 Mae gennym, wrth gwrs, yn hyffordd y mynd. My name is Katherine Wheel, my chair of the Germany group, so we've a mixture of Germanic fields and a column of fields here. But as a group we're very fortunate to have Dr Woods with us at the moment. He holds an MSc and PhD in Economics from the University of Munster. He's been with the King Institute for the World economy Ieithio yn W Despite, hefyd yn ffawr i nimu Gwyl Gweithio Cynllunioedd Cymru ac Rhaid i'n gweithio'r unolus yn cyfrifio. Yn 2013 hefyd wedi'i gweithio'r Ffastriw i arweinyddion gydechrau'r Syrgrif, ynghylch, ond rydyn ni wedi cael eu rai'n ffordd o'r ysgol, oherwydd mae'r ysgol ddim yn ymgyrch yn ymgyrch yn economiaid. Oherwydd, mae yna ei wneud ei ddweud, ac mae'n rhaid i'n gwmwybod i'r ysgol, a oedd ymwneud ymwybod i'r ysgol. Oherwydd, mae'n rhaid i'r ysgol, a'r ysgol yw'r ysgol, a'i ddweud i'r ysgol i'r ddweud i'ch ei ddweud, Ie, ddweud os yw ddwy'r cwun yw'r ffordd iawn eich cyfle. Mae'n ddweud gennym eich bod i'r unig hefyd. Mae'n ddweud i'ch ffordd iawn. Mae'n ddweud i'ch bobl yn ysgrifennu gwir yw'r sefydlain. Felly, y cael y gweld, mae'n ddweud y dyfodol yn y Ffrancfurt, ond y mae'r sgwyl wedi'i wneud y sylwg bod mae'n bwysig yn ymgylchedd opeth. Felly, mae'n gweithio'r bwysig yn ymgylchedd opethol, ond er mwyn i'n bwysig yn ymgylchedd opeth. Mae'r hyn mae'r cyntaf yma. Mae hyn mae'r cyntaf sydd ar gyfer y cyfrifiadau mewn hwn. A llwyddo anghylch y Tytol yn ni wedi'i ymdyn nhw yw ymddangos i'r grannu ym brwyciennu. Ymddangos i'r Cyfrifiadau fel nhw yw ymddangos i'r llwyddo am fod o'r cyflobol yn ymdyn nhw. Mae'r brwyciennu ymdyn nhw sy'n gweld godfell hynny? I did not dare changing it, but there's only one question mark in it and a year ago there would have been a second question mark already behind is there a boom in Germany at all. Well, this question is over now practically everyone agrees in the forecasting community in the macroeconomic community. Yes, there is a boom going on in Germany. So we only have to tackle with the second question mark. Is this sort of the seeds of crisis? And let me start with a kind of textbook like exposition first. What macroeconomists are concerned of is that actual production could deviate too much from potential output. So that we have overcapacity utilization and you may ask yourself what's so bad about overcapacity utilization. Isn't it great to have a boom to produce even more than you would sustainably be able to? Well, it's not good news to deviate from potential output because it is in the boom. And I will come back to this later in my talk. It's in the boom that we are seeing business models emerging that are non-sustainable. The boom by itself is non-sustainable. It's an over stretching of capacity utilization. And therefore we are allocating scarce resources to uses that at the end of their boom will turn out to be a misallocation. And therefore the boom and the exaggerations during the booms are the true course for the subsequent recession. So the more exaggeration we see in the boom, the deeper the correcting recession has to be. So if you're really interested in stabilizing the business cycle, do something about dampening the boom. This is the best recipe for not getting into a too deep recession. Unfortunately, mainstream macroeconomic policymaking has it rather the other way around. Once the crisis is there, people say, OK, now we have to spend more or we have to lower interest rates or whatever. It is a much better idea of really stabilizing an economy by preventing the boom to develop too strongly. Unfortunately, from the political economics perspective, this is extremely difficult task to do because the boom just feels good. Text revenues are coming in like crazy. Budget deficits are shrinking or even are running in surpluses and lots of money there that waits to be spent. And this is exactly the time when most of the most important political mistakes are made. And we're not only talking about technocratic business cycle stabilization. We are talking about human things. Think of the real estate boom in Spain. The peak of the boom, 25% of the male labor force work for the construction sector. And they were qualified people, qualified workers, skilled workers working there, but skilled for the construction business. And once this boom was over, these people fell back on their next best productivity level. And this very often wasn't really significantly above that of an unskilled person. So we are really talking about human well-being when we are trying to prevent these artificial booms from growing more and more. It's not only a macroeconomic technocratic fetish that we are following here. And where's Johnny? Well, according to our current diagnosis already in boom territory and we are approaching the peak of this boom. And let me very briefly show you why we come to this conclusion while also others follow us now in this conclusion by some forecasting and diagnostic material. And in the second part of the talk I will very briefly say something about what policy makers are supposed to do now and what are they most likely doing. Well, we are drifting towards overheating. What