Current Issues Business cycle

Focus Germany October 28, 2016

Subdued industry outlook dampens wage growth

Authors Josef Auer +49 69 910-31878 [email protected]

German wages: Not doing the heavy lifting for the ECB. For a sustained pick-up in EMU core inflation we would probably need to see accelerating wage inflation. Given the substantial amount of slack in many Euro area countries’ labour markets, those countries with a healthier cyclical position – especially Germany with its large size and tight labour market – would be expected to show an over-proportional contribution to rising core inflation rates. However, German wage growth slowed in H1 2016 and there is a range of factors that are likely to also put a lid on the pick-up in 2017. The impact of labour shortage is limited by material mismatch between the qualifications of the unemployed and those sought by employers as well as substantial immigration flows. High real wage gains have pushed up unit labour costs and weighed on corporate profitability, which is further undermined by low productivity growth. Cautious wage agreements in 2016 on average stipulate only 2% wage increases in 2017. Despite a 4% increase in the statutory minimum wage, aggregate wages should increase by only around 2 ½%.

Dieter Bräuninger +49 69 910-31708 [email protected] Eric Heymann +49 69 910-31730 [email protected] Heiko Peters +49 69 910-21548 [email protected] Oliver Rakau +49 69 910-31875 [email protected] Stefan Schneider +49 69 910-31790 [email protected] Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-mail: [email protected] Fax: +49 69 910-31877 www.dbresearch.com DB Research Management Stefan Schneider Content Page Forecast tables ...............................................2 German wages: Not doing the heavy lifting for the ECB .....................................................3 German industry: Only minor output growth expected in 2017. ...........................................9 The View from Berlin. All lights on the debates about personalities and tactical gambits ........17 DB German Macro Surprise Index ................19 Export Indicator.............................................20 Event calendar ..............................................21 Data calendar ...............................................21 Financial forecasts ........................................22 Data monitor .................................................23

German industry: Only minor output growth expected in 2017. According to our forecasts, next year could see the growth rate for industrial production in Germany drop to 0.5% in real terms. Regarding output in Germany’s large industrial sectors we do not expect major outliers. We predict an increase in production in the electrical engineering industry of 1%. Output in the automotive and mechanical engineering industries is likely to increase by 0.5%. Production in the metal industry could by and large stagnate. The chemical industry (excluding pharma) could see domestic production decline by 1% in 2017. We also predict that increases in employment figures in the manufacturing industry will come to a standstill in 2017. However, the overall level of employment in German industry is currently very high. The View from Berlin. All lights on the debates about personalities and tactical gambits. Chancellor Merkel’s persistent hesitation to declare whether she will run as the CDU/CSU’s chancellor candidate again is intensively debated in the public and causing unrest within her party, too. But we still think that Merkel is more likely than not to say yes at the CDU party convention on December 5-6. By promoting EU Parliament President Schulz and Hamburg’s Mayor Scholz as the SPD’s possible candidate besides party leader Gabriel the media have sparked a similar debate about the SPD. While some commentators have characterized the debate as detrimental to Gabriel and his party, actually, it could come in useful for the SPD as a signal that it has three contenders in contrast to the CDU that seems to lack a convincing alternative to Merkel.

Focus Germany Economic forecasts

DX Real GDP (% growth) 2015 2016F 2017F

Consumer Prices* (% growth) 2015 2016F 2017F

Current Account (% of GDP) 2015 2016F 2017F

Fiscal Balance (% of GDP) 2015 2016F 2017F

Euroland Germany France Italy Spain Netherlands Belgium Austria Finland Greece Portugal Ireland

1.9 1.7 1.2 0.7 3.2 2.0 1.4 0.8 0.2 -0.3 1.6 26.3

1.6 1.9 1.4 0.7 3.0 1.8 1.3 1.3 0.9 -0.4 1.0 4.5

1.1 1.0 1.4 0.4 2.0 1.5 1.0 1.1 1.0 1.0 1.1 2.9

0.0 0.2 0.1 0.1 -0.6 0.2 0.6 0.8 -0.1 -1.1 0.5 0.0

0.2 0.5 0.3 -0.1 -0.4 0.1 1.8 0.9 0.5 0.2 0.8 0.1

1.3 1.5 1.0 0.9 1.4 1.1 1.8 1.7 1.2 1.0 1.4 1.5

3.1 8.5 -0.2 2.2 1.4 8.7 0.4 1.8 -0.4 0.1 0.6 10.2

2.7 8.8 -0.4 2.4 1.1 10.5 1.0 2.8 -0.1 1.0 0.5 12.0

2.3 8.2 -0.3 2.0 0.3 10.2 1.0 2.7 0.1 1.2 0.5 7.0

-2.1 0.7 -3.5 -2.6 -5.1 -1.9 -2.5 -1.0 -2.8 -7.5 -4.4 -1.9

-1.8 0.5 -3.1 -2.5 -4.0 -1.8 -2.7 -1.8 -2.4 -3.6 -2.8 -1.1

-1.7 0.5 -2.9 -2.7 -3.6 -1.6 -2.5 -1.5 -2.3 -1.9 -2.8 -1.2

UK Denmark Norway Sweden Switzerland

2.2 1.0 1.0 3.9 0.8

1.9 1.0 0.8 3.2 1.6

0.9 1.7 1.6 2.4 1.6

0.0 0.5 2.2 0.0 -1.1

0.7 0.4 3.1 0.9 -0.4

2.2 1.3 2.2 1.5 0.2

-5.4 7.0 8.7 5.2 11.1

-6.5 6.5 6.5 5.0 10.0

-5.5 6.5 6.5 4.5 9.0

-4.4 -2.1 9.0 -0.8 0.3

-3.5 -2.5 6.5 -0.5 -0.5

-3.5 -2.0 6.5 -0.2 -0.5

Czech Republic Hungary Poland

4.6 2.9 3.6

2.4 2.2 3.3

2.7 2.5 3.5

0.3 -0.1 -0.9

0.5 0.2 -0.7

1.6 1.4 1.1

0.9 4.4 -0.2

1.1 4.7 -0.5

0.5 3.9 -1.1

-1.9 -2.0 -2.6

-1.4 -2.0 -3.0

-1.6 -2.7 -3.0

United States Japan China World

2.6 0.6 6.9 3.2

1.3 0.6 6.6 3.0

1.7 0.9 6.5 3.4

0.1 0.8 1.4 3.4

1.3 -0.2 1.9 4.2

2.1 0.5 1.8 4.6

-2.4 3.3 2.7

-2.4 3.8 2.4

-2.7 3.6 2.1

-2.4 -4.0 -3.4

-3.2 -3.9 -4.0

-3.1 -3.8 -4.0

*Consumer price data for European countries based on harmonized price indices except for Germany. This can lead to discrepancies compared to other DB publications. Sources: National Authorities, Deutsche Bank

Forecasts: German GDP growth by components, % qoq, annual data % yoy

DX 2015

2013

2014

2015 2016F 2017F

Real GDP Private consumption Gov't expenditure Fixed investment Investment in M&E Construction Inventories, pp Exports Imports Net exports, pp

0.5 0.7 1.2 -1.1 -2.1 -1.1 0.6 1.9 3.1 -0.5

1.6 0.9 1.2 3.4 5.5 1.9 -0.3 4.1 4.0 0.4

1.7 2.0 2.8 1.7 3.7 0.3 -0.5 5.2 5.5 0.3

1.9 1.6 3.9 2.7 1.9 3.1 -0.3 3.0 3.4 -0.1

Consumer prices* Unemployment rate, % Industrial production Budget balance, % GDP Public debt, % GDP Balance on current account, % GDP Balance on current account, EUR bn

1.5 6.9 0.1 -0.1 77.1 6.5 190

0.9 6.7 1.5 0.3 74.6 7.3 213

0.2 6.4 0.5 0.7 71.2 8.5 256

0.5 6.1 1.4 0.5 68.2 8.8 275

2016

Q1

Q2

Q3

Q4

Q1 0.7 0.3 1.3 1.7 1.2 2.3 -0.3 1.6 1.3 0.2

Q2 0.4 0.2 0.6 -1.5 -2.4 -1.6 -0.1 1.2 -0.1 0.6

1.0 1.2 1.7 1.2 0.0 2.0 0.0 2.0 2.9 -0.2

0.3 0.4 0.4 1.7 1.9 1.8 -0.1 1.5 2.1 -0.1

0.4 0.1 0.7 -0.4 0.5 -1.3 -0.5 1.8 0.5 0.6

0.3 0.6 1.3 -0.3 -0.8 -0.3 0.3 0.2 1.1 -0.5

0.4 0.4 1.2 1.7 1.8 2.0 0.1 -0.7 0.6 -0.6

Q3F 0.2 0.3 0.8 0.8 1.0 0.8 0.1 0.5 1.6 -0.4

Q4F 0.5 0.4 0.8 0.7 0.1 1.2 0.0 0.4 0.6 -0.1

1.5 6.3 0.7 0.5 65.9 8.2 265

0.0 6.5

0.5 6.4

0.1 6.4

0.3 6.3

0.3 6.2

0.1 6.1

0.7 6.1

1.1 6.1

*Inflation data for Germany based on national definition. This can lead to discrepancies to other DB publications. Sources: Federal Statistical Office, German Bundesbank, Federal Employment Agency, Deutsche Bank Research

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| October 28, 2016

Current Issues

Focus Germany German inflation expected to surpass 2% in 2017 Q1

1

% yoy 4

— In Focus Europe we already stated that tapering in December would be premature as there are downside risks to the ECB’s growth and inflation outlook. On the inflation front, while energy prices will push headline inflation up strongly in the next months we think that the pass-through from higher non-core inflation to core inflation could be weaker than usual.

