An SMS from Ernst (25): Short Messages Service. The Jubilee edition!

With loads of small news stories, it is a perfect day for the Jubilee edition of my SMS from Ernst.

German GDP in 2011

The German statistical bureau Destatis (www.destatis.de) presented today the preliminary GDP for 2011. Germany enjoyed in 2011 a robust growth of its GDP of 3%. Here are the pertinent snips of the GDP press release

German economy in a very robust condition in 2011 

The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. This is shown by first calculations of the Federal Statistical Office (Destatis). Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).
  

Gross domestic product, price-adjusted, chain-linked Change on the previous year (in percent):
2008	2009	2010	2011
+1.1	–5.1	+3.7	+3.0

The impetus for growth was mainly provided by domestic demand in 2011. In particular household final consumption expenditure was a pillar of economic development: in price-adjusted terms, it grew by 1.5%, a rate last reached five years ago. Besides, the year 2011 was again characterised by a strong upward momentum in capital formation: gross fixed capital formation in machinery and equipment (+8.3% in price-adjusted terms) and in construction (+5.4% in price-adjusted terms) was markedly higher than a year earlier.
 
Although foreign trade contributed less to GDP growth than domestic demand, its dynamic development continued: in price-adjusted terms, Germany’s exports of goods and services rose by 8.2% in 2011 from a year earlier. At the same time, imports grew slightly less (+7.2%). The balance of exports and imports contributed 0.8 percentage points to GDP growth in 2011.
 
In 2011, the production side of the GDP was still marked by catch-up effects in almost all economic sectors. Overall, the price-adjusted gross value added of all economic sectors rose by 3.0% from the previous year.

Germany presented again impressive growth in its GDP of 3.0% for 2011. However, there was also a worrisome aspect in the data on 11Q4. This quarter showed a contraction of GDP by 0.25%. Although this is a very limited contraction and these are only a preliminary resultd, it is a warning sign that 2012 could be a lot harder for Germany.

A positive feature in the data was that the domestic consumption grew by 1.5%, where it had been lagging over the years, due to the policy of wage restraint that was introduced in Germany by former chancellor Gerhard Schröder.

Negative for me is that German exports once again grew harder than imports, thus increasing the imbalances on the German external account and - as a consequence – within the Euro-zone. Remember, where Germany and The Netherlands are strong net exporters, the PIIGS-countries are strong net importers.

The Netherlands in its role of corporate tax haven angers Portugal

A few months ago, in my SMS from Ernst (13),  I wrote upon the phenomena that The Netherlands is a tax haven for the largest companies in the world. By establishing their head office in The Netherlands, these companies enjoy the extremely favorable Dutch corporate tax regulation. I wrote this snippet upon it:

I understand that big corporations look for tax havens, as they find it to be in their interest to pay the least tax.

From an American/British/German/Japanese government point-of-view, however, this is antisocial behavior that should be contested.

And as a Dutch citizen, I am not very proud that the Dutch government enables large corporations to avoid tax-payments that are (sometimes desperately) needed in the home-countries of these corporations. Especially as my country hardly gains from this strategy.

How true this last paragraph was, is demonstrated by Portugal, which is one of the PIIGS countries. In Portugal, there is currently widespread anger among government officials, the Portuguese media and the population towards The Netherlands. This anger is caused by the fact that large Portuguese companies also use The Netherland as a tax haven to avoid the corporate taxes in Portugal, thus denying their home country this extremely necessary source of income.

The Dutch worldwide radio service Radio Nederland Wereldomroep (www.rnw.nl) writes the following snips upon this story:

Portuguese angry about Dutch ‘tax haven'

A debate is raging in the media in Portugal about Portuguese multinational corporations which transfer their assets to accounts held in the Netherlands.

The debate was prompted by the decision of the parent company of supermarket chain Pingo Doce to transfer its shares to the Dutch-registered company Francisco Manuel dos Santos to avoid paying taxes in Portugal.

Portugal is one of the EU member states worst affected by the financial crisis. Widespread economic hardship there has prompted much criticism of corporations which seek to avoid taxes by moving to the Netherlands.

Portuguese media have already published numerous stories about multinationals which profit from low tax rates in the Netherlands and the favourable effects of bilateral tax treaties.