you see here in the bars is the degree of overcapacity utilization. If they are positive territory, then it's overcapacity utilization. If you're below the zero line, this means we are underutilizing our economic capacities. And what we are observing for five years in a row now is a very stretched upstream. Unusiwally stretched, therefore we call into the term like a chewing gum cycle. It takes much longer than usual for the typical stipulated pattern to develop. And therefore it was really difficult to diagnose in the first time. But now it becomes quite clear when you look at 2017, we are talking about positive awkward gas nearly 2%. And this is a lot. And as you will see this is not even the end of the story. Or this has been possible also due to labor migration which has led to also an increase of our potential growth rate without the immigration of labor. We are not talking about the refugees. It's a different story about the normal way of labor migration into Germany, in particular from Eastern member states of the European Union. They have contributed massively to the growth path here in Germany. But today capacity utilization is above normal levels and it's higher above normal levels. You may say well these potential output estimations are to some extent questionable. They are difficult. Yes that's true but we have other indicators as well. In particular we have surveys, we have asking firms what's about your capacity utilization. And whatever industry you look at you will get more or less the same answer via way of normal capacity utilization level. This is true for manufacturing. Construction sector is already at their capacity limits. They are booming already for a couple of years. And even if you look in the services sectors, statistics are not developed in this sector. But even their information that we have is they are running out of production capacity. The most important factor that they report in surveys that prevents them from reducing more is that they are running out of labor. So all these are clear signs of over capacity utilization. And this is our current GDP forecast of the 2.2% last year, another 2.5%. This year this is way above potential output growth which is around 1.7% in Germany. Also elevated a little bit stronger than normal. I'll come back to this later. And every year that you see GDP expanding stronger than potential output is growing you're ending up to over capacity utilization. And I don't want to go into all these details here but all the short term indicators that we have clearly indicate we will have a very strong first quarter, probably then a kind of weaker one. But the underlying trend is still clearly upwards towards higher capacity utilization. And this is a broad based expansion. Very oftenly you see in the business or the macroeconomic reporting that people are looking at net exports and their growth contribution of net exports. And then they come to the conclusion that oh Germany is only domestically driven. This is nonsense because netting out exports and imports would imply that all imports are only used for producing export goods which is obviously not the case. So what we are doing is we are allocating via input output calculations the imports that we are expecting to different uses to consumption goods, investment goods and exports goods. And if you do this exercise then you see that Germany is currently very much driven again by external business. As you know the external environment has improved a lot. In particular in the euro area, the euro area even without Germany is already also in positive territory in terms of the output gap. I think this has kind of happened without being noticed really by policy makers. So the alarm range should really be on now for everyone who is concerned about business cycle stabilisation. And again if you look at trade expansion in the euro area it looks kind of normal on average. But the two driving factors, or there are the two driving factors, one is France number one and number two is Germany. In these two countries alone today account for credit expansion in the euro area. And again looking at the euro area average can be extremely misleading as it was with respect to inflation rates prior to the European debt prices. But the ECP was on target ten years in a row, very proud. But obviously something can happen below the radar of inflation rates that produce a lot of turmoil in our economies. So very strong impact of the external economy, of the external environment. Consumption is not that strong anymore but still strong for Germany, for what Germans are used to. And now what we typically see or expect in such a boom investment spending is accelerated. I don't want to go too much into the details here. Again the messages exports are back on track, not as dynamic as they were prior to the great recession. But anyway we have to customer ourselves out more normal times. What we have seen prior to 2007 was not the standard way of economic operations. And are we very concerned about the protectionist wave that is rushing through the world economy? Well of course we are concerned. But we do not really believe that