DBe 3 2 1

— For a sustained pick-up in core inflation we would probably need to see accelerating wage inflation. Given the substantial amount of slack in many Euro area countries’ labour markets, those countries with a healthier cyclical position – especially Germany with its large size and tight labour market – would be expected to show an over-proportional contribution to rising core inflation rates.

0 -1 08

09

10

11

12

13

14

Germany

15

16

17

Eurozone

Sources: Eurostat, Federal Statistical Office, Deutsche Research

Energy inflation less a drag on headline inflation lately

German wages: Not doing the heavy lifting for the ECB

2

Euro area, % yoy, pp

— However, German wage growth slowed in H1 2016 and there is a range of factors that are likely to also put a lid on the pick-up in 2017. The impact of labour shortage is limited by material mismatch between the qualifications of the unemployed and those sought by employers as well as substantial immigration flows. High real wage gains have pushed up unit labour costs and weighed on corporate profitability, which is further undermined by low productivity growth. Cautious wage agreements in 2016 on average stipulate only 2% wage increases in 2017. Despite a 4% increase in the statutory minimum wage, aggregate wages should increase by only around 2 ½%. In our view, this prevents German price developments from doing the heavy lifting for the ECB at least in 2017.

Inflation: Surging headline, but (when) will core follow?

Sources: Eurostat, Deutsche Bank Research

Wage growth gap narrowing

3

Gross wages per employee, % yoy 8 6

ECB policies and its dovish communication stance that Mario Draghi reiterated during the ECB press conference on 21 October could come under increasing scrutiny in the next few months. We expect the volatile, gradual oil price normalization to continue and to push Euro area inflation above 1% in Q1 2017 1 and inflation in Germany temporarily increasing above 2%. This could leave its mark in market based inflation expectations and make it harder for the ECB to convincingly communicate its medium-term accommodative policy stance. Watch out for the next OPEC meeting end-November when a decision about lower oil production – agreed on the meeting end-September – will be made. This could add to the inflation up-trend. For a sustained recovery of inflation towards the ECB’s target of close but below 2% it will need more than a recovery of energy inflation, though. Core inflation would need to pick up materially from its tight range of between 0.8 and 0.9% that it has been in since May. For this to happen, we would probably need to see a feed-through from rising non-core inflation towards core inflation via a pick-up in wage growth.

4 2 0 -2 -4 -6 06 07 08 09 10 11 12 13 14 15 16 FR

DE

Source: ECB

ES

IT

There are several hurdles for wages to accelerate quickly, though. Substantial spare capacities, large unemployment gaps and low corporate profitability narrow the pricing / negotiation power in many Euro area countries, which should limit the speed and extent of the feed through of higher energy prices.

1

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| October 28, 2016

The more pronounced inflation spike in Germany is helped by the recently announced increase of the renewable energy surcharge on electricity. Current Issues

Focus Germany This applies even to countries that have a healthy cyclical position and that would normally be expected to carry an over-proportional share of the inflationary pressure as Germany. We will focus on Germany in this article as it accounts for almost 30% of the EMU-CPI basket and shows many signs of a heated labour market. Unemployment and vacancies are close to or at historic lows and highs, respectively. However, we see limits to the pace of wage inflation as weak global trade and a general level of uncertainty, slowly rising unemployment, a migration related increase of the labour supply, weak productivity growth and past wage agreements that last into 2017 would limit the pressure on aggregate core inflation.

German wage growth in 2016: Slowing Despite the on-going health of the German labour market in 2016 wage growth has slowed in the first half of the year. While employment has continued to grow at around 1.2% yoy and the unemployment rate has seen further gradual declines to its lowest level since the start of the 1990s, compensation per employee slowed to only 1.9% in Q2 after averaging 2.5% in the preceding four quarters. Looking at alternative wage measures like negotiated wages confirms 2 that picture (figure 4). German wages slowed in H1 2016 ...

4

% yoy

... but should recover in H2

5

% yoy, negotiated wages, incl. one-offs and aux. payments

4

6

3.5 3

5

2.5

4

2 1.5

3

1

2

0.5 1

0 12

13

14

15

16

0 11

Negotiated wages (BuBa, per month) Negotiated wages (Stat. Off., per month)

12

13

Bundesbank

14

15

16

Federal Statistical Office

Compensation per employee Sources: Deutsche Bundesbank, Federal Statistical Office Sources: Federal Statistical Office, Deutsche Bundesbank

There is likely to be some pick-up in wages in H2 2016, but that still leaves the 3 2016 average below last year’s rate and below our forecast from early 2016. Part of the slowdown was due to a base effect from last year. This should reverse. Moreover, as usual, German wage growth is strongly determined by sector wage agreements between labour and employer representatives. Judging by monthly wage numbers there was a pick-up in wage growth in Q3 as wage agreements in e.g. the very large metal sector came into force (around 10% of total employment), where one-off payments and a 2.8% wage hike were agreed (figure 5). In total, wage growth in 2016 will probably slow to a good 2% from around 2.5% in 2015. As a result the gap between German wage growth and that in other large euro area countries will narrow somewhat in 2016 (figure 3). Note that the

2

3

4

| October 28, 2016

The more pronounced slowdown of the wage measure from the Statistical Office was largely due to a base effect given different rules of when sector wage agreements are included in the wage indices and the effect has already been reversed looking at monthly figures. See Focus Germany, 27 January 2016. Current Issues

Focus Germany introduction of the statutory minimum wage of EUR 8.50 per hour at the start of 2015 pushed up wage growth.

Slow fall of unemployment limits wage pressure

We had expected wages to pick up slightly to 2.7% in 2016 (negotiated wages ex. one-offs). However, inflation and productivity developed weaker than expected while unemployment was somewhat lower than we had forecast. However, even plugging in actual historic values into our model leaves the model forecast higher than current wage developments. The reason for the model’s errors is likely to also apply in 2017.

6

Chg. yoy, %-p., adv. by 18months (left); % yoy, 6M moving average (right) -2.0

4

-1.5 3

-1.0 -0.5

2

0.0 0.5

1

1.0 1.5

0 00

02

04

06

08

10

12

14

16

18

2017: Pick-up in German wage growth limited Instead of just talking about forecast results from our models and its drivers we want to highlight several more thematic factors that are most likely to have weighed on wage growth in 2016 and are likely to continue to do so in 2017. In part these factors are very hard to model and or quantify. More importantly, wage models have tended to overstate the wage outlook in recent years not only in Germany but also more broadly in Europe and the US. A flatter Phillips curve – a weaker statistical relationship between inflation and activity measures 4 – and unstable model parameters have often been blamed. .

Unemployment rate (left) Wages (right) Sources: Federal Statistical Office, DB Research, Deutsche Bundesbank

Finding people to fill jobs is getting harder Job vacancy duration in days

Sources: Federal Employment Agency, Deutsche Bank Research

7

German labour market is very tight, but mismatch could limit impact No matter which indicator you look at the shortage on the German labour market has increased further in 2016. By now it takes 90 days to fill a vacancy and the number of vacancies has risen to over 500.000 (over 1% of total employment, figure 7+8). The share of companies that report labour shortage as a hurdle to increasing their output has also risen even in the manufacturing sector (figure 8) and judging by early indicators of the labour market (figure 9) this environment does not seem to change quickly soon. This seems at odds with slowing wage growth and the overall moderate wage growth level. In our view, one of the main reasons for this disconnect is 5 mismatch. In a semi-annual survey of German corporates by the DIHK shortage of qualified labour became the biggest risk to their economic outlook 6 well ahead of other factors like labour costs. At the higher end of qualification levels the vacancy times are generally much above average. Also regional mismatch is playing a role as can be already seen by the wide range of regional unemployment rates by Federal States (from 3.5% in Bavaria to 10.4% in Bremen). The material scarcity should typically leave its imprint in strong upward wage pressure, e.g. acceleration of job switching to the highest paying employer. However, this is probably not taking place yet due to “German caution” and due to the stable, traditional long-term employer-employee relationships especially in the “German Mittelstand”. In 2015 average job tenure amounted to 11 years in Germany compared to e.g. 9 years in the UK and 4 years in the US (median job tenure). On top of that, government policies – the early retirement scheme for people with over 45 contribution years to the statutory pension insurance scheme – add to the labour shortage as highly qualified and especially experienced workers leave the labour market. This factor could be especially visible in the 4

5 6

5

| October 28, 2016

See for instance this speech by the ECB’s Vitor Constancio: http://www.ecb.europa.eu/press/key/date/2015/html/sp151105_1.en.html. Also see the Focus Germany on German wages cited above. See Focus Germany, 1 July 2016. http://www.dihk.de/ressourcen/downloads/dihk-konjunkturflyer-herbst-16engl.pdf/at_download/file?mdate=1476946076817 Current Issues

Focus Germany manufacturing sector, where low production growth would usually go hand in hand with low labour demand, but instead labour shortage stands at an historic high.

