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EFN Report Summer 2018: Economic Outlook for the Euro Area in 2018 and 2019

EFN Reports, No. 3, 2018
Abstract
• In summer 2018 the cyclical upswing of the world economy is not over, but it appears to be fragmenting. While economic activity in the European Union has lost steam, the upswing in the US has gained pace, and growth in China appears to be robust. • Markets for commodities as well as for capital are at present strongly affected by political movements: oil prices are more than 50% higher than one year ago, as the US exit from the Iran nuclear deal puts the long run oil supply from Iran at risk, and the strongly expansionary US tax reform explains the rise in US long run interest rates. . • Uncertainties about the future international trade system cause firms to slow down or even reverse the globalization of value chains. As an early consequence, world trade in the second half of 2018 and in 2019 will expand at much slower rates than during 2017. • In the euro area growth slowed in the first quarter 2018, due to weaker investment activity in France and Italy and, more importantly, a fall in exports in all larger euro area economies except Spain. However, the drivers of the upswing such as low interest rates for credit and expanding real incomes will still be supportive in the near future, and fiscal policies will be slighly more expansionary. But a slowdown in world trade will dent export growth as well as corporate profits. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.1% in 2018 and to 1.7% in 2019 – a forecast that will only be realized if damages to the international trade system are limited and if the European sovereign debt crisis does not come back. • While wage inflation has been slowly increasing during the past quarters to about 2%, a clear upwards trend of core consumer price inflation is still not detectable. The recent jump of the headline rate to 1.9% is due to higher oil prices. Our forecasts for 2018 and 2019 are close, although still below, 2%.
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EFN Report Spring 2018: Economic Outlook for the Euro Area in 2018 and 2019

EFN Reports, No. 2, 2018
Abstract
• The world economy is booming. The global upswing is investment-driven, and since investment goods usually have a large import content, it is no surprise that world trade has been buoyant during winter. The very expansionary US fiscal policy (tax reform and lifting of spending caps) could give an additional shortterm stimulus for the world economy. • However, we forecast world trade to slow down during 2018. The US administration’s announcement of high tariffs on steel and aluminium comes close to triggering a spiral into a broader trade conflict. Moreover, the globalization of value chains has been slowing down since the financial crisis due to the industrial upgrading in China and in other emerging economies that has declined processing trade. In addition, some types of manufacturing jobs have returned to source countries (reshoring) in response to technology innovation and lower labour costs differentials. • The euro area is in the middle of a broad based cyclical upswing. Higher exports and improved expectations have induced firms to invest more into equipment, as capacity utilization has been above average for some time now and is still increasing, and financing costs are very low. However, recent soft indicators, but also industrial production have been surprisingly downbeat, and there was some turbulence in financial markets, which suggests some caution. • The ECB will probably stop its asset purchase program at the end of 2018, but only later in 2019 start raising interest rates. Fiscal policy in the euro area is slightly expansionary this year, and a notable fiscal stimulus in France and in Germany is to be expected for 2019. • Overall, we forecast euro area GDP to expand by 2.2% in 2018 and by 1.6% in 2019. Accelerating wage dynamics will, together with higher price setting powers of firms and the recent increase in oil prices, cause consumer price inflation rising to nearly to 2% in 2019. Uncertainty, is however substantial, as a slight slowdown cannot be ruled out, which would also impact inflation dynamics.
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EFN Report Autumn 2017: Economic Outlook for the Euro Area in 2017 and 2018

EFN Reports, No. 4, 2017
Abstract
In 2017 the world economy is in an upswing, but consumer price inflation is still surprisingly low in advanced economies, and central banks will therefore keep key interest rates very low and financial conditions favorable for the rest of the year and, probably, for 2018. Global growth, though, will moderate a bit, since expansive policy measures in China have been reduced. As an early consequence, imports of emerging Asia were no more than stagnant during summer. The upswing in the euro area is broad based, both regionally and with respect to the different components of aggregate demand, as investment has recently picked up markedly, partly due to construction of dwellings. From the production side, the level of capacity utilization in the manufacturing sector is clearly above its long-term average and rising further. Inflation will not have reached the ECB’s target rate of below but close to 2% at the end of 2018. The trend of a growing participation rate in labour markets and the amount of part-time and low quality jobs are some reasons why overall wage and price dynamics are still very moderate; the appreciation of the euro, the incorporation of technical innovations and a possible change in the consumer preferences for low-cost products could be other reasons. We forecast a GDP growth rate of 2.3% for 2017 and 1.9% for 2018. This year’s strong pickup of world trade means that net exports will, in spite of rather strong domestic demand, contribute positively to GDP growth in 2017, while the opposite holds for 2018, due to the significant appreciation of the Euro.
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Managerial Stability and the Pricing of New Equity Issuances: The Effects of State Enforcement of Noncompetition Agreements