we will see something like escalating trade conflict. And this is because the whole debate is too trade centristic. If you look at the transatlantic economics phase what we see is they are much more interwoven by a capital flows than by a trade flows. And what I've shown to you here is other trade shares of trade from the EU to the US and from the US into the EU. It looks like well trade seems to be more important for European exporters than for American exporters. But if you look at the foreign dime investment possessions the picture is quite different. Then you see that the exposure of the United States in Europe in the European single market is much more important than the other way around. And just compare the sales volumes of US owned affiliates in the European single market compared to the exports shown out of the United States. Then you see that the business that the affiliates are making in the European Union are much much more important than their exports. And we believe that once the president tries to trigger such a trade conflict and disturbs the economic functioning of the EU then vital interests in the United States would be affected and they would push for a more rational policy stance in the EU. So just thinking in terms of retaliation measures we think it's a very bad idea. It's much better to focus on where is our mutual benefit out of having an integrated transatlantic space. And I think that very important people in the United States would support this. So therefore we are not that alarmed. We are concerned of course as anyone else is. But we think there are good reasons that you will not see this escalating trade conflict in the transatlantic EU economic space. And I said construction activity is already booming. We have now order books that are coming up coming near to the peeps in the mid 1990s. And this was when you really had very pronounced construction boom after your realification was probably unavoidable. But the reason that Germany became the chief man of the Europe in the second half of the 90s and the first half of the 2000s was because we have to shrink the construction sector again. So far we don't see the construction sector itself expanding that much, which is so far with news that the order books are already piling up three months. Merges, investment in machinery and equipment, merges and acquisitions as well, I did this first. We have quite a cheap ban now to offer for if you are interested. You feel free. Investment in machinery and equipment is also picking up not as pronounced as we would see it any forward. Cycles, there are probably at least two reasons or three reasons. One is the whole upswing is very stretched. Therefore, these accelerator effects are much more done than they usually are when you see a quick switch in capacity utilization rates. It's number one. Number two is maybe, and this is what people from the corporate sector tell us, our equipment has become more of the plasticity of our equipment has increased, which means that with the same hardware it is easier to produce new products just by exchanging the software. This might also explain why overall investment in machinery and equipment is kind of subdued. Plus, this country is running out of skilled labour. It's nice to have the machinery, but if you do not have someone who can work with it, then you would rather invest somewhere else where people are still available. So maybe these three reasons together explain why you're expecting, yes, an upswing of our investment, spending of corporates, but not as pronounced as we would forecast it if we stick to the patterns that we only used to in the past. Labour market is increasingly tight. I've shown you the immigration numbers. They will come down also because in those countries the economic situation is improving tremendously, particularly in the eastern part of the European Union. You see very strong growth numbers there, and this makes less likely that people migrate into Germany. We see it for, we could have a whole bunch of indicators here, but all indicators tell us the situation becomes more and more difficult to find. Labour, you see it in the unemployment rate, we are approaching full employment in this country. I wouldn't take the ILO number at face value because we here have important statistical problems to have the refugee immigrants reflected in this number. This is based on telephone surveys, and well these people aren't registered anyway, and even if someone asked that, we in Germany are currently working on a regular basis. Therefore the ILO number is probably over, it's not very reliable, but even registered unemployment is going down below 5%. The fiscal policy is really not ambitious. You see that although the fiscal budget is about 1%, the structural budget balance is shrinking according to the plans of the new government. There will not be a significant impact this year, just too late in the fiscal year to do anything that would act as a game changer, and the whole package is kind of end loaded. But next year you will see already some impact of what they are planning. Some observers are concerned, well six months without