There has been an official statement from chairman Alexandre Soares dos Santos of Jeronimo Martins, the holding company for Pingo Doce.

When asked why he moved the family holding ‘Francisco Manuel dos Santos’ to The Netherlands, he stated that the family was afraid that Portugal might have to leave the Euro-zone and has to return to the old currency, the Escudo. ´We have the right to protect our family capital´, he stated.

Although Dos Santos does the right thing from his own point-of-view, I´m strongly against this kind of tax evasion by the extremely wealthy citizens of a country. When the rich citizens don´t pay taxes in their own country, why should the average citizen do so.

This behavior can have a very negative influence on the tax paying morality in a country that is already at the brink of defaulting. And when Portugal defaults, this would have devastating effects on the Euro-zone that is already in a very dire situation.

More flexibility on the Dutch labor market

In The Netherlands, the long lasting myth exists that the Dutch labor market is extremely rigid and it is almost impossible to fire people, as this would be very expensive. And if you would only look at the position of older workers with fixed contracts that are already at the same company for 15 years or more, this is definitely true. Older workers enjoy various kinds of lay-off protection and op top of that receive a compensation that is dependent from their number of years in service.

However, younger workers definitely don´t have the same position as the older workers. These younger workers in general change their job more often, thus building up less working years at a particular company.  On top of that, they are less frequently in the position to receive a fixed contract.

Dutch labor law states that a worker can only have three ‘one year’-contracts before the company must offer him a fixed contract. But companies often find ways to avoid these fixed contracts in reality; for instance by not continuing the last temporary contract, but instead recontracting their worker after a few months interval, with again a temporary contract.

The biggest setback of this behavior for the worker is that he doesn´t build up a pension in the meantime and he doesn´t have the same form of job security that older workers do have.

The Dutch government, in order to make the Dutch labor market even more flexible, decided that the length of temporary contracts might be increased from one until seven or even ten years. The Dutch financial newspaper Het Financieele Dagblad writes on this story:

Minister Henk Kamp of Social Affairs wants long-term temporary contracts (link in Dutch)

Minister Henk Kamp of Social Affairs will soon come with a proposal to deploy long-term temporary labor contracts. He wants to enable contracts with a length of 7 to 10 years.

This is disclosed in a letter from Kamp to the Dutch Second Chamber of Parliament (i.e. House of Representatives). Earlier, Minister Maxime Verhagen of Economic Affairs mentioned already the possibility of long-term temporary contracts.

Kamp states that herewith an ‘extra possibility’ is created to ‘ease the usage of long-term temporary contracts’.  

In my opinion this plan is the wrong solution for the right problem. Sometimes, aging workers of 55 years and older are much less productive and less motivated than younger workers. You could say that these workers are in a gliding flight towards their pension and don’t take one step too much for their job.

In a vivid economy and in jobs with limited time pressure, this behavior could be accepted. But ‘when the going gets tough´, you can’t use people that are working at 60% of their possibilities, especially when they don’t excel in their job in a different way.

It must be possible for a company to fire these mill-stones with a limited compensation in cash, as harsh as this may seem. Now companies are very reluctant to contract older workers that do want to have a job.

Companies think that these older workers are also very expensive to fire when they can´t make it at their new job and don´t hire them in the first place.

But the solution that the cabinet presents to introduce long-term temporary contracts solves absolutely nothing, concerning the aforementioned problem and makes it even harder for younger workers to get a fixed contract. Don´t do it, I would state. 

An SMS from Ernst (24): Short Messages Service

As there was enough small news, but little big news in The Netherlands, it is again time for my SMS from Ernst: the feature that brings you the interesting news in bitesize chunks!

How inflation in The Netherlands ate away all wage increases since 2000

Yesterday, the Dutch Central Bureau for Statistics (http://www.cbs.nl/) presented the total increase of the collectively agreed wages in The Netherlands for 2011. And as can be expected in the Age of Austerity, the increase has been very modest. Here are the pertinent snips of yesterday´s CBS publication:

Modest rise again for collectively agreed wages in 2011

The increase in collectively negotiated wage rates was again modest in 2011. Just as in 2010, wages rose by 1.3% on average.

Collectively agreed wages rose by substantially less than inflation in 2011. Prices rose by an average 2.3% last year. This means wages lagged a full% point behind inflation.