Companies experience labour shortage Labour shortage as limiting factor, share of companies, %

8

Strong labour demand

9

Tight labour market

10

Number of registered openings subject to social security contributions

Standardised values (since 2008) 3

25

500 450 400 350 300 250 200 150 100 50 0 2005

2 1

20

0

15

-1 10

-2 -3

5

-4 08

0 95 97 99 01 03 05 07 09 11 13 15 Manufacturing Construction

Services

09

10

11

12

13

14

15

2007

2009

2011

2013

100 90 80 70 60 50 40 30 20 10 0 2015

16 Job vacancies ('000, left)

BA-X ifo employment baromter PMI employment index

Share of vacancies unfilled for more than 3 months (%, rgiht) Vacancy time (days, right)

Source: EU Commission Sources: Federal Employment Agency, ifo, Markit, Deutsche Bank Research

Source: Federal Employment Agency

At the lower end of the skill scale and especially in the services sector strong employment growth is fuelled by the large number of immigrants keeping the fall of the unemployment rate limited and easing the wage pressure (figure 6). Wage agreements from 2016 to weigh on 2017 wage growth A large share of German wages is directly (nearly 50%) or indirectly set by wage agreements between labour and employer unions mostly on sector-levels. The key dimensions of the contracts are the wage increase, the length for which the agreement is valid and the way the wage increase is distributed over the time of the validity of the contract. There is a tendency of contracts to have longer duration when the sector is doing badly and/or when the outlook is negative and/or uncertain, as this increases planning certainty on both sides. For instance, the bulk of the agreements this year has a duration of over 20 months and goes up to over 30 months (private banking sector). The 2016 average at 22 months is higher than the long-term average and last year’s 21 months. The major agreements this year mostly include a first wage increase at the beginning of the duration and a lower one towards the middle of the duration. Aggregating across sectors and weighting by their respective employment numbers the first wage step averages 2.6% for 2016 and the second 2.1% for 2017. In total, these sectors stand for nearly 20% of employment. With such a large share of wage hikes for next year already agreed at low levels there is a limit to what the new agreements over the course of 2017 will be able to add to the headline. The same happened in 2015 and 2016 (2.7% & 2.0%).

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| October 28, 2016

Current Issues

Focus Germany

In good times manufacturing pushes wages above 3%

11

12

Slow exports to weigh on manufaturing wages % yoy

Contribution to yoy-growth of gross wages, nat. accounts, %-p.

8

25 20 15 10 5 0 -5 -10 -15 -20 -25

6

4

4

3

2 2

0

1

-2 -4

0

-6 -1

97

01

-2

05

09

13

17

Negotiated wages - industry (left, 7Q lag) 00

02

04

06

08

Total ex. Manuf.

10

12

Manufacturing

14

16

Gross wages (nat. acc.) - manufacturing (left) Nominal exports (right)

Total

Sources: Deutsche Bank Research, Deutsche Bundesbank, Eurostat

Sources: Eurostat, Deutsche Bank Research

Weak global demand and uncertain outlook weigh on manufacturing wages Weak productivity trend

13

% yoy, real 6 4 2 0

Despite the German business cycle being more driven by domestic demand rather than exports, the manufacturing factor remains the bellwether of the German economy given its large direct share of the economy (>20% of value added; 25% of total wage sum) and its importance as a contractor of intermediate inputs. We remain sceptical on the near-term outlook for German industry and forecast real export to slow further in 2017 and equipment investment to stagnate. In addition, we see risks clearly tilted to the downside.

-2

Historically, there has been a relatively strong correlation between exports and actual wage paid in the manufacturing sector (gross wages from national accounts) as current demand determines hours worked with German manufacturing companies enjoying a lot of flexibility in shifting working hours based on demand. Moreover, export growth seems to have a lead of several quarters over negotiated wages, which better represent the underlying wage trend (figure 12). Indeed, while this year’s wage agreement in the metal sector stipulates a 2.8% wage hike in mid-2016 the social partners agreed on only 2% for mid-2017 given overall weak export growth and the uncertain outlook.

-4 -6 -8 95

99

03

07

per hour

11

15

per person

Source: Federal Statistical Office

Increase of unit labour costs above long-term average

14

% yoy, 4Q moving average

Underlying productivity likely to slow

10

The trend of German labour productivity has remained broadly stable but weak in recent years. In the last 12 quarters productivity growth averaged only 0.6% yoy. Given our expectation that real GDP growth will slow to 1% in 2017 and that employment should continue to grow, measured productivity per employee will likely weaken further from already subdued levels. This will probably push up unit labour costs further, which are already expanding above their long-term average rate (figure 14).

8 6 4 2 0 -2 -4 93

97

01

05

09

Compensation of employees Labour productivity (inverse) Unit labour costs per hour

13

In many ways, this discussion is similar to the one about wage growth in the US, where wage growth remains moderate despite the labour market reaching full 7 employment based on many measures. Hence, we see only a very low probability of productivity growth fuelling corporate profitability, which is likely to limit workers’ bargaining power.

Average ULC growth Source: Federal Statistical Office

7

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| October 28, 2016

See for instance: US Economics Weekly, 14 October 2016. Deutsche Bank Research. Current Issues

Focus Germany Real wages are strongly pressuring profitability Strong real wages weighing on profitability

15

% yoy, centered 7Q average (left); % of value added, 4Q average (right) -1

48

-0.5

46

0 44

0.5 1

So far we have focused on nominal wages. However, for corporates as well as consumers real wage growth is more important. In recent years real wage growth has been the highest since the early 1990s. Even abstracting from the oil impact, both real wage measures suggest little room for further real wage increases without eroding further the already low corporate profitability. The gross profit share of German non-financial corporations has been near stable since 2013 at the low levels last seen in the early-2000s. Judging by low core inflation, corporates also have low pricing power (figure 16).

42

1.5

40

2

Minimum wage increase to boost wages in 2017, but not in 2018

38

2.5 3

36 00

02

04

06

08

10

12

14

16

Real wages CPI (left, inv.) Real wages core CPI (left, inv.) Gross profit share (right) Sources: Deutsche Bundesbank, Deutsche Bank Research, Eurostat

The key supportive factor for aggregate wage growth in 2017 is the 4% hike in 8 the federally mandated minimum wage from EUR 8.50 to EUR 8.84. The minimum wage applied to almost 11% of the workforce at the time of the introduction at the start of 2015 and is adjusted only every two years. Therefore, even though it will boost wages in 2017, it will weigh on wage growth in 2018. The impact on the index of negotiated wages – the traditional focus of analysis in Germany given the importance of wage agreements between social partners – will be limited, as recipients of the minimum wage are often not covered by sector wage agreements. Therefore, the impact should be more visible in gross wages according to national accounts data.

Don’t expect German wages to do the heavy lifting for ECB Core inflation seems to lead wages

16

% yoy 2.5

4 3.5

2

3 1.5

2.5

1

2 1.5

0.5

1 0

0.5

-0.5

0 97 99 01 03 05 07 09 11 13 15 17 Core inflation (moved fwd. by 6M, left) Negotiated wages /right)

Sources: Deutsche Bank Research, Deutsche Bundesbank, Eurostat

In sum, there is a large number of structural and cyclical factors that keep German wage growth at bay in 2016 and 2017 despite the fundamental strength of the labour market and despite the likely surge in headline inflation. In nominal terms we would expect negotiated wages to pick up to about 2 ½% from a good 2% this year, which should help keep German wage growth ahead of its European peers, but it is unlikely to give a substantial boost to the Euro area aggregate wages limiting the upside to Euro area core inflation. Therefore, Germany is unlikely to do the heavy lifting for the ECB, which suggests on-going monetary support especially for those countries with a weaker cyclical position within the Euro area. For a more sustained improvement of German wage growth towards e.g. 3% corporate productivity and profitability would have to pick-up for instance via an acceleration of global trade. This would probably ease disinflation in traded goods – an important factor given Germany’s dependence on exports and tight integration into international value chains. Domestically, a slowing of intra-EU immigration could add to the wage pressure at the lower end of the skill scale, although the gradual integration of the large number of refugees into the labour market could counter that. These factors could play more of a role going into 2018. Heiko Peters (+49 69 910-21548, [email protected]) Oliver Rakau (+49 69 910-31875, [email protected])

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| October 28, 2016

We see the introduction of the minimum wage and the way it is adjusted as a structural problem. Moreover, other labour market policies have also been tightened. For details on that see: Focus Germany, 1 July 2016. Current Issues

Focus Germany German industry: Business sentiment is brightening

1

Company expectations, balance of positive and negative company reports

— We expect that German industrial production will increase by 1% in real terms in 2016. This means that Germany will achieve the same momentum as in 2015, although growth will once again remain below the increase in GDP that we are currently predicting (forecast for 2016: +1.9%).

20 15 10 5

— According to our forecasts, next year could see the growth rate for industrial production in Germany drop to 0.5% in real terms. This could include a change of mainstays in the international markets, as we expect increased GDP growth for regions like the US and Latin America in 2017 compared to 2016. In contrast, our forecast for GDP growth in the euro area next year is less optimistic than our predictions for 2016; this also applies to the German economy.