the government wouldn't this depress business sentiments and a negative impact on GDP. Well there's very very little evidence on that. If you look at other countries like Belgium, Spain, Netherlands, where the longer periods of not having a re-elected government, they've had quite well. For the libertarian I would say there are worse things in the world that have not had a re-elected government. So this is clearly nothing that would influence our forecast in any way. The medium term again is alarming. We are seeing the boom, the peak of the boom coming. And if you ask me how do you come up with this projection that we will then see the recession or the downswing, I should say, the downswing coming in 2020? Well this is not written in stone of course, but do we have a model for that? Well not really a model that gives us the exact date. But what we can do is we can look at what were the record high levels of capacity utilization of output gaps that we have observed in the past. And then we come to the conclusion that somewhere around 2020, maybe 21, we will see the end of the story. And then necessarily we will have the beginning of the downside. So those who are relying on their eternal boom will be clearly disappointed. And what we are concerned about is that two effects will show up at the beginning of the new decade. One is the downswing, so the correction of the boom. The second is it is also the beginning when demographics in Germany will no longer be compensated by immigration or higher participation rates of women or elderly people. Then the demographics become the dominating factor for German growth numbers. And on average German growth was 1.5%, over the last, let's say, two, three decades. This will then shrink at least 1%, maybe even below. The Bundesband is even more skeptical about that. This would not be a problem if just the whole country would shrink. But this is not the case. Most of the people will continue and live, which is good news, by the way, but they have to consume out of some income that they are no longer producing. And therefore we see that our social security system can really come under stress. And it's not good news if this beginning of the low growth period is accompanied by a business cycle doctor. This brings me very quickly to some risk and policy assessments very often here, in particular in financial markets. Booms don't die out of old age, they are murdered by policy makers, in particular by central banks. Thank you again. This is logically not possible. If a boom would be sustainable, wouldn't it be a boom, then it would just be on a higher growth trajectory. But which we are not according to all the indicators that we have. So there is some exaggeration going on. And the problematic thing again that may reiterate this of the boom is that business people can no longer distinguish between, Am I doing good in my business because I have a great product? Or am I doing good because I'm just swept away with all the others? And well, the natural human response is my product, it's my success. So people are tempted to build up business models that are not viable in the long term. And they must be corrected. And this is what, at the end of the day, squanders scale resources. To put it another way, you could say this diagram that I've shown in the beginning is somewhat misleading. It could convey the message that well, sometimes we are above normal, sometimes we are below, but on average it's the same then the growth trend. This is not the case. The more we fluctuate around the trend, the more resource misallocation happens in the boom, and the flatter is the overall output trend. Therefore overall well-being, material well-being depends on dampening of these factors. As I said, there are these endogenous distortions that are building up. And we are also seeing an easy-going mentality in policymaking. I come back on this point on my last slide, second last slide. I would just like to mention very briefly that you must not forget that the whole economic development, not only in Germany, but also in the euro area, but in Germany in particular, is accompanied by absolutely extraordinary monetary policy systems that is trying to bring interest rates down below their market levels. But what does this mean? Well, the ECB says we want to bring up inflation rates back to our target of near 2%. But by so intervening, we do not only affect possibly the average rate of inflation, but you are necessarily affecting relative prices. Every product price, each of every product price, has an interest component in it. And the more distant the product is from its final use for production, the more important this interest rate component is. Therefore, if you are manipulating the interest rate, you are necessarily also manipulating relative prices. And you all know relative prices is what is steering our market economies. So we are not talking about peanuts here. We are talking about the machine room of our economic system. And we are also not talking about expansionary monetary policy for a year or two years where it would not cause too much damage. We are talking about an extended period, 