Although wages rose modestly in 2011, the increase did grow in the course of the year. In the first quarter of 2011 wages rose by 1.1%, in the last quarter by 1.5%.

These snippets made me curious. How large the real wage increase (i.e. increase above measured inflation) has been during the last eleven years? Therefore I once again visited the wonderful Statline database of CBS and came with the following results. 

Disclaimer: As the data for company owners/executives has been issued only once a year until 2010, I interpolated the data per month for 2000-2010. The data for 2011 has been extrapolated. All data is courtesy of the CBS.

Collectively agreed wages and Income of owners / executives
vs inflation in the period 2000-2011. Data courtesy of www.cbs.nl
Click to enlarge

This picture shows clearly that the collectively agreed wages did hardly increase above inflation levels, during the whole period from 2000-2011. The only category of incomes that has been increased above inflation level is that of the owners/executives.

You can safely conclude that the purchasing power of people who took part in collectively agreed wages (the majority of workers in The Netherlands) didn´t increase since 2000, while their average uncollaterized debt, average mortgage debt and housing expenses (a.o. taxes based on value of their house) did rise substantially since then. In the process people might have felt richer initially, due to more available spending money, but they got poorer instead.

Supercar dealer Hessing defaults: was it the Age of Austerity? Or just poor judgment?

The Dutch dealer of thoroughbred Italian, German and British cars Hessing defaulted yesterday. Hessing Holding BV and all of its subsidiaries (car dealerships and yachting sales) have filed for bankruptcy on Monday, 9 January 2012, after the companies asked for suspension of payments the previous Thursday.

While Hessing might not be a household name in the United Kingdom and the US, the company is renowned in The Netherlands for selling about every really expensive car brand there is (a.o. Lamborghini, Ferrari, Bugatti, Rolls Royce and Bentley) and also items like expensive yachts and cabin cruisers.

The company was famous for its stunning glass-cathedral showroom (see picture) that was integrated in a sound barrier alongside the A2 highway near Utrecht, arguably the most important highway in The Netherlands.

Hessing's showroom like a  glass-cathedral at the A2 highway in
The Netherlands ( picture courtesy of http://www.hessing.nl/  )
Click to enlarge

Only one day after the default, there is already interest in taking over Hessing’s dealership for the thoroughbred car brands. Stern, a large dealer of a.o. Mercedes and Opel, started negotiations today and is very optimistic on the outcome.

While I initially thought that this bankruptcy was a result of the Age of Austerity coming to The Netherlands, this wasn’t the case. Sales of Rolls Royce in The Netherlands were actually above expectations in 2011. In reality, the company has defaulted on a real estate investment gone awry.

In De Bilt, a sophisticated village near Utrecht, the real estate branch of Hessing planned to build the first gated community in The Netherlands with houses and apartments for the very wealthy. Unfortunately, the forward sales of houses were so disappointing that one of Hessing’s partners, car dealer/importer Louwman (Toyota) withdrew its €10 mln investment. The inability of Hessing to settle this amount, led to its default yesterday.

This story proves once again that a combination of megalomania and bad judgment in investments can annihilate the healthiest company within days. Hessing should have known in advance that the market for extremely expensive houses and gated communities in The Netherlands was dead as a doornail before it even started. The signs have been around since 2006.

Dutch Queen Beatrix proves herself once again as the ultimate marketing tool

Almost one year ago, on 7 March, 2011 I wrote on the marketing abilities of Queen Beatrix of The Netherlands:

The Netherlands is a country with an excellent reputation on the production and export of hi-quality produce and goods:

·    Seeds, flowers and agricultural produce,

·    State-of-the-art consumer products

·    Means of production, like microprocessors (NXP) and wafer machines for the chip industry (ASML)

·    Hi-tec weaponry: guns, radar installations, war ships and submarines

·    Instruments and tools for the nuclear industry

We build it very good and we export it even better, thanks to the best marketing tool a country can have: queen Beatrix of The Netherlands. The queen is the kind of person that opens doors for the Dutch industry that remain closed for other people and countries. Although the Dutch royal family seems like a “blast from the past”, it never ceases to amaze me how effectively they can operate, as a lot of leaders are attracted by the glamour of real royalty.