0 -5 -10 -15 -20 12

13

14

15

16

…on dev. of business activity …on dev. of employment …on dev. of production activity …on dev. of export activity Source: ifo Institute

Improvement in total orders

2

125

The German manufacturing industry began 2016 with good output results in the first quarter. However, industrial production since then has not followed a consistent trend – on the contrary. Viewed at a monthly level, production development over the course of this year has been a continuous series of ups and downs. On the whole, in the first eight months of 2016, real production was up a good 1% on the levels of the previous year (year overall 2015: +1.1%); this increase was mainly due to the strong start to the year. The development of order intake in 2016 has been less volatile so far. On the whole, the result of the first eight months was a real year-on-year increase of 0.2%, although this was not as good as in production. Overall, it is still not possible to identify any stable upward or downward trend in industrial activity (production and orders). It seems that there is currently an equal balance between factors stimulating and curbing growth in the industry.

115

105

95 13

14

Domestic

15 Foreign

16 Total

Source: Federal Statistical Office

3

Far more optimism recently Manufacturing, balance of positive and negative company reports 50 40 30 20 10 0 -10 -20 11

12

13

Expectations Source: ifo Institute

9

| October 28, 2016

14

15

— Regarding output in Germany’s large industrial sectors we do not expect major outliers upwards or downwards in 2017. We predict an increase in production in the electrical engineering industry of 1%. Output in the automotive and mechanical engineering industries is likely to increase by 0.5%. Production in the metal industry could by and large stagnate. The chemicals industry (excluding pharma) could see domestic production decline by 1% in 2017. — We also predict that increases in employment figures in the manufacturing industry will come to a standstill in 2017. However, the overall level of employment in German industry is currently very high.

Manufacturing, real order intake, 2010=100, seasonally adjusted

12

German industry: Only minor output growth expected in 2017

16

At best, we expect minimal momentum in industrial production in Germany in the remaining months of 2016. Investment activity remains subdued in many important sales markets. The euro, which has been stronger than in the first half of 2015, is also having a detrimental impact on exports. In the year to date, there has been a drop in the value of Germany's exports in important sales markets (e.g. US, France, UK). Brexit had an impact on exports to the UK; it is likely to continue to have a negative impact on these exports in the coming months and will affect domestic industrial production as a result. Nevertheless, exports to some European countries have developed very positively in 2016 (e.g. Poland, Spain, Italy, Austria); exports to China have so far increased marginally yoy. The renewed increase in the manufacturing industry's utilisation of capacity at the beginning of the fourth quarter of 2016 is an encouraging sign. Furthermore, business expectations improved significantly in September and October are now in positive territory.

Current assessment

Overall, we expect that German industrial production will increase by 1% in real terms in 2016. This means that Germany will achieve the same momentum as in

Current Issues

Focus Germany 2015, although growth will once again remain below the increase in GDP we are currently predicting (forecast for 2016: +1.9%). Rate of growth could decrease somewhat in 2017 Flat upward trend expected

4

Manufacturing, real production index, 2010=100; seasonally adjusted 115

110

105

100 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Recent decline in foreign orders

5

Automotive industry, real order intake, 2010=100, seasonally adjusted

Automotive industry: European demand provides positive momentum

140 130

The diesel affair is still dominating many headlines in the German automotive industry. However, developments in demand for passenger cars in important sales markets will be of particular significance for the economic development of this industry. In the US, sales of light vehicles have stabilised in 2016 – after years of growth at a very high level. The same is true of the UK. In 2015, car sales in units in both of these countries set new records. Demand from these two countries also made a significant contribution to a more than 11% increase in the value of German automotive industry exports in 2015. However, in 2016, the industry’s exports to the USA and UK have decreased significantly, which – together with economic trends – can be partly explained by a loss of confidence due to the diesel affair in both cases.

120 110 100 90 12

13

14

15

Domestic

16 Foreign

Source: Federal Statistical Office

Current assessment still better than expectations

6

Automotive industry, balance of positive and negative company reports 60 40 20 0 -20 -40 -60 12

13

14

Expectations Source: ifo Institute

10 | October 28, 2016

15

According to our forecasts, next year could see the growth rate for industrial production in Germany drop to 0.5% in real terms. This could include a change of mainstays in the international markets, as we expect increased GDP growth for regions like the US and Latin America in 2017 compared to 2016. In contrast, our forecast for GDP growth in the euro area next year is less optimistic than our predictions for 2016; this also applies to the German economy. On the whole, we expect increased global economic growth in 2017 in comparison to 2016, which should prop up German industry. Nevertheless, slow momentum is likely to keep influencing investment activity in the most important sales markets for local industrial companies and in Germany itself in 2017. This means that there will also be limits to international and domestic demand for capital goods produced by German manufacturers in 2017. Due to the German manufacturing industry’s focus on capital goods (and manufacturing the accompanying intermediate goods), industrial production should only experience moderate growth for as long as exports and equipment investments continue to run at half speed. We also predict that increases in employment figures in the manufacturing industry will come to a standstill in 2017. However, the overall level of employment in German industry is currently very high.

16

Current assessment

In 2016, the Chinese car market has been driven by tax breaks for people purchasing passenger cars with cylinder capacities of up to 1.6 litres. The Chinese government took this action in autumn 2015 when demand for passenger cars temporarily stalled; the programme will run until the end of 2016. There continues to be excellent development in Chinese demand for SUVs. The real value of German automotive industry exports to China is likely to have risen by 5% by the end of 2016, although it had fallen by almost 16% in 2015. China continues to be one of the most important export markets for the German automotive industry. However, demand in the world’s largest car market is primarily being met by German manufacturers’ factories in China. New passenger car registrations in Europe should increase sharply in 2016 (approx. +5%), which has a positive effect on manufacturing plants in Germany. Among the large Western European car markets, Italy and Spain have recorded the most momentum so far, albeit on a still very low level when viewed in a longterm comparison. In Spain, a state scrappage scheme that had been frequently extended in the last few years expired in summer 2016. For this reason, momentum could be (significantly) more moderate in the next few months than it

Current Issues

Focus Germany has been recently. Ultimately, the German passenger car market is still developing very encouragingly. In 2016, passenger car registrations will climb to their highest level since 2009 – the year of the scrappage scheme. Going by the real production index, German automotive output in these fluctuating economic conditions is likely to increase by roughly 2.5% in 2016 (2015: +0.6%). Price pressure will increase or the profits per vehicle will probably decrease, especially in markets with slowing growth. Lower growth rate in 2017

7

Automotive industry, real production index, 2010=100, seasonally adjusted 140 +4.3%

130

+2.5% +0.6%

120

+0.5%

+1.2%

110 -0.4% 100 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Our forecast is that the economic framework for the German automotive industry will worsen in 2017. In the US, sales of light vehicles are likely to take another year’s break. There is a large question mark in relation to the development of the Chinese car market, as a number of customers in this high-volume segment are choosing to purchase cars sooner due to the aforementioned tax incentive programme. It is unclear what the impact of these developments will be. It also remains to be seen whether continuing high backlog demand for individual motorisation could compensate for this impact, e.g. in the Chinese hinterland. Furthermore, it is unclear how the Chinese government would react if demand for cars were to decrease at the beginning of 2017. For German manufacturers, the fact that the programme has hardly affected demand in the premium car segment should prove positive in this uncertain environment, as should the fact that their range of products on the whole are to Chinese customers’ tastes. Nonetheless, price and competitive pressure are also increasing in higher vehicle classes. The European car market is likely to provide automotive production in Germany with renewed momentum in 2017. Since its nadir in 2013, over the last few years, the industry has won back a significant portion of the sales market that had been lost in Western Europe. For this reason, new car registrations should increase in 2017, but only at a low one-digit rate. The negative effects of Brexit are also likely to curb sales in the UK, particularly as manufacturers from Europe look set to (continue to) raise their prices in local currency next year should the British pound perform poorly against the euro. In 2017, the Spanish car market is also likely to feel the effects of the end of the aforementioned scrappage scheme. In contrast, there could once again be a (moderate) increase in new passenger car registrations in Germany in 2017.

Order intake remains volatile

8

Manufacturing, real order intake, 2010=100, seasonally adjusted

Overall, we expect that German automotive production in 2017 will increase by roughly 0.5% in real terms. Qualitative growth – better equipped vehicles – will have favourable effects in this regard. The proportion of diesel passenger cars in production and new registrations should decrease in 2017, but not dramatically. So far, customers have reacted to the diesel affair very calmly. Alternative engine technologies remain a niche, in spite of increasing market shares.

Mechanical engineering remains surprisingly stable

130

120

110

100 12

13

14

Domestic Source: Federal Statistical Office

11 | October 28, 2016

15

16 Foreign

In 2016, German mechanical engineering, whose prospects have generally been viewed as very cyclically, looks set to achieve stagnation in output (adjusted for price changes). This will extend a long, unprecedented phase of stagnation in the mechanical engineering industry – which has already lasted for four years – by another year. Important domestic customers such as the automotive industry and the construction industry have propped up mechanical engineering in 2016. By contrast, international business (export quota: 62%) has curbed the industry’s economic growth. For example, the export of machines to China and Russia has decreased once again – as it did in 2015. This is joined by a noticeable decline in exports to raw materials countries like Saudi Arabia and Brazil.