7, 8, probably until we see an exit to this, if we see it, of a whole decade. And a lot can happen in terms of new distortions, new production structures emerging that are again not viable due to the relative price distortion caused by monetary policy. And this spills over to financial stability. Financial crisis is nothing else but a mirror image of a massive distortion in the physical capital stock of an economy. When it turns out that the physical capital stock and all the production structures around it cannot longer provide the yields that are once expected to be produced, then you see a financial crisis. Because then you do not have the individual business model that flocks which is normal in the ongoing business world, it is too many due to the too low interest rates in a systematic way investors were guided towards the misallocation of capital. And to correct this is extremely painful. Plus we are currently overestimating, rather than underestimating, potential output. This is due to the mechanics, statistical characteristics of our economic approaches here. So it is more likely that we are underestimating the current output gap than we are overestimating it. Plus people take for granted that there are nearly 2 million people who came as equals refugees into our country will stay here. Well some of them probably will stay, but what happens if there is again peace in Syria in the other countries? Obviously many of them would want to go back. So we cannot take for granted that they stay and consider them as if they were already, naturally, part of the labour force in Germany. So at least we should be cautious about not taking this for granted. What we are deploring is a very negative policy response. I've already talked about prosyclicial fiscal policies and I don't want to overstretch it, I would say. It's not as rigorous as it should be, but it's not really extremely prosycical, but at least going in the wrong direction. But what we are seeing is an expansion of the welfare state and this makes the whole system even less prepared for the democratic change that is coming in the next decade, or it's not coming somewhere in the future, it's coming in a couple of years before the front door. And therefore we are aggravating the intergenerational conflicts that are already quite strong in the next decade. We have a restribution debate that goes along the lines that we want to increase the guaranteed minimum income levels. And this creates perverse incentives for people to become economically active. There's a huge span, roughly 1,000 euros, from someone who's unskilled who enters the labour market. He has a couple of hundreds of euros that he can keep for himself, but then there's a very long period, a very long gap that he has to overcome until his net income increases if he earns more money. And this is a disincentive for becoming part of the labour force and gaining all the qualifications, et cetera, et cetera. This is really something that should be tackled, we don't see it actually in our current debate. And something that I call the Gulliver syndrome, we are reducing flexibility more and more and this will make it even more difficult to master the upcoming upswing. What do I mean by the Gulliver syndrome? It's well, we are introducing a minimum wage, equal pay regulations, a rent break, gender quota, full-time, part-time guarantees, et cetera, et cetera. Each of these policy measures does not keep the economy on the ground and prevent entrepreneurs from becoming active. But it is the sum of all these strings that keep Gulliver on the ground as they keep economic activity on the ground that makes it more difficult for entrepreneurs really to invest in their business and to take some risks. It's a nonsensical debate just to look at one isolated policy instrument and say this is not doing that much harm. Well, of course it does not do so much harm. But even there, even a minimum wage is below the equilibrium wage of the labour market like in southern Germany. In Munich, a minimum wage of 9.7 Euros is nonsensical because the free labour market would show you a higher wage. Nevertheless, it is a hindrance to production. Why? Because you have to report that or you have to show that you are paying the minimum wage and so easy to circumvent it. You just make a contract 30 hours a week. This is an awkward contract. But at the same time, we have an agreement for four months. So it's very easy to go around it. What's the response of the government? Well, you restrict the regulations that these extra contractual arrangements are provided. This is the same for the other regulations as well. So it's not only that we are interfering with the price mechanism. We are creating a lot of extra bureaucracy which, if it becomes overwhelming, will be a blocking strategy economic activity. So much for our current assessment of the situation in Germany. So we are not having a party in our institute. We are very concerned that people don't take this boom serious and just say, well, nice to have. Now is the time to respond, but so far we have not seen the debate and the policy response that would be accurate. Welcome.