Last year, Queen Beatrix only could pay a private visit to Sultan Qaboos of Oman, due to the societal acrimony in this desert country on the Arabic peninsula.

Currently, however, Queen Beatrix is paying an official state visit to Oman, with in her court circle all captains of industry of The Netherlands. And boy, does it pay. The list of companies that received an order or might receive one is long and growing. The following information is retrieved from Het Financieele Dagblad (http://www.fd.nl/) and the local newspaper De Stentor (http://www.destentor.nl/):

List of real and potential orders for Dutch companies
as negotiated during the visit of Queen Beatrix to Oman
Click to enlarge

I presume that this list will become much longer in the coming days. The Queen proves herself once again as the ultimate marketing tool for “The Netherlands ltd”.

Although I personally don’t feel a strong connection with the royal family, they are worth every cent from an economic point-of-view during visits like these.

Are the economies of the United States and the leading Euro-zone countries diverging currently? Elaboration of a Twitter discussion with my friend Matt Busigin.

The last days the Euro and the Euro-zone were again all over the place:

• 'Merkozy' are preparing yet another decisive summit on the future of the Euro at the end of this month
• France needed to roll-over €8 bln in long-term sovereign debt at much more unfavorable interest rates;
• The financial and economic situation in Spain is becoming more desperate every day, with a soaring budget deficit and state-debt, that seem to be negatively adjusted per week, rising unemployment and people that are getting more desperate by the hour;
• Greece is according to Greek insiders 'ready for stepping out of the Euro' (which I seriously doubt, by the way);
• And according to others, the 'whole euro is on the brink of a total meltdown'. Large companies are already preparing for an exit out of the Euro-zone; 

People should almost get in a state of shock by reading so much bad news on the Euro and the members of the Euro-zone. For these people I have some relatively good news.

Last year on January 27, 2011, I wrote my third post: “Greece and Ireland out of the Euro? Don't put your money on it!'. In those days the same rumors were spread on Greece and (at the time) Ireland, stating that both wanted to step out of the Euro-zone. Until now all these rumors have been proven unjustified.

It is very much true that the European Union has messed up big-time in trying to save the Euro and the PIIGS-countries. And of course you could say, that you only notice the results of falling into an abyss at the moment that you hit the ground.

Still, I don't want to flock in the herd of Euro-doomsday talkers that are crowding the internet currently. I am convinced that 'the politicians get going in Europe when the going gets really, really tough'.

But now doesn’t seem the time for this yet, as far as the politicians are concerned. This is especially frustrating for the financial markets and for the people living in the PIIGS-countries, but this is the way how it works in Europe. Europe more often moves like a snail than like a cheetah.

What is more interesting for me, is the question why the economies of the United States and the leading Euro-zone countries (Germany, The Netherlands, Austria and France) seem to be diverging so strongly at the moment?!

My attention was drawn to this subject as a consequence of one of my pleasant discussions at Twitter with the savvy software engineer and amateur-economist Matt Busigin of http://www.macrofugue.com/, one of the people that I consider to be a friend.  

While the economies of the United States and Canada already seem in the middle of an uphill climb out of the depression, the leading European economies still seem to be in a downhill phase of that same depression:

Of course, the strongest Euro-countries carry the burden of the weaker Euro-countries (hence, the PIIGS and the East-European countries (especially Hungary)) in three ways:

• Directly (financially), through billions of Euro's in government support money and (possible) write-offs on loans to the weak countries;
• Indirectly (financially), through refinancing programs and government aid for banks, insurance companies and pension funds that need to be saved from bankruptcy or serious downgrades, as a consequence of of assets degradation.
• Economically, through diminishing export possibilities as a consequence of dropping demand.

However, in my opinion these reasons don't explain thoroughly the current differences between the US and f.i. Germany, France and The Netherlands.

My findings and assumptions concerning US and Canada:

• Directly after the crisis started, the US and Canada went through a process of violent debt destruction and rapidly rising unemployment (see the following chart). The housing market got huge blows and enormous numbers of retail and other companies defaulted.