Yin-chi Liao, Bill Francis, Iftekhar Hasan, Haizhi Wang
International Review of Entrepreneurship, No. 2, 2017
Abstract
In this paper, we empirically investigate the relationship between managerial stability induced by the legal enforcement of noncompetition agreements and the pricing of new equity issuances. Making use of the variation in the enforceability of noncompetition contracts across states in the U.S., we find that managerial stability is negatively related to underpricing and price revision for our sample of new equity issuing firms. Our results demonstrate that the stability of management is important for an issuing firm to convey its intrinsic value credibly to the market.
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Plant-based Bioeconomy in Central Germany – A Mapping of Actors, Industries and Places

Wilfried Ehrenfeld, Frieder Kropfhäußer
Technology Analysis and Strategic Management, No. 5, 2017
Abstract
The bioeconomy links industrial and agricultural research and production and is expected to provide growth, particularly in rural areas. However, it is still unclear which companies, research institutes and universities make up the bioeconomy. This makes it difficult to evaluate the policy measures that support the bioeconomy. The aim of this article is to provide an inventory of relevant actors in the three Central German states of Saxony, Saxony-Anhalt and Thuringia. First we take an in-depth look at the different sectors, outline the industries involved, note the location and age of the enterprises and examine the distribution of important European industrial activity classification (NACE) codes. Our results underline the fact that established industry classifications are insufficient in identifying the plant-based bioeconomy population. We also question the overly optimistic statements regarding growth potentials in rural areas and employment potentials in general.
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Mind the Gap: The Difference Between U.S. and European Loan Rates

Tobias Berg, Anthony Saunders, Sascha Steffen, Daniel Streitz
Review of Financial Studies, No. 3, 2017
Abstract
We analyze pricing differences between U.S. and European syndicated loans over the 1992–2014 period. We explicitly distinguish credit lines from term loans. For credit lines, U.S. borrowers pay significantly higher spreads, but lower fees, resulting in similar total costs of borrowing in both markets. Credit line usage is more cyclical in the United States, which provides a rationale for the pricing structure difference. For term loans, we analyze the channels of the cross-country loan price differential and document the importance of: the composition of term loan borrowers and the loan supply by institutional investors and foreign banks.
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14.12.2016 • 50/2016

The German Economy: Economic Activity Spurred by Private Consumption and Construction

German economic activity remains robust due to strong domestic demand. IWH forecasts gross domestic product (GDP) to increase by 1.3% in 2017. The growth rate is half a percentage point lower than in 2016 due to calendar effects and a negative contribution of external trade. Consumer price inflation also remains modest (1.3%). “Unemployment is expected to increase slightly due to a protracted integration of refugees into the labor market”, says Oliver Holtemöller, Head of the Department Macroeconomics and IWH vice president

Oliver Holtemöller
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Global Food Prices and Monetary Policy in an Emerging Market Economy: The Case of India

Oliver Holtemöller, Sushanta Mallick
Journal of Asian Economics, 2016
Abstract
This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks. 
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EFN Report Autumn 2016: Economic Outlook for the Euro Area in 2017 and 2017

EFN Reports, No. 4, 2016
Abstract
During the first half of 2016, investment activity of private firms was weak in most advanced economies and labour producitivity was even decreasing, as was world trade in goods. Consumption of private households, however, kept the world economy afloat. Within this global context, the modest recovery of the euro area economy continues, with important tailwinds from labour markets. Employment ist expanding everywhre, even in those countries, such as France and Italy, where unemployment rates have still not come down significantly. Since monetary and fisical policies will not become more expansive in 2017, the stimulus from cheap oil is fading, and exports to the UK will be dragged down by the fallout of the Brexit votem there is reason to expect the euro area recovery to lose some momentum. GDP will, according to our forecast, increase by 1,6% in this year and by 1,5% in 2017, about as much as potential output in the euro area. Our inflation forecast for 2016 is 0,2%. For 2017, we expect inflation to increase up to 1,2%, as during next year the favourable effects of decreasing energy prices will fade off.
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02.09.2016 • 35/2016

The German Economy: Still Robust Despite Sliding Sentiment

The prospects for the German economy are still quite favorable. While sentiment indicators suggest that growth will slow at the end of the year, domestic demand will continue on an upward trend. The German GDP should increase by 1.9% in 2016. For 2017 we expect a lower growth rate of 1.2%“Weaker export volumes and higher growth of imports are the relevant factors for the slowdown”, says Prof Oliver Holtemöller, IWH Vice president. Unemployment will rise a bit as more refugees enter the labor market. Consumer price inflation remains moderate. The general government balance (cyclically ad¬justed as well as unadjusted) will be in surplus in both 2016 and 2017.

Oliver Holtemöller
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