In Europe it is no secret that Germany’s economy was weak last year given the country’s gearing to exports; though it would have been even weaker still were it not for surprisingly resilient domestic demand. German real GDP growth slowed from 1.5% YoY in 2018 to 0.6% YoY in 2019. However, real household consumption growth rose from 1.3% in 2018 to 1.6% in 2019, while real gross fixed capital formation growth slowed from 3.5% YoY to 2.5% YoY over the same period (see following chart). Real net exports also declined by 5.9% YoY in 2019.

Germany Real GDP, Household Consumption and Investment Growth

Germany real GDP household consumption and investment growth

Source: Federal Statistics Office, CEIC Data

Increasingly Aggressive Emissions Regulations

Still it is far from clear that the worst is over. In this respect, my attention has been drawn of late to the self-harm, which risks being inflicted on the all-important German auto sector, as well as the European auto industry in general, as a result of the need to meet aggressive EU emissions regulations.

Carmakers are required from the start of this year to lower average CO2 output to 95g per kilometre by 2021 and to 80g per kilometre by 2025. In this respect, the European economy, to a far greater extent than in North America is about to be impacted dramatically by the implementation of an environmental/climate-related agenda.

An interesting article in the pinko paper late last year highlighted that if the European car industry sold the same mix of vehicles in 2021 as it did in 2018 the industry would face fines of €25 billion (see Financial Times article: “Can European carmakers accelerate electric transition?”, Dec. 18, 2019) because of the emission targets. This is because customers have been shunning diesel cars in favour of petrol ones, a trend which raises the dreaded CO2 emissions. Diesel emits a fifth less CO2 than petrol which is why, when I covered the global auto industry as a journalist many years ago, everyone was encouraged to buy diesel, most particularly in Europe.

By contrast, it is no surprise to learn that there remains a conspicuous lack of demand for electric cars in Europe with sales concentrated, predictably, on countries that offer generous incentives. Thus, only 2.5% of cars sold in Europe in 2018 were electric and the number for 2019 was 3.6%, according to the European Automobile Manufacturers Association (see following chart). One issue here is a lack of charging stations.

But, far more importantly, European car buyers have developed a taste for petrol guzzling American-style SUVs, just like they have developed a taste for American-style shopping malls and McDonalds. Sales of such vehicles now account for about 40% of total car sales in Europe, up from 20% in 2014.

Electric Cars as % of Total New Car Sales in Europe

Electric cars as Pct of total new car sales in Europe

Source: European Automobile Manufacturers Association (ACEA)

The above, therefore, represents an existential threat to Europe’s car industry which supports close to 14 million jobs. That is so long as the EU insists on imposing these emission regulations, which were first set back in 2009. Meanwhile, another Financial Times article last month reported a recent study that more than 400,000 jobs could be lost in Germany over the next ten years as a result of the EU mandated shift towards electric vehicles (see Financial Times article: “German shift to electric autos puts jobs at risk”, Jan. 14, 2020).

This is because German carmakers will be forced to rely on imports to meet targets for electric vehicle sales. That is, of course, to assume customers want to buy the things. But if the subsidies are big enough they probably will. Germany certainly has the fiscal wherewithal to blow on such subsidies, though the money would be far better spent upgrading the country’s infrastructure. Germany’s fiscal surplus rose from 0.6% of GDP in 2014 to 1.9% in 2018 and was 1.5% in 2019 (see following chart).

Germany Fiscal Balance as % of GDP

Germany fiscal balance as Pct of GDP - Feb 2020

Source: Bloomberg, Bundesbank

The Consequences of Germany’s Strict Environmental Regulations

Meanwhile it is no secret that the Eurozone political establishment has been much more sympathetic to environmental policies than the likes of Donald Trump. After all it was German Chancellor Angela Merkel who banned the use of nuclear power almost on a whim in response to the Fukushima disaster in Japan in 2011.

The ironic consequence, from an environmental perspective, was a big increase in the use of coal in Germany in the three years after the disaster, as well as a resulting increase in the cost of power for German industry. Still, the share of electricity generation by coal has declined in recent years as renewable sources rise (see following chart). In this respect, renewable energy in Germany has been stimulated by massive subsidies.

The German government has now agreed a deal with Germany’s coal-producing regions to phase out the use of coal power by 2038 in return for compensation and benefits totalling €40 billion (see Financial Times article: “Berlin secures €40bn deal with regions to end use of coal by 2038”, Jan. 17, 2020). German Finance Minister Olaf Scholz also said recently that coal-fired power plants in Germany will receive €4.35 billion in compensation for switching them off early.

Coal-fired Electricity Production as % of Total Electricity Generation in Germany

Coal-fired electricity production as Pct of total electricity generation in Germany

Note: Including lignite and hard coal. Source: AG Energiebilanzen (AGEB)

Renewables as % of Total Electricity Consumption in Germany

Renewables as Pct of total electricity consumption in Germany

Source: Federal Ministry for Economic Affairs and Energy

Germany’s goal is to meet at least 65% of its electricity needs with “renewables” by the end of this decade, up from the current 42% share.

In relation to this announcement, German environment minister Svenja Schulze was also quoted last month as saying that Germany would be the first country to exit from both coal and nuclear power. Germany’s goal is to meet at least 65% of its electricity needs with “renewables” by the end of this decade, up from the current 42% share (see previous chart). While Green Party politicians in Germany are, predictably, arguing that the transition is not quick enough, these are dramatic moves, though in practice Germany is likely to keep buying nuclear power from France and coal from Poland.

It also has to be wondered what the political reaction against the green lobby will be in Germany when it becomes apparent the damage such policies will inflict on both employment and the German economy in general (i.e. on ordinary people). It is unlikely to be pretty, most particularly as the people hit the most will be in the lower income category. These people will include not only employees of auto component companies who will lose their jobs but also the multiple service sector jobs linked to the auto sector, the largest sector in the German economy and therefore the largest also in the Eurozone.

Meanwhile, it is worth recording that, from a stock market perspective, the Deutsche Börse Prime Automobile Index peaked in March 2015 and has since declined by 36%. As a result, the index has underperformed the German stock market benchmark DAX by 43% since March 2015 (see following chart) and has underperformed Toyota by 56% in euro terms since April 2014.

Deutsche Borse Prime Automobile Index relative to DAX

Deutsche Borse Prime Automobile Index relative to DAX

Source: Bloomberg

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