Jens Weidmann: Opening statement at the 2019 press conference
on the annual accounts
Opening statement by Dr Jens Weidmann, President of the Deutsche Bundesbank and
Chairman of the Board of Directors of the Bank for International Settlements, at the 2019 press
conference on the annual accounts, Frankfurt am Main, 27 February 2019.
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1 Introduction
Ladies and gentlemen,
A very warm welcome to our press conference, at which we will present our annual accounts.
You could say that the annual accounts represent the essence of a year - 365 days condensed
into a set of figures occupying just two A4 pages. Drawing up the accounts means looking back
over past events. But I know you are also very keen to hear about current developments and the
outlook for the future, and I don't want to disappoint you there.
So, as usual, I will first say a few words about economic activity and monetary policy before
moving on to the key points of our annual accounts.
Mr Beermann will then discuss selected aspects of our balance sheet with you in more detail.
2 Economic situation
Ladies and gentlemen,
Economic activity lost momentum last year - in Germany, the euro area, and around the world.
After fairly dynamic growth in 2017, the pace of expansion slackened at the global level. For
Europe and Germany, this translated into weaker stimulus from foreign business.
This was compounded by more subdued activity in the euro area's export markets than in the
international environment as a whole. Turkey's economic problems played a role here, for
instance.
Additionally, however, there were specific developments in Germany, in particular. All in all, the
slowdown in Europe was far more significant than it was at the global level. Euro area GDP
expanded by 1.8% last year. Although this is a slower rate than in 2017, it is still higher than the
potential growth rates according to conventional estimates.
In 2018, the German economy grew by 1.5% in calendar-adjusted terms, which was roughly in
line with the increase in its capacity rates. Aggregate capacity utilisation therefore remained high.
However, the annual average figures mask the slowdown in economic growth over the course of
the year, especially in the second half.
Reports from the German economy have generally been disappointing over the last few months.
German economic output even contracted in the third quarter - primarily due to the difficulties
which car makers encountered with the new vehicle emissions test procedures.
The motor industry took far longer than expected to resolve this problem. Besides this,
production in other industrial sectors dipped in the final quarter. As a result, the German
economy as a whole remained stagnant during the last few months of 2018.
New manufacturing orders stabilised at a significantly lower level. And at the current end, the
relevant sentiment barometers are pointing to a pronounced cooling of the business climate.
There is plenty to suggest, then, that the dip in growth will continue into this year. As a result,
Germany's economic growth will probably lag well behind the potential rate of 11⁄2% in 2019.
We cannot sugar-coat these facts. But nor do I think we should use them to paint too bleak a
picture of the outlook for the economy.
The domestic economy depends in large part on the situation in the German labour market. And,
as before, this market is in excellent shape.
Unemployment has fallen to 5% (in seasonally adjusted terms) over the last few months - its
lowest level since German reunification.
What's more, employment is constantly hitting new record highs: in December, the number of
people in employment surpassed the 45 million mark.
And demand for labour by enterprises is still high. For instance, the Institute for Employment
Research (IAB) reported a new record last week of around 1.5 million job vacancies.
The sustained improvement in the labour market was also reflected in wage growth - wages
rose sharply last year, even after adjustment for inflation.
And inflation was the strongest it has been since 2012. Consumer prices (as measured by the
HICP) climbed by 1.9%.
However, the short-term fluctuations in industry or other sectors have only a minor impact on
labour market developments, which are influenced more strongly by the underlying cyclical trend
over the medium term. As a result, the rise in employment and stronger wage growth will
probably continue this year.
Economic growth in Germany is solidly underpinned by favourable financing conditions, rising
employment levels and increasing wages. Fiscal easing this year will provide additional stimulus.
In other words, the economy is unlikely to go into reverse; it will probably just not accelerate as
quickly in 2019.
I see this as the most likely scenario at present. All the same, this outlook is subject to a fair
amount of uncertainty.
3 Uncertainty and risk
Over the past few months, many people have begun to worry that increased uncertainty in the
economy could curb investment activity, in particular.
One argument is that it might make sense for enterprises to delay investment decisions until they
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have a clearer idea of the situation.
It's difficult to gauge effects like these accurately. Although various measures have been pointing
to a rise in uncertainty over the last few months, some of the indicators remain below their
longterm average or do not display any close correlation to aggregate output in the past. This
suggests there are no significant dampening influences on economic activity at present.
Even so, uncertainty is always a key issue these days, especially when I meet with
entrepreneurs. Perhaps it's affecting business sentiment because it has prevailed for so long.
Added to this, two political developments with an uncertain outcome could very well end up
placing a real burden on the economy.
The first is that the global trade dispute still hasn't been resolved. So there is a continued risk that
protectionism might spread worldwide.