Current Issues

Focus Germany Expectations show upward trend

9

Manufacturing, balance of positive and negative company reports 45 30 15 0 -15 -30 12

13

14

15

Expectations

16

Current assessment

Source: ifo Institute

Production continues to remain flat

10

Manufacturing, real prodution index, 2010=100, seasonally adjusted 125

+1.2%

+1.2%

+0.5%

+0.5%

115 +/- 0% -1.6% 105 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Foreign orders tend to decline of late

11

Electrical engeneering, real order intake, 2010=100, seasonally adjusted

However, German exports appear to be relatively stable in comparison to those of EU countries – especially those in the euro area. In the first eight months of 2016, machine exports to the UK (Germany’s fourth largest buyer) were 2% up on the level of the previous year; exports to Turkey (Germany’s thirteenth largest buyer) increased by 1.6% year on year. Due to recent (political) irritations, both countries are unlikely to remain pillars of the German machine export business in the next few months. German mechanical engineering companies are now taking a significantly more critical view of these two countries as investment locations. We predict conflicting trends in 2017 that should balance out for mechanical engineering companies on the whole: For mechanical engineering, the continued development of connected industry (keyword Industry 4.0) will remain an important field of action – particularly in collaborations with suppliers and purchasers. Significant mechanical engineering customers like the three major German car manufacturers have decided to rapidly expand into the new, global future field of electromobility. Some of the new investments required to adapt manufacturing to Industry 4.0 are likely to benefit German mechanical engineering companies. Moreover, more orders currently bode well for German construction activity, upcoming infrastructure investments and the continued restructuring of the local energy sector. The expected interest rate development is not very likely to curb investment activity. By contrast, international business will remain a serious challenge, as only subdued development is currently being forecast for the global economy. Moreover, there are “special burdens” that need to be dealt with: For instance, structural adjustments in the European and global steel industries (keyword: excess capacities) are presenting a challenge to mechanical engineering companies and producers of smelter and rolling mill facilities. Relatively low global prices for agricultural products are slowing agricultural engineering, and manufacturers of mining machinery are only likely to notice any increased momentum to demand provided there are marked improvements to commodity prices and price expectations. But although mechanical engineering has now experienced several years without any growth, the industry should not be judged “too critically”. An important indication of the positive view that mechanical engineering companies themselves take of their medium-term prospects is the marked rise in employment figures in the last few years. In addition to this, proof of the high international esteem in which mechanical engineering continues to be held is international companies’ preference for gaining or taking over (if possible/ appropriate) specialist German mechanical engineering companies as collaboration partners, who range from machine tool engineers to specialists for innovative 3D manufacturing. If the global economy were to – surprisingly – recover more quickly than expected, the prospects for mechanical engineering companies would also be more favourable.

Electrical engineering: Moderate output increases in 2016/17

120 115 110 105 100 95 12

13

14

Domestic Source: Federal Statistical Office

12 | October 28, 2016

15

16 Foreign

Production in German electrical engineering started 2016 on a high level, but since then has experienced a rather sideways trend. In the first eight months, the industry achieved an output increase of roughly 1.2% year on year (2015: +1.5%). Domestic demand provided the industry with somewhat stronger momentum, although there was no serious difference between domestic demand and the momentum provided by international orders. Electrical engineering exports remained a key economic pillar in 2015. They experienced a nominal increase of more than 7%, in which the depreciation of the euro was a fundamental factor. In the first eight months of 2016, nominal exports exceeded year-on-year values by “only” a good 2%. The decline in exports to the UK has made a negative impact here (-3.5% year on year). Current Issues

Focus Germany Output should grow moderately again in 2017

12

Electrical engeneering, real production index, 2010=100, seasonally adjusted 115 +1.0%

+1.0%

+1.5%

+2.5% 110 -2.7% 105 -2.1% 100 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Over the course of 2016 and 2017, there should be an average upward trend in German electrical engineering output. Manufacturers of capital electrical engineering goods are feeling the effects of restrained demand on the part of their major domestic and international customers. Consumption-related segments could profit from the very positive development of private consumption in Germany, but the proportion of classic electrical consumer goods in total German net production has decreased over the course of the last few decades. This means that there are currently no identifiable stimuli that would be strong enough to allow for a steeper increase of production. The currently relatively strong euro is having a negative effect on international demand. But on the other hand, there are currently no indications that electrical engineering will slip into a recession. This means that business expectations have remained in positive territory for many months now. And at the beginning of the fourth quarter, capacity utilisation had exceeded the average of the last ten years by roughly 2.5% points. Overall, electrical engineering production is likely to experience real average growth of 1% p.a. in 2016 and 2017. This would be a slightly subdued continuation of the moderate upward trend that the industry has seen in the last few years.

A question mark for the metals industry Metals production will also remain weak in 2017 Foreign orders tending downwards

13

Metals production and processing, real order intake, 2010=100, seasonally adjusted 120 110 100 90 80 12

13

14

15

Domestic

16 Foreign

Source: Federal Statistical Office

Sentiment is improving

14

Metals production and processing, balance of positive and negative company reports 30 15 0 -15 -30 -45 12

13

14

Expectations Source: ifo Institute

13 | October 28, 2016

15

16

Current assessment

The German metals production industry started the year with an output deficit due to a relatively weak fourth quarter in 2015. At the beginning of 2016, metals production increased somewhat, which gave rise to some hope for a better year for metals. However, these expectations were soon tempered once again, although there are now indications of a certain amount of stabilisation. One deciding factor in this deceleration has been international business: Because Europe, with an export share of three quarters, is the dominant international customer for metals producers, subdued European economic growth is slowing down international sales in particular. Added to this is China exporting increasing amounts of steel to Europe and to non-European third markets at very low prices due to significant excess steel capacities. German producers are still focussed on quality steel, which means that they are less affected by China’s export offensive than other European countries; however, increased competition is having a negative impact on German producers’ business in some of the more simple types of steel both at home and abroad. Lower energy prices and fewer environmental regulations are also benefiting Asian competitors. The 2016 increase in the global price of iron has put a strain on relatively material-intensive steel producers, provided they have not been able to pass it on to their customers; German import prices for iron ore have increased by roughly 25% since the beginning of 2016, albeit on a low level. For metals producers, domestic demand has remained relatively stable due to good construction activity and only subdued industrial activity. In 2017, the production of metals in Germany is likely to decrease by 0.5%. If German steel producers get involved in reducing excess capacities in Europe and the rest of the world (above all in Asia) with smaller closures at home, it could decrease even more. This is probably another reason why steel and iron production has been performing below average, while the non-ferrous metal industry records above-average output. In 2017, international business is likely to remain troubled, and these troubles have been exacerbated by Brexit, as 8% of German metals exports in 2016 went to the UK. Domestic business will probably become more energetic. This is where the construction industry comes in – not just in residential construction, but also in civil engineering (keyword infrastructure investment). Stable demand is expected from industrial customers Current Issues

Focus Germany Output is set to decrease again in 2017

15

Metal production and processing, real production index, 2010=100, seasonally adjusted

Metal products: a continued upward trend in 2017 after growth in 2016

110 +2.8%

+0.1%

105

100

-1.0% -3.7%

-0.5%

-0.6%

95 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Upward trend in 2017 likely

16

Metal products, real production index, 2010=100, seasonally adjusted 120

115

in areas such as electrical engineering, mechanical engineering and – even more so – automotive engineering.

+1.1%

+1.5% +0.5% +0.9%

+2.8%

-1.5%

110

105 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

Most of the medium-sized metals producers view their economic situation in 2016 in similarly good terms as in the last two years. Their expectations have improved of late and have returned into positive territory. These assessments are not surprising, as the industry looks set to achieve real production growth of 1.5% this year (2015: +0.9%). Recently, domestic demand – so important to sales – has come from private households, which can be attributed to increasingly higher employment figures and noticeably higher incomes. In addition to this, the energetic construction sector and its high rates of completion are spurring on sales of many metal goods. In 2017, the output of metal products looks set to develop better than that of metals producers; however, we only expect a slight production increase of 0.5%. International demand is likely to remain subdued not least due to political troubles in Europe. Domestically, suppliers of consumption-related metal products have to contend with rather hesitant private households, which means that their employment prospects for 2017 are not as favourable as they were in previous years. Immigrants are now increasingly setting up and furnishing their own households, which is beneficial to the industry. But competition on the part of lower-priced import goods creates high price pressure and diminishes returns. Demand for construction-related metal products is likely to continue. Meagre industrial activity will remain a challenge for the producers of industry-related metal products. The lightweight construction dictates of the automotive industry are continuing, stabilising the business of manufacturers who produce construction elements using light metals and/or thin but (at least) just as stable steel or iron components.

