Left leaning German coalition could restrain growth says Deutsche Asset and Wealth Management report

9th September 2013

With the outcome of the German election so important for the economic fortunes of the Europe and the world, Deutsche Asset and Wealth Management (DeAWM) has put together a report analysing the manifestos of seven political parties in Germany.

It has also considered the potential repercussions of various coalition scenarios on politics, business and finance. The full report is available here.

The report identifies what is calls six possible constellations of the five parties the right wing CDU/CSU, the liberal FDP, the centre left SPD, the Bündnis (Alliance) 90/Die Grünen Greens and Die Linke or Left party.

DeAWM says that based on poll results and election manifestos, it regards two coalition scenarios to be the most likely: the same coalition of CDU/CSU and FDP as the current government or a brand new major coalition of CDU/CSU and SPD.

It says that in terms of election manifestos, a coalition of SPD and Bündnis 90/Die Grünen is also possible. Indeed a coalition of SPD, Bündnis 90/Die Grünen and Die Linke would also be thinkable purely based on election pledges. But even ahead of the elections, SPD and the Green Party have ruled out any coalition with the Left.

The asset manager then grapples with the impact the different coalitions are likely to have on growth as well as the bond and equity markets.

The reports says: “If the current CDU/CSU and FDP coalition continues for the coming legislature period, there should be a positive impact on growth. According to our regression analysis, tax plans should stimulate consumption. If a CDU/CSU-FDP coalition were to implement their tax plans immediately, we would expect to see real growth bring about increased consumption of 0.83 to 1.56 percentage points. By contrast, if SPD and Bündnis 90/Die Grünen tax plans came into force, this could depress private consumption. As such, their plans would bring fewer positive effects for real growth.”

“The long-term real growth of an economy and the anticipated inflation rates for the next few years are key factors influencing interest rates offered by federal bonds as well as the euro’s value in terms of foreign exchange. A CDU/CSU and FDP coalition suggests relatively stable development for German bonds and little change in interest rates. This election outcome is likely to have little impact on the euro exchange rate.

“Even with the large coalition of CDU/CSU and SPD, we do not expect major repercussions for federal bond interest rates. However, the situation would be different with a SPD and Bündnis 90/Die Grünen coalition. The tax plans of both parties could depress economic growth at least in the short term.

“Weaker growth would be likely to reduce returns offered by federal bonds. On the other hand, we would expect such a government coalition to be rather more open-minded about secondary liability on debts of the peripheral countries, which in turn would tend to increase returns.”

“Even if the outcome of the elections has an impact on economic growth in both Germany and the Eurozone, the impact on the equity markets is likely to be limited. Many listed companies do business internationally and the equities of major conglomerates are globally spread”.

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