Global Daily – Germany economy optimism + Dutch pension reform delay
Euro Macro: Sky-high expectations for the German economy. Germany’s ZEW expectations index jumped by 13.7 points to 84.4 in May, reaching its highest level in more than twenty years. The index gauges the expectations of economists and financial analysts about Germany’s economic conditions during the next six months (‘improve’ minus ‘get worse’).
The other part of the ZEW survey is the current conditions index (‘good’ minus ‘bad’). This rose as well in May (to -40.1, up from -48.8), although it remained well below its long-term average value of -8. A major factor behind the high level of expectations seems to be that the pace of vaccination in Germany has been stepped up noticeably since the middle of April. Indeed, almost 33% of the population has received at least one dose of vaccine against COVID-19 (9.5% is fully vaccinated). Also, the government has recently decided to relax some of the restrictions for those who have been fully vaccinated and those who have recovered from Corona (e.g. rules about obligatory testing before entering hair salons and certain shops and about the maximum number of people that can meet). Nevertheless, the majority of lockdown measures are still in place (e.g. restaurants, bars, museums and theatres remain closed and curfews remain in place). We have assumed that the bulk of these measures will be lifted as from June onwards. Consequently, we forecast GDP growth to bounce back sharply during the second half of the year, although Q2 will probably also see expansion. We expect the level of Germany’s GDP to return to pre-pandemic levels around the end of 2021, which we expect to be around two quarters before the eurozone as a whole. (Aline Schuiling)
Euro Fixed Income: The Dutch pension fund law will be delayed by a year – It was announced yesterday that the implementation of the new pension law will be delayed from 1 January 2022 to 1 January 2023. This means that the transition phase which will start once the new law is in place will now be from January 2023 until January 2027, which is the time period that pension funds can move to the new system. Meanwhile, the financial position of Dutch pension funds improved significantly since the beginning of this year based on the funding ratio. This will give Dutch pension funds leeway to act earlier on the back of the Dutch pension fund reforms. However, Dutch pension funds need to invest according to their plan participants’ risk appetite under the new contract. This is a new task for them and the assessment of the risk appetite of the plan participants is expected to start once we enter the transition phase and will take some time. Once the risk appetite is known of their plan participants, pension funds will adjust their current asset allocation and hedges accordingly.
The market impact is a long way off, but we still expect it to take shape between 2024 and 2025, despite the delay. As the assessment of the risk appetite, will take some time as well as the new investment policy, we stick to our view that pension funds will move to the new system over that period. On an aggregate level we expect that the risk appetite for the Dutch pension fund sector as a whole will be neutral. Based on this we expect that the changes in the asset allocations and the interest rate hedges will result in steepening pressure on the 10s30s of the Dutch, German and EUR swap curve and flattening pressure on the 30s50s swap curve. Finally, we expect Dutch pension funds to be on hold in the run up to the reform. For more information please see our (Jolien van den Ende)