Chemicals industry has to swallow bad news No clear trend

17

Chemicals industry, real order intake, 2010=100, seasonally adjusted 105

95

85 12

13

14

Domestic Source: Federal Statistical Office

14 | October 28, 2016

15

16 Foreign

The German chemicals industry is characterised by a markedly higher international interdependency when compared with the manufacturing industry as a whole. Its export share rose to 59% in 2015 (industry: 49.6%); its main customer is Europe, which purchases roughly 70% of its products. In 2015, 5.5% of all chemical exports went to the UK and 2.3% went to Turkey. The most recent (political) troubles in these two countries are therefore of particular significance, as their cumulative proportion (i.e. 7.8%) is markedly higher than that of important global customers such as the US (6.1%) and China (4.3%). For some years now, economic performance in the German chemicals industry has been behind the industry average. An important reason for this is its focus on Europe, whose development has significantly lagged behind that of North America and Asia since the beginning of the financial crisis in 2008/2009. The prospects of the German chemicals industry have continued to worsen in 2016. The encouraging start to the year with a slight revival of orders and production has not continued over the course of the year. The troubled global economy and, in particular, only subdued recovery in Europe have curbed international business. In light of the most recent strains arising from Brexit and Turkey, and now relatively tempered prospects in Asia and North America, there will be no improvement to the industry’s economic situation in the next few months. Domestic business is in fact benefiting from relatively encouraging developments in the construction industry, vehicle manufacturing and the plastics sector; however, on the whole, these stimuli are not enough to increase production. If, after the most recent downturn, the chemicals industry remains at

Current Issues

Focus Germany its current production level until the end of the year, chemicals output in 2016 will have decreased by roughly 1% in real terms. Expectations have recovered recently

18

Chemicals industry, balance of positive and negative company reports 40

20

0

-20 12

13

14

15

Expectations

16

Current assessment

Prospects for the chemicals industry will remain muted in 2017. There are a number of reasons for this: Brexit will have a particular impact on German chemicals companies that had invested in sales and/or their own production facilities on the other side of the English Channel. Because a new trade agreement with the EU is by far not in sight yet, new investments in Britain are becoming riskier than they had been and most of them are therefore being postponed. Moreover, the global trend toward increased chemicals capacities is continuing, which, of course, is intensifying competition both at home and abroad. However, because (in particular large) German chemicals companies are investing or have invested in global growth regions, they are also benefitting from the local growth of chemicals output in those regions as well as growing global demand. These results, of course, are not reflected in domestic production statistics.

Source: ifo Institute

Output is expected to decline further

19

Chemicals industry, real production index, 2010=100, seasonally adjusted 105 +0.5% 100

95

-2.8% -0.4% -1.3%

-1.0%

-1.0%

90 12

13

14

15

16

17

Sources: Federal Statistical Office, Deutsche Bank Research

According to our forecast, the chemicals industry is facing a 1% decrease in production in 2017. The basic chemicals sector dominates in Germany with a production share of two thirds in comparison with the more medium-sized speciality chemicals sector (with “only” one third). In current market conditions, it is of importance that the basic chemicals sector primarily sources the basic raw materials essential for its production from abroad. The most quantitatively important basic raw material is crude oil, which petrochemistry builds upon and from which it gets its name. Because oil prices look set to increase in 2017, prices for naphtha, the most important raw chemical material, and for many other chemicals are likely to continue to stabilise – as has already been observed in phases in 2016. Due to the fact that all primary chemicals have now switched to monthly contracts, producers of basic chemicals will probably be able to quickly pass on increasing procurement costs to their customers. On balance, there should be more favourable developments in sales than in domestic output. Josef Auer (+49 69 910-31878, [email protected]) 9 Eric Heymann (+49 69 910-31730, [email protected])

9

15 | October 28, 2016

The authors would like to thank Philipp Büchner and Janina Meister for their assistance preparing the charts. Current Issues

Focus Germany Forecast for the main industrial sectors

Industry

NACE

20

2014

Production 2015 2016

2017

Last 12M, % yoy

% yoy

% yoy

% yoy

% yoy

-1.3

-0.5

0.1

0.1

1.0

0.5

Gross value added

Export ratio

Business climate*

Capacity utilisation**

Producer prices

EUR bn, 2014

%, 2015

Diff. yoy, Net points

Diff. yoy, pp

42.0

23.2

2.5

Food

10

Textiles

13

7.8

50.0

1.8

4.7

-0.1

2.5

1.9

2.0

1.0

Paper

17

10.8

39.6

9.1

1.1

0.8

-1.0

0.7

-1.0

0.0

Chemicals

20

42.9

58.9

9.1

1.1

-3.1

-1.3

-0.4

-1.0

-1.0

Pharmaceuticals

21

24.0

66.5

-3.7

0.0

0.6

5.2

4.4

2.0

1.0

22.2

27.1

39.5

5.6

0.7

0.0

0.7

2.3

2.5

0.5

Building materials

23

17.1

31.0

11.6

1.5

0.2

2.3

0.0

2.0

0.5

Metals production

24

21.1

40.9

27.3

6.8

-6.6

2.8

0.1

-1.0

-0.5

Metal products

25

53.3

33.9

10.3

1.9

-0.3

2.8

0.9

1.5

0.5

26+27

78.7

56.4

7.3

1.6

0.1

2.5

1.5

1.0

1.0

Plastics

Electrical engineering Mechanical engineering

28

93.8

62.6

5.5

0.1

0.9

1.2

0.5

0.0

0.5

Automotive

29

115.4

64.9

3.8

3.2

0.2

4.3

0.6

2.5

0.5

10-33

604.5

49.9

7.1

1.3

-0.5

2.0

1.1

1.0

0.5

Manufacturing

* Data for gross value added contain in the case of the food industry also beverages and tobacco (NACE 11 and 12), in the case of the textiles industry also clothing and leather (NACE 14 and 15), and in the case of the plastics industry also rubber (NACE 22.1) ** Latest figure available Sources: Federal Statistical Office, Deutsche Bank Research

16 | October 28, 2016

Current Issues

Focus Germany 1

German parties' popularity

The View from Berlin

Results of the Allensbach survey, %

All lights on the debates about personalities and tactical gambits

45 40 35 30 25 20 15 10 5 0

About ten and a half months before the federal elections augurs still have to live with uncertainty concerning major actors and parts of the plot, as the big parties have neither designated their chancellor candidates nor revealed their favourite partners for next term’s government coalition. In addition, the parties have also to nominate their candidates for the federal president election on February 12, 2017. All this gives rise to speculations and to parties’ tactical manoeuvres. CDU/CSU

SPD

FDP

Greens

Left Party

AfD

Of course, Chancellor Merkel is in the limelight as she has not yet declared whether she will run as the CDU/CSU’s chancellor candidate again. Given her strong sense of duty, missing signs for weariness of holding office and the risk of being labeled unsuccessful with respect to the management of the refugee influx otherwise, we still think that she is more likely than not to announce her willingness to run at the CDU party convention on December 5-6. Nevertheless, unease can be observed within her party about Merkel’s indecision.

* Result of the federal election on September 22 Source: IfD Allensbach

Asylum applications & registered refugees in the EASY system*

2

200000 150000 100000 50000 0

Asylum applications

Refugees

* Preliminary registrations that may include double count Sources: BAMF, BMI

3

Major politicians' approval ratings Approval rating for the respective politician on a scale from -5 to +5

2.5 2 1.5 1 0.5 0 -0.5 Jan 14

Jul 14

Jan 15

Jul 15

Jan 16

Jul 16

Chancellor Merkel SPD leader Gabriel Foreign Minister Steinmeier Finance Minister Schäuble CSU leader Seehofer Source: Forschungsgruppe Wahlen, ZDF Politbarometer

17 | October 28, 2016

Oct 16

Two arguments are easily at hand to explain Merkel’s hesitation: First, the Chancellor actually is still hesitant as a fourth term can be quite burdensome – a lesson learned from former Chancellor Kohl’s declining popularity in his last term. The second more relevant reason might be, however, that Merkel does not want to unnecessarily provoke CSU leader Seehofer by defeating his timetable. Seehofer has repeatedly stated that the CDU and the CSU would have to agree on factual issues at first while personalities would be put to the agenda only afterwards. A few days ago he stressed this point again replying to some CDU grandees’ and a CSU vice leader’s backing for Merkel. But the two sister parties are still divided on Seehofer’s request for an upper limit of 200,000 per year on the influx of refugees. Albeit Seehofer has characterised such a limit as a core element of the CSU’s campaign for the federal election he also knows that Merkel would lose most of her creditability if she consented here. Therefore, he pointed to a way out of the dilemma in stating that the two parties could cope with a different wording for migration policy goals if they basically agreed on a common stance, namely to stick to the restrictive approach the federal government has already enacted. The latter, however, is also requested by major parts of the CDU and would be acceptable for Merkel. (In fact, in the past six months from April to September the number of newly arrived refugees has totalled to 98,500.) This does not mean that the CDU and the CSU will get to cloud nine soon. Unlike Seehofer there are still many among the CSU who think that Merkel should kowtow to the CDU/CSU’s conservative wing. Therefore, Seehofer has not invited the Chancellor to address the delegates at the CSU convention on November 4-5. The SPD’s top aspirant for chancellor candidate is Economics Minister Gabriel. But recently the media have promoted Martin Schulz, the President of the European Parliament. According to surveys he might perform better than Gabriel in the election, but both are less popular than Merkel. Others have named Olaf Scholz, Hamburg’s First Mayor, as potential candidate, too. But Scholz would have to fight hard, especially in southern Germany where he is less known. The three politicians are more or less in the same traditionalist SPD camp. But especially Mr. Schulz is said to be the wrong candidate for the newly debated left alliance between the SPD, the Greens and the Left Party, given his close cooperation with Mr. Juncker, the conservative President of the European Commission, in Brussels. The SPD’s left wingers would favour such an alliance and recently about 90 MP’s from the three parties met in Berlin to discuss the prospect for her pet project. While the meeting has attracted the media’s interest a red-red-green (r2g) coalition is not feasible according to present surveys due Current Issues

