Fiscal Package Hope for Germany, Says Schnitzer

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00:00I wonder your initial response to the weakness of this data. So we have the German composite PMI

00:04at 48.6 and weakness, more weakness than anticipated in the services side of the economy.

00:10Does that make sense to you? It's not really what we expected because, yes, the economy is not

00:17strong. We are stagnating this year. But there are signs of recovery in the sense of we have a fiscal

00:23package now implemented by the government. This has actually given quite a lot of expectations

00:31that the economy will recover. So I'm a bit surprised. You're surprised. I mean, does this

00:37mean that you came out with new forecasts for the German economy yesterday, Monica, and they

00:42showed stagnation as your forecast for 2025? Does this apply downside risk to that forecast?

00:49There's a risk we could get contraction in the German economy, I suppose, this year.

00:55It really all depends what's going on with the U.S. tariff policy. So this definitely has

01:02increased uncertainty tremendously. So companies are holding back their investment. They're

01:07not sure, should they move production to the U.S.? Should they not? It really makes companies

01:14hold back their investment. So that's that. And for consumer confidence, we also see that

01:19it's still low. So consumers are holding back their purchases. That's also bad. But on the

01:26other hand, as I just said, the fiscal package that is going to be implemented gives hope that

01:33the economy will be recovering. So at least on the churn side, there's now much less uncertainty

01:40than there used to be last year.

01:44Monica, good morning. It's Guy. Let's talk about the exciting subject of economic multipliers.

01:49Yes. I'm wondering what effects we see from this German spending package, how quickly it

01:55comes, how much of an effect we actually get. What is your current thinking around that?

02:00Because there does seem to be this expectation that we do see a fairly good read across from

02:04extra fiscal into economic data.

02:08Yes, that's actually what our report yesterday was about. We did some projections how the fiscal

02:15package will impact the German economy. It's the GDP, also the debt. And we see that it depends

02:24really very much on how you spend the money and how quickly. So let's start with how quickly. If we

02:29get this started this year already, which is unlikely because it takes some time, some planning to do,

02:35then, of course, the effect is stronger. But we expect at least next year to the economy picking up.

02:44And that already gives our projection of a 1% growth next year. But we do say it really depends on how

02:54you spend it. If you spend it on consumption, we are actually very frank, then this is not going to

03:01boost the economy a lot. It will boost it to some extent. There's a Keynesian effect, then it will

03:08be some effect. But the effect will be so much larger if it's spent on investment, as it should be,

03:17because the debt break that was changed was changed in order to spend it on investment.

03:24What do you think the effect, if we do spend it on investment, if the Germans spend it on investment,

03:30what effect do you think there will be on the potential growth rate of the German economy?

03:36So we do think that over the next couple of years, the growth of the German economy,

03:44or it can increase the German economy quite substantially. And we could expect a growth

03:52rate to go well beyond the 1% that we are projecting for next year. So in that sense,

04:04there could be actually quite some effect.

04:08Monica, it's Creedy in London. Talk to us a little bit more about that effect. We had a guest on the

04:13show earlier talking to us about how the fact that leading into defense spending may not be as

04:17lucrative in terms of fiscal multiplier that Guy just mentioned, relative to say infrastructure

04:22spending or other pieces as well. Can you just walk us through the lag or kind of the limited

04:26effect of the defense piece specifically? Exactly. So defense, it's better than consumption,

04:33but still the multiplier that we expect for Germany will be below one. So it's actually not boosting

04:40the economy a lot. It will be larger if it's really spent on investment in terms of infrastructure.

04:46It will be larger if it's spent on things like research and development that has the

04:52long, the longest effect and the largest effect. So actually also, if you consider how long the effects

04:58will last of this fiscal stimulus, it will be longer, more prolonged if it's spent on investment

05:06rather than on defense rather than on consumption. So in the other pieces of that investment strategy,

05:14you mentioned infrastructure, you mentioned research and development there. Are inflation worries going

05:19to factor into that or make that project more difficult or is that a issue of the past?

05:26So it all depends on capacity. And yes, we see for building capacities that we still have quite some room

05:34here. If you think about road construction, for instance, there is less capacity left at the moment,

05:41less idle capacity. So in that sense, it's really important that the government announces their plans

05:48very quickly because that means then the companies can prepare for the orders that will reach them.

05:56And so then they can increase their capacity. I mean, that's the whole idea. The whole idea is that the

06:02economy will grow because also capacity will be extended and the capacity that is there is going to be used.

06:11So yes, if the money would be spent right away and just on one thing and the capacity is not there,

06:19then there could be some inflation effect. But this is not how we expect things are going to happen.

06:23Monica, what do you think the priority for the German input into the trade conversation between Europe

06:33and the United States? What should the priority for Germany be when it comes to that trade conversation?

06:39It's obvious that some sectors are much more affected than others. So we rely a lot on automobiles,

06:46products on machinery, also on pharmaceuticals and chemicals. So these are the products where we

06:56would be very interested in making sure that the tariffs actually come down. So there will be a

07:03strong focus of the German administration to talk about these things.

07:09Monica, a final question to you, if I can. I apologize in advance if this is too direct of a

07:13question. But I am curious, as we digest the various trains of thought from trade worries

07:18to inflation to supply chain crises, investors seem to be coming on our show time and time again and

07:23saying the world is a tricky place to navigate except for Germany because we have this fiscal

07:29spend coming down the pike. Monica, I'm curious, what keeps you up at night? What are you worried

07:33most about that project coming to fruition?

07:35Actually, I think this project is one of the biggest hope we have at the moment, that things are going

07:45well and will be falling into place. So the worry could be that it takes too long to actually

07:54put it into action. But I do think the government has the sense of urgency that is needed now to really

08:02make things move fast. And the companies are waiting for the money. They are waiting for the orders. And so are the people in Germany.

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