What this means is illustrated by the trade dispute between the United States and China. A
model-based analysis by the Bundesbank suggests that the already adopted trade barriers
could, on their own, shrink both countries' respective output levels by 0.5% over the medium
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term and diminish world trade by 1%.
And there is still a threat of extra tariffs on vehicle imports.
The United States has at least joined China and the EU at the negotiating table. If markets are
more open after these talks than they were before, this would, in fact, be real progress.
Perhaps these bilateral agreements can prevent the harmful cycle of tariffs and
countermeasures from spiralling into a larger conflict. But they certainly can't replace what we've
achieved through a rule-based, multilateral trading facility. So it's essential that we maintain and
enhance the global trade regime.
The second factor adding to the atmosphere of uncertainty is Brexit. As things stand, the United
Kingdom might leave the European Union on 29 March - and it's not yet clear whether this will be
with or without a withdrawal agreement.
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The Bank of England (BoE) has simulated a large number of different scenarios, which also
reflects the wide range of potential macroeconomic effects.
If the close economic partnership between the UK and the EU can be maintained, the British
economy could actually perform better than is generally believed at the moment.
On the other hand, the BoE is warning that a disorderly Brexit could trigger short-term trade
disruptions and the risk of a severe recession in the UK. In the worst case scenario, UK GDP
might slump by as much as 8%. This would also affect the economy in the euro area and
Germany.
Early on in the process, German banking supervisors strongly urged credit institutions to prepare
for a disorderly Brexit. And this has paid off - as far as we are aware, institutions have made
good progress with their preparations and some have already successfully completed them.
Most British banks that need a licence for their units based in the euro area have received them
or are likely to do so by 29 March. This will allow them to maintain their business relationships
with their EU customers.
A total of 16 credit institutions have decided either to relocate units to Ger-many or to significantly
expand their existing business here.
4 Monetary policy
Let's move on to monetary policy.
The biggest decision of last year was made in December, when the ECB Governing Council
decided to cease net asset purchases at the end of the year. This decision marks the first step
on the long road towards monetary policy normalisation.
Under the asset purchase programme (APP), the Eurosystem purchased securities worth a total
of just under €2.6 trillion.
While net asset purchases may have come to an end, the programme itself is still ongoing. This
is due to the fact that principal payments from maturing securities will be reinvested in full until
further notice. As a result, the total volume of securities on the Eurosystem's books will remain
steadfastly high. And it is this stock of assets that gives the programme its economic impact.
On top of this are the persistently low key interest rates. The ECB Governing Council expects
these to remain at their present levels at least through the summer of 2019, and in any case for
as long as necessary.
Having interpreted the data, market participants currently believe that the ECB's first key interest
rate hike may be delivered later than was anticipated even in early December. Taken in isolation,
this expectation is depressing capital market rates, thus supporting financing conditions for
enterprises.
This also shows that our state-contingent forward guidance serves as an autopilot of sorts: more
or less automatically, it triggered a response from market participants - all without monetary
policymakers getting involved.
All in all, then, monetary policy in the euro area remains exceptionally ac-commodative. This is
shown by various measures of monetary policy ac-commodation, such as short-term real
interest rates or the divergence of Taylor interest rates from the policy rate. At present, they are
close to the values measured at the height of the crisis.
The next steps towards normalising monetary policy will depend on how the inflation outlook
evolves in the euro area.
ECB staff will present their macroeconomic projections next week. I will leave it to them to say
more on this topic.
However, it is clear to me that short-term fluctuations in the oil price - such as the sharp decline
at the end of 2018 - as well as revised growth expectations for 2019 may have a temporary
impact on the inflation outlook.
Remember, though, that the ECB Governing Council defines price stability as a medium-term
measure, so we would do well to look beyond these fluctuations. As things currently stand, the
persistently upbeat labour market conditions and strong wage growth will strengthen the
underlying upward price pressures in the euro area in the medium term.
The question currently at the forefront of monetary policymakers' minds is how to make
decisions in the face of uncertainty.
The recommendation typically made in the academic literature is to exercise caution when
conditions are uncertain. If very different scenarios appear plausible, monetary policymakers
need to make sufficiently robust decisions and not overreact in their response to the ups and
downs of isolated indicators.
If, however, there is a risk of a scenario materialising that would have devastating consequences,
it may be appropriate to take preventive policy-based action to avert the threat. For example,
monetary policymakers made the right move during the financial crisis when they responded
swiftly and decisively to stave off a deflationary downward spiral of declining prices and wages.
But deflation is not a cause for concern at this time. According to our calculations, the
marketbased probability of deflation is a mere 1.5%. While market-based, long-term inflation
expectations for the euro area may have dipped in recent months, survey-based measures
remain in the range of below, but close to, 2%.
