German Consumer Confidence & Election Results

By Orbex

As anticipated, the German federal election results came in with a narrow plurality for the center-left SDP party.

This is the closest result in history, suggesting that it will be the most difficult coalition negotiation as well. Some estimate the government negotiations to last until even Christmas. This means that Merkel could remain Chancellor for several more months.

Markets, then again, might not be so happy with the uncertainty.

The narrow results have allowed for a wide range of interpretations. Some media headlines announced that Germans demanded change, while others proclaimed Germans voted for continuity.

Thankfully, the major concern for the markets has been averted. In fact, they avoided a hard-left coalition of SPD, Linke, and Greens, who would have taken the government reins, and pushed up taxes and increased regulations.

Where to now?

Although Schultz’s SPD gained the most votes, the left-leaning parties failed to obtain an overall majority.

This means the center-right, and Merkel’s successor, Laschet of the CDU will try to form a “Jamaica” coalition, of CDU, plus liberal FDP and the Greens. That had been attempted before, but talks broke down as the pro-business FDP and pro-environment Greens could not agree on a platform.

Last time, the “escape valve” was to return to an CDU-SPD “grand coalition”. However, that option is not on the table anymore, since the sum of votes from both parties does not equal a majority either. This allows for alternatives of a “grand coalition” with the FDP or the Greens.

Nonetheless, given the political costs that the “grand coalition” implies for both parties, this could generally be a very distant, and last resort alternative.

Out of the two options, however, an CDU-SPD-FDP alliance is the less impossible one. The FDP has been in government before and has a more pragmatic approach than the other “minor” parties.

What about the people?

The uncertainty in the government provides uncertainty in the market. This is particularly in terms of where regulatory pressures and tax increases will lie. That said, it might leave many businesses on hold in terms of investing, providing a slight drag on the economy for the next couple of months.

On the other hand, consumers generally won’t really change their habits because of the election. That doesn’t mean it’s good news though, as Germany heads into autumn and worries about covid still persist.

Tomorrow we have the release of GfK Consumer Confidence, which analysts expect to move further negative to -1.8 from -1.2 in August. Unfortunately, this measure of consumer sentiment never recovered from the pandemic.

Regulatory reaction

Later in the day, analysts anticipate ECB’s Lagarde to give a speech in the bank’s Central Banking Forum. In fact, they will be going over her remarks with a fine-tooth comb looking for hints about future rate policy.

However, with the largest economy in Europe in somewhat of a regulatory limbo until they decide on the coalition, the ECB is likely to have ample room to keep monetary policy easing in place.

In turn, this might make the regulators’ job easier because there is less inflation. The problem is that less inflation is because of lower growth.

Article by Orbex

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