US unemployment rate 2001-2011
Courtesy of Bureau of Labor Statistics (www.bls.gov)
Click to enlarge

• Due to the speed and violence of the debt destruction process in many industries, the process started quickly and is probably largely finished now, only 5 years after the first symptoms of the credit crisis in the US. The US labor market is lean and mean again and companies have probably reduced their production facilities to the level that is necessary for the current markets.
• Lately, I noticed a bullish optimism in the tweets and articles of people that I think highly of: people like Andrew Nyquist, Kevin Depew, Conor Sen and Professor Pinch of Minyanville  (http://www.minyanville.com/)  and Matt Busigin.
• Although the distinguished Todd Harrison, founder of Minyanville, is much more bearish in the long run, he also foresees a (short-lived) bull-market for the coming months.
• Cloud computing and social media seem to be the developments that are currently lifting the US economy to a new level of activity.
• The production data, employment data and consumption data of the US and Canada, although still in the lower regions, show undeniable signs of growth and improvement.
• The housing market seems to finally be at the bottom of the parabola in the US and there is reason for moderate optimism.
• It seems that the people in the US are simply sick and tired of being bearish and just want to be bullish again. Such a sentiment can be a very strong catalyst for economic growth.

My findings and assumptions concerning the leading Euro-zone countries:

• The consumer confidence in The Netherlands and France is very poor at the moment. The consumers in these countries seem to have lost all confidence in the economy. The data in Austria and Germany is not much better. See for instance this chart that I earlier posted in my Outlook for 2012 and that is based on Eurostat data.

Consumer confidence in the leading Euro-countries.
Data courtesy of Eurostat (ec.europa.eu/Eurostat)
Click to enlarge

• From the four leading Euro-countries only France had a more than moderate growth of unemployment with 2.3% after the Lehman default in September 2008. Austria, The Netherlands and Germany all stayed below 1.6%, which is extraordinary low for such a big crisis (see the following chart based on Eurostat data):

Unemployment in the leading Euro-countries from 2008-2011
Data courtesy of Eurostat
Click to enlarge

• The Netherlands is now the only country of four where unemployment actually has been rising for some months. Germany, Austria and France have an (almost) equal or lower unemployment than mid-2011.
• The Netherlands also has a layer of 700,000 freelance professionals, almost 8.9% of the labor market, while Germany has even 11% or 4.4 mln independent workers (it´s not clear if this number includes retailers).
• In case of a contracting economy, this flexible layer can be laid off very quickly. This is already happening in The Netherlands at the moment.
• Dutch companies were very reluctant to lay-off people during the 2008-2009 crisis, as they reckoned that qualified personnel could be hard to find when the economy would expand again.
• Keeping this excess personnel had a negative influence on the reserves of these companies, as productivity dropped.
• Considering the previous bullet and looking at the moderate growth of unemployment in all four countries directly after the crisis started, I assume that these countries and especially The Netherlands and Germany are still in a situation of overcapacity: in the financial industry, the manufacturing industry, the services industry and perhaps even in the agricultural industry.
• This is not such a problem when exports remain at a high level, but very dangerous when exports go down.
• Besides that, internal consumption in Germany and The Netherlands is below normal for such wealthy countries, due to cautious consumer spending in The Netherlands and years of wage restraint policy in Germany, setting back wealth development of German workers
• Given the fact that the financial reserves have diminished during the last three years (at least in The Netherlands), this could lead to a soaring unemployment when demand stalls.
• Especially the Dutch housing market is still in a 'bubblicious' state, while the Dutch mortgage debt is an astonishing 120% of GDP. The number of people in arrears is soaring at the moment. All the ingredients for violent debt destruction seem to be present in The Netherlands.
• The key economic factors seem to point downwards for Austria, Germany, France and The Netherlands.

If you look at the mentioned differences between the US and the leading European countries you get the idea that the Euro-zone might be in for a very bumpy ride in the coming years, while the US economy could very well be at the way up.

The crisis in Europe hardly seemed to cause any pain outside the PIIGS-countries in numbers of unemployed workers. In my opinion this can be considered as a bad omen. Also the process of debt destruction in the leading Euro-countries is only at the beginning. If the export stays up, the leading European countries might have experienced the easiest depression ever.

However, I have the idea that exports won´t stay up and that the depression has only just started in Europe. This might cause the economies of the US and Europe to diverge strongly in the coming years; a situation that might last for quite some time.