German politics: SPD wins in Hamburg 

Despite a slump in support in national opinion polls to c15%, the centre-left SPD managed to win the Hamburg state election with 39.0% of the vote. The SPD benefited from the leadership problems of the centre-right CDU and the weakness of the small liberal FDP who had been outwitted by the right-wing AfD in the Thuringia incident three weeks ago. The pragmatic reputation of the Hamburg SPD and the inclination of voters to reward successful incumbents such as Hamburg’s SPD state prime minister also helped.    

The Hamburg result can have two major consequences: 

First, it further reduces the risk that the SPD may pull out of the federal government in Berlin and bring down chancellor Angela Merkel before the end of her final term in autumn 2021. Although the more leftist national SPD leaders contributed very little to the success in Hamburg as the regional party kept them at arm’s length, the Hamburg result will further steady the nerves in the otherwise deeply battered SPD. 

Second, the strong showing of the SPD and the Greens (up strongly into second place in Hamburg with 24.2%) draws attention to the tail risk that, after Merkel, Germany may be governed by a green-red-red coalition rather than a tie-up between a CDU/CSU - led by Friedrich Merz or Armin Laschet - and the Greens as junior partner. Judging by opinion polls, an alliance between the Greens, the SPD and the Left Party would have a roughly 30% chance of winning federal elections. In such a case, a wave of regulations along the lines of the „housing rent cap“ in the city state of Berlin could seriously harm German trend growth.

In addition, the dismal result for Merkel‘s centre-right CDU of just 11.2% adds to the pressure on the party to resolve the leadership crisis fast. 

US politics: Sanders vs Trump?

Following Bernie Sanders’ victory at the Nevada primary, betting markets now see a 53% probability that the self-styled „democratic socialist“ will clinch the Democratic nomination. That is probably good news for Donald Trump. As Sanders may deter some centrist voters, betting markets continue to put the probability that Trump will be re-elected on 3 November at 59% (www.electionbettingodds.com). Of course, it is still very early days. Apart from a pre-Nevada TV debate that did not go well for him, Sanders’ top challenger, Michael Bloomberg, has not entered the fray yet. The outlook may get clearer after the 3 March „Super Tuesday“, when one third of the Democratic delegates will be selected.

As long as Congress remains divided with the Democrats controlling the House and the Republicans the Senate, neither a re-elected Trump nor a Democratic president could get much legislation passed by Congress. Neither Trump nor a moderate Democrat in the White House facing a divided Congress would probably change the overall direction of the economy and markets very much. At the margin, Trump would probably be a bit better for US domestic equities (de-regulation) whereas a moderate Democrat might pursue a steadier trade policy that could benefit trade-dependent companies in the US, Europe and beyond. Of course, a president Sanders or a president Trump who controls both Houses of Congress could be a different matter. See the attached slide for a highly stylised scenario analysis.

Forecast changes   

So far this year, three major events and data releases have affected our economic and financial outlook:

1) The Covid-19 pandemic has brought economic activity in parts of China to a standstill, with some serious repercussions around the globe see Mickey Levy’s piece China’s economy: after the fall, what kind of recovery?. The current surge in Covid-19 cases in Italy and Korea could change the near-term outlook for these countries.

2) Japan‘s economy tanked even more than expected in response to the October rise in VAT.

3) Purchasing managers indices in Europe held up better than expected in February despite some virus-related damage to services and industrial supply chains.

As a result, we have changed some of our key forecasts relative to our projections published in our Global Outlook at the start of 2020:

- We now expect China‘s overoptimistic official data to show just 4.5% instead of 5.9% growth for 2020 and 5.4% instead of 5.6% for 2021.

- We have cut our GDP growth forecast for Japan from 0.6% to 0.3% for 2020.

- We have reduced our calls for Eurozone growth in Q1 2020 from 0.2% to 0.1% qoq. But as we expect most of the losses from a temporary interruption of supplies from China to be recovered later on, we have raised our calls for Q2 and Q3 marginally, leaving the forecast for annual GDP growth this year unchanged at 1.0%. The risks to this call are tilted to the downside. The rise in Covid-19 cases in Italy to 150 over the weekend accentuates the downside risks.

- For heavily affected Germany, we now project a 0.1% qoq drop in GDP in Q1 instead of a 0.1% gain. Encouraged by the resilience of the PMIs, we still expect a gradual rebound to start during Q2.

- As Covid-19 concerns add to risk aversion and make safe havens more attractive, we have lowered our calls for 10-year bond yields, for instance from 0.3% to 0.2% for Bunds and from 2.2% to 2.0% for Treasuries for the end of 2020. For the same reason, we now expect the US dollar to remain slightly stronger for longer with an end-2020 target of 1.13 instead of 1.15 dollars per euro.

Holger Schmieding
+44 7771 920377

holger.schmieding@berenberg.com
www.berenberg.com

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