Risks that should not be ignored also include the adverse side effects of exceptionally
expansionary monetary policy. During the financial crisis, we witnessed the way in which the
risks to financial stability can affect economic development and ultimately take their toll on price
stability, too.
In all likelihood, the normalisation of monetary policy will be a gradual pro-cess lasting several
years. From my point of view, this makes it important to continue along this path, should the
inflation outlook permit it.
In this context, we need to keep an eye on more than just the risks to financial stability which can
build up in a persistent low interest rate environment. Going forward, monetary policymakers'
capacity for effective intervention should not be ignored, either.
If, contrary to expectations, there is a significant deterioration in the outlook for inflation, the
Eurosystem has a range of monetary policy instruments at its disposal. However, this
nonstandard toolkit's cost-to-benefit ratio differs from that of standard monetary policy. In this
respect, the trade-off between the effectiveness of certain instruments and their side effects may
be worse than it was in the past and could ultimately leave little room for manoeuvre.
5 Public finances
Furthermore, it needs to be clear that monetary policymakers' focus is on safeguarding price
stability. In the event of a major economic shock, fiscal policymakers would doubtless also be
called upon to take action.
Under existing fiscal rules, euro area countries with sound public finances would likewise have
the opportunity to do so.
Unfortunately, many countries have failed in recent years to take advantage of the low interest
rates and favourable economic conditions to sufficiently improve the sustainability of their
government finances and scale back their high debt ratios. I fear that this has been a missed
opportunity to make hay while the sun shines.
Failure to comply with the ceilings for the deficit and debt ratios defined in the Stability and
Growth Pact has been a far-too-frequent occurrence:
Since the introduction of the euro, participating countries have exceeded the reference value
of 3% for budget deficits in just under 40% of all cases.
When it comes to the debt ratio, the results are even more sobering: euro area countries
failed to comply with the limit of 60% of GDP in well over half of all cases.
In 2018, too, euro area government debt fell only moderately in spite of the favourable economic
environment and extremely low interest rates. Only ten euro area countries achieved a debt ratio
of below, or at least close to, the 60% ceiling.
Sound public finances are a key foundation for a stability-oriented monetary policy. They are also
vital in tackling the substantial, foreseeable impact of demographic change.
In Germany, the statutory pension insurance scheme, in particular, is coming under pressure.
Right now, the issue frequently at the heart of the debate is the pension level. The consensus
previously reached on the topic involved cutting state pensions over time while encouraging the
adoption of supplementary private pension provisioning. In principle, I still believe this to be a
sensible approach and would like to caution emphatically against allowing today's highly
favourable financial situation to cause us to lose sight of tomorrow's problems.
In particular, a sustainable overall concept needs to take account of both social contributions and
the tax burden. Excessively high tax and social contribution rates stunt employment. In this
context, the labour supply is already being negatively affected by demographic trends.
In future, the priority must be to boost employment. In view of this, the Bundesbank has been
signalling for quite some time that, given increasing life expectancy and improved physical health
in old age, it would make sense to further raise the statutory retirement age.
If the ratio of time in employment to time in retirement were to be kept broadly constant, this
would not put future pensioners at a disadvantage. It would simply mean that static contribution
periods are not accompanied by longer and longer pension-drawing periods.
All in all, I believe that the current basic tenet of the statutory pension insurance scheme - the
principle of equivalence - is the best way forward here. The more an individual pays in, the bigger
their pension will be. Social benefits independent of pensions should be financed out of general
taxation in a transparent and comprehensible manner. The same applies to any top-up of the
basic pension, which forms part of the coalition agreement and was recently the subject of
discussion.
6 Stoking the engines of economic growth
Ladies and gentlemen,
Alongside sound public finances, stoking the engines of economic growth should be right at the
top of the political agenda.
In this regard, too, Germany is faced with particular challenges due to demographic change. The
Bundesbank estimates that the labour supply (labour force potential) will already be in decline as
of 2022. At that point, the migration gains will no longer be sufficient to compensate for the
effects of ageing.
In recent years, labour has supported potential growth by around 11⁄2% - also due to high levels
of immigration. However, from 2021, it is likely that labour will cause potential growth to gradually
decline - to as low as just under 1% by 2028, to be precise.
One possible lever that policy-makers could adjust is the labour force participation rate. By
having a higher propensity to work, older people, in particular, as well as migrants can help to
stabilise the overall supply of labour.
Furthermore, the ratio of women working part-time in Germany remains considerably higher than
the EU average. Better provisions for supervising children or people in need of nursing could
promote a greater supply of labour.
In the light of an ageing population, it will be even more important in the fu-ture than it is today for
each potential worker to be able to bring their skills onto the labour market.
Beyond the labour supply, the welfare of our society is vitally dependent on how much each
individual worker can produce.