Focus Germany Distribution of seats in the Federal Convention Left party AfD 94 35

FDP 33

4

CDU/ CSU* 542

SPD* 387

Others 11

Greens* 145

Pirates 12

*Respective figure could be enlarged by one seat Source: Wahlrecht.de

The Germans favourite government coalitions % of those asked 40 35 30 25 20 15 10 5 0

CDU/CSU-SPD SPD-Greens CDU/CSU-Greens CDU/CSU-FDP Source: Forschungsgruppe Wahlen: ZDF Politbarometer

5

to the SPD’s relatively poor showing. Some commentators have blamed Gabriel’s hesitation to throw his hat in the ring for the SPD’s candidate debate and interpreted it as a sign of weakness. However, as party leader he has undisputedly the first pick. The debate might also come in useful for the SPD as a signal that the party has three possible candidates in contrast to the CDU that – at least in the public perception – lacks a convincing alternative to Merkel. The situation with respect to the election of the federal president is complicated. The Federal Convention which only meets to elect the president, i.e. usually only every five years, has 1,260 seats at present. One half of the seats are taken by the (at present) 630 Bundestag MPs, the other half is held by representatives of the parties with seats in (at least one of) the 16 state parliaments. In the Convention the CDU/CSU/SPD coalition as well as Merkel’s alleged favourite future coalition, i.e. the CDU/CSU together with the Greens, but also a leftish alliance of the SPD, the Greens and the Left (including the Pirates) would have a majority. In the past the president election was sometimes a harbinger for a change in the federal government. But this time the parties‘ strategists want to avoid such a signal in order not to prejudice future government coalition talks. The parties’ options for coalition formation will very much depend on the voters decision on September 2017, as six parties are likely to get seats in the Bundestag (CDU/CSU, SPD, Greens, Left Party, FDP and AfD) and minor shifts in electoral behaviour could have a strong impact. Instead the grand coalition ventilated the plan to nominate a consensus candidate who could even get the Greens‘ votes. But SPD leader Gabriel has pressed ahead with own proposals. Lately he recommended Foreign Minister Steinmeier who has been Germany’s most popular politician for the past 9 months. But in a year with a federal election it would be hard for the CDU to vote in favour of a prominent SDP politician at the Federal Convention. He is also debated in the Left Party. Among the Left many still accuse Steinmeier of being one of the architects of former Chancellor Schröder’s liberal reform agenda 2010. Thus commentators have interpreted Gabriel‘s proposal as a gambit to force Mrs. Merkel’s hand. The Chancellor still seems to stick to the coalition‘s original plan which is not yet completely off the table. Thus, here, too, Merkel might win in the end but again she will have to struggle and to consent. Dieter Bräuninger (+49 69 910-31708, [email protected])

18 | October 28, 2016

Current Issues

Focus Germany DB German Macro Surprise Index The DB German Macro Surprise Index compares published economic data with market forecasts and thus provides clues as to the direction of future forecast revisions.10 DB German Macro Surprise Index Average of last 20 z-scores of data surprises 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 14

15 DB German Macro Surprise Index

16 +/- 1 standard deviation

Values above (below) 0 indicate the data came in better (worse) than expected Sources: Bloomberg Finance LP, Deutsche Bank Research

Last 20 published economic data for Germany

DX

Bloomberg Tickers

Indicator

GRCAEU Index GRZEWI Index GRZECURR Index GRCP20YY Index GRIFPBUS Index GRIMP95Y Index GRUECHNG Index GRFRIAMM Index MPMIDEMA Index MPMIDESA Index GRIORTMM Index GRIPIMOM Index GRCAEU Index GRZEWI Index GRZECURR Index GRCP20YY Index MPMIDESA Index MPMIDEMA Index GRIFPBUS Index GRIMP95Y Index

Current Account Balance (EUR bn) ZEW Survey Expectations ZEW Survey Current Situation CPI (% yoy) IFO Business Climate Import Price Index (% yoy) Unemployment Change (000's mom) Retail Sales (% mom) Markit Manufacturing PMI Markit Services PMI Factory Orders (% mom) Industrial production (% mom) Current Account Balance (EUR bn) ZEW Survey Expectations ZEW Survey Current Situation CPI (% yoy) Markit Services PMI Markit Manufacturing PMI IFO Business Climate Import Price Index (% yoy)

Reporting Publication Bloomberg Current value month date consensus 7 2016 09.09.16 20.2 24.5 9 2016 13.09.16 0.5 2.5 9 2016 13.09.16 55.1 56.0 8 2016 13.09.16 0.4 0.4 9 2016 26.09.16 109.5 106.3 8 2016 27.09.16 -2.6 -2.5 9 2016 29.09.16 1.0 -5.0 8 2016 30.09.16 -0.3 -0.2 9 2016 03.10.16 54.3 54.3 9 2016 05.10.16 50.9 50.6 8 2016 06.10.16 1.0 0.3 8 2016 07.10.16 2.5 1.0 8 2016 10.10.16 17.9 15.0 10 2016 11.10.16 6.2 4.0 10 2016 11.10.16 59.5 55.5 9 2016 13.10.16 0.7 0.7 10 2016 24.10.16 54.1 51.5 10 2016 24.10.16 55.1 54.4 10 2016 25.10.16 110.5 109.6 9 2016 26.10.16 -1.8 -1.9

Surprise -4.3 -2.0 -0.9 0.0 3.2 -0.1 -6.0 -0.1 0.0 0.3 0.7 1.5 2.9 2.2 4.0 0.0 2.6 0.7 0.9 0.1

Standardised surprise -1.6 -0.2 -0.2 0.2 2.3 0.3 -0.4 0.2 0.0 0.3 0.3 1.4 0.5 0.3 0.5 0.2 2.8 0.7 0.5 0.4

Quantile rank 0.0 0.4 0.3 0.3 1.0 0.6 0.3 0.6 0.4 0.7 0.6 0.9 0.7 0.7 0.7 0.3 1.0 0.9 0.7 0.7

Sources: Bloomberg Finance LP, Deutsche Bank Research

Heiko Peters (+49 69 910-21548, [email protected])

10

19 | October 28, 2016

See for details Focus Germany. August 4, 2014. Current Issues

Focus Germany Export Indicator 2016: demand impact remains weak – price impact turns negative The Export Indicator identifies the effects on German exports of changes in global demand on the one hand, and currency movements on the other (price impact).11

Heiko Peters (+49 69 910-21548, [email protected])

11

20 | October 28, 2016

See for details Focus Germany, March 3, 2016. Current Issues

Focus Germany Germany: Events of economic-, fiscal- and euro-politics Date 7-8 Nov

Event Eurogroup and ECOFIN, Brussels

5-6 Dec

Eurogroup and ECOFIN, Brussels

5-7 Dec

CDU Party Convention, Essen

8 Dec

ECB Governing Council meeting, press conference

15-16 Dec

European Council, Brussels

19 Jan

ECB Governing Council meeting, press conference

23-24 Jan

Eurogroup and ECOFIN, Brussels

DX Remarks Debates on the economic situation – Commission's 2016 autumn forecast, discussion of inflation developments, Greece – state of play, Spain and Cyprus post-programme surveillance – 6th respectively 1st review, Banking Union. Financial and macroeconomic stability developments in the euro area, including monitoring of individual Member States, Greece – state of play. Debate on the party's programme for the imminent campaign for the federal election in September 2017. It is expected, that Chancellor Merkel will announce, whether she will run again as the CDU/CSU's top candidate. We continue to believe the ECB will extend its EUR 80 bn QE programme in December and adjust it to resolve the eligible bond problem. Poss. migration crisis – state of the implementation of the EU-Turkey Agreement, digitisation, trade policy. Review of the monetary policy stance, supposed the ECB will act in December according to our expectation.

