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‘Boom!’: Did Germany Just Change The Game With Long-Awaited Fiscal U-Turn?

"Fiscal [stimulus] changes the whole equation".

“The fact that there’s masses of fiscal room to tackle the slowdown doesn’t seem to matter in Berlin”, SocGen’s Kit Juckes lamented on Wednesday, after data out of Germany showed industrial production fell 5.2% YoY in June, the most in a decade.

It was the latest in a string of abysmal data. Late last month, for instance, Ifo’s gauge of business expectations plunged to 92.2, the lowest reading since 2009.

Just days earlier, while documenting the country’s increasingly worrisome factory slump, IHS Markit warned that the malaise in the manufacturing sector was starting to spill over into services.

Read more: German Industrial Production Crashes Most In A Decade, ‘Dooming’ Economy

The point: The German economy is likely to fall into a recession and despite being able to borrow at deeply negative rates, Berlin hasn’t shown a willingness to loosen the purse strings.

Until now.

According to ReutersGermany may issue new debt in order to finance “a climate protection package”, a move that would presage a welcome U-turn on fiscal policy. Reuters cites an unnamed senior government official.

Bund yields jumped ~5bps on the news.

The plan, if confirmed, would represent a breaking of a previously intractable fiscal logjam that’s bedeviled those calling for more government spending to help take some of the onus off monetary policy when it comes to reviving growth and inflation in the eurozone.

According to the source, Berlin might “strictly” tie and limit the new debt to the proposed climate protection initiative, expected to clear the cabinet next month.

It’s probably premature to get too excited about this. Germany’s affinity for fiscal rectitude is the stuff of legend and one imagines this isn’t going to be a total capitulation. Indeed, the Finance Ministry was quick to say there’s been no decision on giving up its balanced budget.

Still, the signaling effect could be important and may help to bolster sentiment at a critical juncture for the bloc’s flagging economy. Q2 growth data showed a marked deceleration across countries.

(*Germany is estimate)

As Kevin Muir, of Macro Tourist fame, put it on Thursday, “BOOM! Game on! Don’t underestimate how big this announcement is”.

As a reminder, the ability of the services sector to buffer the manufacturing drag is under severe strain, as the following breakdown from Goldman’s current activity indicator shows:


Does Thursday’s news mark a turning point? We’ll see. With the US-China trade war set to drag on in perpetuity, a German fiscal push would certainly help or, as Kevin puts it, “Fiscal [stimulus] changes the whole equation”.



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