In my opinion, the role of the state is to create favourable conditions for private enterprises to
offer innovative and consumer-oriented products and services. Not least, competition ensures
that consumers and employees can also share in the gains in prosperity that have been
generated.
Competition for customers leads to lower prices; competition for labour to higher wages.
Competition also fuels innovation, as enterprises can - at least for a time - gain an edge over
competitors by creating new products. This widened offering in turn benefits the consumer.
Open markets foster competition. The European single market is the best example of this.
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Studies show that prosperity in Europe has risen substantially.
For this reason, the state should eliminate competitive distortions and rectify market failures. In
the past, however, governmental control and insulation have not proven themselves to be good
levers for increasing productivity and prosperity. The state is certainly not the better entrepreneur.
I believe that the size of enterprises is also the result of private sector deci-sions and market
forces. Small and medium-sized firms, in particular, with their "hidden champions" are one of the
strengths of our economy.
They do not owe their success to governmental guidance. Incidentally, this also applies to the
awe-inspiring rise of certain international tech companies.
And, finally, we should not jeopardise the prosperity gains that result from the close economic
integration with our partner countries. This also includes international value chains in which
enterprises focus on products with manufacturing processes that offer them comparative
advantages.
The German economy in particular thrives on openness. Last year, German businesses
exported goods and services with a total value of almost €1,600 billion around the world. This
corresponds to nearly half of the country's GDP.
The counterpart to the export of goods is the export of capital.
The level of German direct investment abroad rose in 2016 to around €1,100 billion. More than
half of this total was invested in our partner countries outside of the EU. This also has positive
repercussions for economic growth in Germany. Studies show that investment abroad leads to
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additional investment at home.
Conversely, there were almost 17,000 companies with foreign capital interests active in
Germany in 2016. Foreign investors held direct investment stocks totalling nearly €500 billion.
They generated turnover of around €1,500 billion and employed 3 million people.
Direct investment coming from Germany and coming into Germany are essential to prosperity in
our open economy.
In sensitive sectors, there may be legitimate security concerns. However, US foreign trade policy
in particular shows that the line between these concerns and protectionist motives is not always
objective and clear-cut.
And, of course, state-owned businesses can distort international competition. But we must
respond by strengthening market forces and not by weakening them at home as well.
7 Annual accounts - profit and risk provisioning
Ladies and gentlemen,
I would now like to move on to our annual accounts.
On the assets side, the monetary policy purchase programmes were again the key driver of
balance sheet growth, followed by liquidity inflows from other European countries.
On the liabilities side, the euro balances of resident and non-resident investors recorded the
largest increases.
The profit and loss account for the 2018 financial year closed with a net profit of €2.5 billion. This
is roughly half a billion euros more than in the previous year. This rise is driven by higher interest
income due to the negative interest rates on increased deposits.
Following allocation to the reserves, we have today transferred the remaining distributable profit
of €2.4 billion in full to the Federal Government. According to the 2019 budget plan, it will be used
to finance the budget.
With regard to the elevated interest rate risk, we had already increased our risk provisioning in
two tranches in the previous two years - by €1.75 billion in 2016 and €1.075 billion in 2017. And,
one year ago, I indicated that a third tranche would follow. On that basis, the Executive Board has
reviewed both the scope of our general risk provisions and the Bundesbank's foreseeable risk
situation, while also taking into account our current risk coverage potential. As a result, the
general risk provisions will be increased by an additional €1.475 billion, bringing the total to €17.9
billion.
General risk provisions are traditionally used to hedge against exchange rate risk, but, due to the
non-standard monetary policy measures, also against default and interest rate risk. The latter are
largely a result of the wide discrepancy in maturities: we have very substantial holdings of low
interest-bearing assets, with very long residual maturities in some cases; our liabilities, however,
are mainly in the form of short-term deposits.
With that, I will now hand over to Dr Beermann, who will provide you with more details on the
annual accounts. We will then - as always - be happy to answer your questions.
Thank you for your attention.
1
See B. S. Bernanke (1983), Irreversibility, uncertainty and cyclical investment, The Quarterly Journal of
Economics, Vol. 98, pp. 85-106;
2
See Deutsche Bundesbank, The potential global economic impact of the USA-China trade dispute, Monthly
Report, November 2018, pp. 11-13.
3
See Bank of England, EU withdrawal scenarios and monetary and financial stability, November 2018
4
See, for example, H. Badinger (2005), Growth Effects of Economic Integration: Evidence from the EU Member
States, Review of World Economics, Vol. 141, pp. 50-78
5
See S. Goldbach, A. J. Nagengast, E. Steinmüller and G. Wamser (2019), The effect of investing abroad on
investment at home: On the role of technology, tax savings, and internal capital markets, Journal of International
Economics, Vol. 166, pp. 58-73.