Source: Deutsche Bank Research

Dieter Bräuninger (+49 69 910-31708, [email protected])

Germany: Data calendar

DX

Date

Time

Data

Reporting period

31 Oct 2016

8:00

Retail sales (Index, sa), pch mom

September

2 Nov 2016 7 Nov 2016 8 Nov 2016 8 Nov 2016 8 Nov 2016 8 Nov 2016 15 Nov 2016 23 Nov 2016 23 Nov 2016 24 Nov 2016 29 Nov 2016

10:00 8:00 8:00 8:00 8:00 8:00 8:00 9:30 9:30 10:30 8:00

Unemployment rate (%, sa) New orders manufacturing (Index, sa), pch mom Industrial production (Index, sa), pch mom Trade balance (EUR bn, sa) Merchandise exports (EUR bn, sa), pch mom (yoy) Merchandise imports (EUR bn, sa), pch mom (yoy) Real GDP (Index, sa), % qoq Manufacturing PMI (Flash) Services PMI (Flash) ifo business climate (Index, sa) Import prices (Index, sa) pch mom (yoy)

October September September September September September Q3 2016 November November November October

DB forecast

Last value

0.3

-0.3

6.1 -3.0 -0.7 21.2 1.9 (3.5) 3.1 (2.0) 0.2 54.0 54.5 109.5 1.1 (-0.4)

6.1 1.0 2.5 21.8 3.4 (4.4) 1.9 (1.7) 0.4 55.1 54.1 110.5 0.1 (-1.8)

Sources: Deutsche Bank Research, Federal Statistical Office, Federal Employment Agency, ifo, Markit

Heiko Peters (+49 69 910-21548, [email protected]) Oliver Rakau (+49 69 910-31875, [email protected])

21 | October 28, 2016

Current Issues

Focus Germany Financial forecasts

DX US

JP

EMU

GB

CH

SE

DK

NO

PL

HU

CZ

Key interest rate, % Current Dec 16 Mar 17 Dec 17

0.375 0.625 0.625 1.125

-0.10 -0.10 -0.10 -0.10

0.00 0.00 0.00 0.00

0.25 0.10 0.10 0.10

-0.75 -0.75 -0.75

-0.50 -0.50 -0.50

0.05 0.05 0.05 0.25

0.50 0.50 0.50

1.50 1.50 1.50 1.50

0.90 0.90 0.90 0.90

0.05 0.05 0.05 0.05

3M interest rates, % Current Dec 16 Mar 17 Dec 17

0.89 0.88 0.88 1.38

0.06 0.05 0.05 0.05

-0.32 -0.30 -0.30 -0.30

0.40 0.43 0.34 0.35

10J government bonds yields, % Current 1.86 Dec 16 1.75 Mar 17 2.00 Dec 17 2.00

-0.05 -0.10 -0.10 -0.10

0.17 0.00 0.10 0.25

1.25 1.15 1.20 1.40

Exchange rates Current Dec 16 Mar 17 Dec 17

EUR/USD USD/JPY EUR/GBP GBP/USD 1.09 104.56 0.89 1.23 1.05 94.00 0.84 1.25 1.03 94.00 0.84 1.23 0.95 94.00 0.83 1.15

EUR/CHF EUR/SEK EUR/DKK EUR/NOK EUR/PLN EUR/HUF EUR/CZK 1.08 9.72 7.44 8.99 4.34 309.23 27.02 1.10 9.25 7.46 9.00 4.30 315.00 27.10 1.11 9.13 7.46 8.96 4.28 316.25 27.10 1.14 8.75 7.46 8.84 4.20 320.00 25.13

Sources: Bloomberg Finance LP, Deutsche Bank

22 | October 28, 2016

Current Issues

Focus Germany German data monitor

Business surveys and output Aggregate Ifo business climate Ifo business expectations Industry Ifo manufacturing Headline IP (% pop) Orders (% pop) Capacity Utilisation Construction Output (% pop) Orders (% pop) Ifo construction Consumer demand EC consumer survey Retail sales (% pop) New car reg. (% yoy) Foreign sector Foreign orders (% pop) Exports (% pop) Imports (% pop) Net trade (sa EUR bn) Labour market Unemployment rate (%) Change in unemployment (k) Employment (% yoy) Ifo employment barometer Prices, wages and costs Prices Harmonised CPI (% yoy) Core HICP (% yoy) Harmonised PPI (% yoy) Commodities, ex. Energy (% yoy) Oil price (USD) Inflation expectations EC household survey EC industrial survey Unit labour cost (% yoy) Unit labour cost Compensation Hourly labour costs Money (% yoy) M3 M3 trend (3m cma) Credit - private Credit - public

DX Q3 2015

Q4 2015

Q1 2016

Q2 2016

Q3 2016

May 2016

Jun 2016

Jul 2016

Aug 2016

Sep 2016

Oct 2016

108.3 102.7

108.6 104.2

106.8 100.7

107.8 101.8

108.0 102.2

107.8 101.7

108.7 103.0

108.3 102.1

106.3 100.1

109.5 104.5

110.5 106.1

103.0 -0.2 -2.0 84.3

103.2 -0.4 0.6 84.4

100.7 1.8 0.8 85.0

101.8 -0.8 -0.5 84.4

102.4

101.5 -1.1 0.1

102.9 1.2 -0.3

102.4 -1.5 0.3

100.8 2.5 1.0

104.1

105.8

-0.6 0.9 121.4

3.5 10.0 123.2

1.4 6.3 122.7

-5.3 -0.1 124.6

0.3 3.6 124.9

0.7 -1.8 125.7

1.1 -4.6 126.0

0.8 -2.2 126.1

128.4

129.0

-0.3 0.6 6.1

-4.4 0.4 5.7

-6.1 0.6 4.5

-3.2 -0.3 9.4

-3.2 0.8 11.9

-1.6 0.0 8.3

-2.1 0.5 -3.9

-2.5 -0.3 8.3

-3.7 -0.9 0.5 60.6

0.2 -0.9 -1.1 60.7

2.1 0.4 0.0 62.2

-1.4 0.4 -1.1 66.1

1.9 -1.3 0.0 21.8

-1.1 -0.1 0.6 21.3

2.8 -1.4 0.0 19.9

-0.2 3.4 1.9 21.8

6.4 -2.3 0.9 108.1

6.3 -26.0 1.1 109.7

6.2 -40.0 1.2 108.4

6.1 -29.0 1.2 108.2

109.0

6.1 -10.0 1.2 108.3

6.1 -5.0 1.2 108.0

6.1 -6.0 1.2 108.1

6.1 -6.0 1.2 108.7

110.2

0.0 1.0 -1.7 -8.7 51.3

0.2 1.2 -2.3 -12.6 44.8

0.1 1.1 -2.8 -14.6 35.1

0.0 1.0 -2.6 -6.5 46.9

0.4 1.1 -1.7 2.9 47.0

0.0 1.1 -2.7 -6.9 47.7

0.2 1.2 -2.2 -3.9 49.9

0.4 1.3 -2.0 0.2 46.6

0.3 1.0 -1.6 4.1 47.1

0.5 1.1 -1.4 4.7 47.3

4.9 0.8

4.0 1.5

5.3 -2.4

3.6 1.7

6.2 3.0

1.9 2.4

5.9 3.2

4.9 4.8

7.2 1.6

6.4 2.7

1.5 2.4 2.6

1.7 2.4 1.9

2.0 2.5 3.3

0.3 1.9 0.1

8.2

9.2

7.8

7.2

2.7 11.7

2.0 -9.1

2.7 9.7

7.2 7.2 2.7 9.7

7.4 7.3 2.0 9.1

7.2

2.5 11.1

7.2 7.2 2.7 1.4

84.8

126.8 -2.5 4.2

6.1 -16.3

-2.9 9.4

6.1 1.0 110.7

2.2 9.5

% pop = % change this period over previous period. Sources: Deutsche Bundesbank, European Commission, Eurostat, Federal Employment Agency, German Federal Statistical Office, HWWI, ifo, Markit

23 | October 28, 2016

Current Issues

Focus Germany Focus Germany deals with macroeconomic and economic policy issues in Germany. Each issue also contains a timetable of financial and economic policy events as well as a detailed data monitor of German economic indicators. Focus Germany is a monthly publication.  Focus Germany: Difficult times for German savers ........................................................ October 4, 2016  Low returns, political discontent – Germans explore riskier options .............................. September 2, 2016  ECB helps industry and boosts property prices ................ July 27, 2016  German consumer vs Brexit................................................ July 4, 2016  Growth and fiscal outlook: Risks remain ............................ June 3, 2016  How to pay for retirement? ................................................ May 12, 2016  Solid growth but difficulties for exports and construction ..................................................................April 4, 2016 Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E-mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910-31877 E-mail: [email protected]

 2016 GDP growth: External headwinds & domestic tailwinds ............................................................ March 3, 2016  Above potential growth, no wage excesses ................ January 28, 2016  Pick-up in the domestic economy in 2016 .............. December 16, 2015  Strong domestic demand – but no excesses ............ November 5, 2015  Migration, urbanisation, inflation ................................... October 2, 2015

Available faster by E-mail: [email protected]

 Solid growth, budget surpluses but new challenges .................................................. September 1, 2015  Cracks in the foundation? ................................................. July 31, 2015  Inflation moving higher, despite subdued core inflation ..................................................................... June 29, 2015

 German savers challenged by QEAll.................................... April 30, 2015 © Copyright 2016. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. rights reserved. When quoting please cite “Deutsche Bank Research”. German exporters facing The above information does not constitute the provision ofinvestment, legal or tax advice. Anystrong views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without March notice. Opinions headwind despite softer euro ......................................... 30, 2015 expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness,  Stronger growth and wages – completeness and accuracy of the information given or the assessments made. reaction from ................................................. March 2015 In Germany this information is approved and/or communicatedlittle by Deutsche Bank AGsavers Frankfurt, licensed to carry on banking business and to 2, provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche AG, London a member of the London Stock Exchange,  German growthBank after oil, EURBranch, and ECB ..................... February 2, 2015 authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This information is distributed in Hong Kong Deutsche Bank Hong Kong Branch, in KoreaJanuary by Deutsche  Outlook 2015:byRecovery withAG, risks attached ................. 6, 2015 Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this downshift in global trade report and consider the PDS before making any decision  aboutStructural whether to acquire the product. Printed by: HST Offsetdruck Schadt & Tetzlaff GbR, Dieburg burdens growth outlook ............................................. December 2, 2014 Print: ISSN 1612-314X / Internet/E-mail: ISSN 1612-3158 Further disappointments ........................................... November 5, 2014