawn by the FDP. The SDP, the CDU/CSU and the Greens are fine with it. They will probably discuss a green investment package which would not be part of the budget. A more gradual re-introduction of the debt brake is a possibility too.
Green is the new black: German politicians acknowledge there is an urgent need for more investments, especially to reach a low-carbon society. The Greens advocate for €500bn in climate change investment over the next ten years (about 1.5% of GDP per year). The SPD has been less explicit. It seems to aim for something around 1% of GDP in green investment. The CDU and the FPD don’t put a number on it. But they also call for sizable green investment. With the risk of a major energy crisis hitting Europe hard this winter (see “For how long equity markets can ignore the energy shock?”, by Peter Garnry, 14 September 2021), we expect the next government will create the right conditions to stimulate the green transition. In our view, funds should be allocated to controllable renewable energy (hydroelectricity and biomass) and not to variable renewable energy (wind power and solar power). The former must be an integral part of the energy mix. The latter is not useful since it is not able to supply a steady supply of electricity. Hopefully, the next government will also backpedal on the decision to exit nuclear power.
Digitalisation and other investments: We believe the next government will create incentives for the private sector to do investments, especially for the digitalisation of the economy. Much more efforts will be needed to modernize and digitize the country’s administration. The pandemic served as a wake-up call for many. People had issues working from home due to patchy internet connections. Schools lacked basic technology for remote learning, for instance. This is due to a persistent lack of public investment over the past ten years. But it is also partially explained by the division of power enshrined in the constitution. Germany's sixteen states shape their own policies on areas including health, culture, and education. The creation of a ministry of digital affairs could improve coordination between the federal government and states.
Welcome changes for the EU integration: A Traffic Light coalition government would have more positive implications for European integration and EU-level fiscal spending than a Jamaica coalition. We could see a pace for the reform of the rules of the SGP to allow for more public investment, in the future. We could also see faster implementation of an EU digital tax and a minimum global tax. It would put less pressure on the European Central Bank to exit emergency monetary policy measures too.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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