Germany's Deficit Blowout
Today's most important surprise - or shock - came from Germany, whicc reported a federal budget deficit of Eu48.bn for December. That compares with a surplus of Eu2.9bn in December last year, so it's a massive turnaround. It's not because revenues are down, it's because spending is truly spiraling: revenues were up 35.3% yoy, with a monthly movt 2.4SDs above historic seasonal trends. But spending jumped 153% yoy, with the monthly movt a trend-shattering 5.1SDs above historic seasonal trends.
Germany's pandemic has had a different rhythm to the rest of the world, escaping the worst in the first half of 2020, only to be ambushed towards the end of November last year. As a result, Germany's fiscal deterioration in 2020 and most of 2021 was far less dramatic than elsewhere.
But that deterioration is with us now: in 4Q, the Eu82.25bn deficit was equivalent to 8.8% of quarterly GDP, taking the deficit for calendar 2021 to 6% of GDP (vs 3.9% in 2020).
What's more, it will widen further this year, not only because Germany's pandemic continues, but also because the new government has just passed a supplementary budget allowing them to spend unused loans worth Eu60bn, to be spent on investments in climate protection and digitization. Fiscal consolidation will have to wait until 2023.
This means that Germany's fiscal policy will be expanding hard at a time when all its major trading partners are busy taking taking back the extraordinary fiscal expansion seen in 2020. For example, in the UK, the 2021 net public sector borrowing of £183bn is down 30.4% yoy, in the US, the federal deficit narrowed by 23% in 2021; and in Japan the 2021 fiscal deficit narrowed 38.9%, and even in China, the deficit probably narrowed by around 25.5%
In addition, of course, whilst the ECB is necessarily committed to maintaining its expansionary policy with near-zero interest rates, central banks in other major economies are taking the first steps towards tightening.
Frankly, I don't remember another time when Germany and by extension Europe was committed to expansionary monetary and fiscal policies whilst all other major economies were retrenching. This is the reverse of the usual dynamic. Could it be that it's enough to de-synchronize world growth patterns in 2022, with Europe actually emerging as a net source of demand for the rest of the world? If so, it's a big departure from their traditional mercantilist model. What's more, although fx movements are in my view unforecastable, this policy contradiction between Germany and the rest of the world would seem to suggest stress on the Euro. But, please bear in mind, that's not a forecast, merely an observation.
