ideas: Mr. Baader, you have been chief economist at Société Générale since 2017. Can you briefly tell us something about your career and what the work of a chief economist is all about?
Klaus Baader: I’ve had an entirely linear career. After studying economics at the University of Cologne and the London School of Economics, I started at Salomon Brothers in 1989 as a Germany economist – and what was then known as the DM block. Over the years, my remit expanded to include the Eurozone until, in 2012, Société Générale offered me the opportunity to relocate to Hong Kong and become Chief Economist for Asia and Australia, which I did for six years and learned a great deal. And then came the promotion to chief economist for the world economy – which, by the way, I initially found to be an enormous challenge. While my career was quite linear in terms of content, the same cannot be said of my employers. After Salomon came UBS, then Lehman Brothers in two stages of ten years, briefly at Deutsche Bank, four years at Merrill Lynch, until I ended up at SG in 2009.
Being chief economist in a bank is a balancing act: On the one hand, you have to try to aggregate the interpretations and forecasts of the individual responsible regional teams into a global view, you could say »narrative«, which is often very difficult. On the other hand, you also have to represent your own views and convictions about the global economic situation and what the main drivers of the global economic cycle are. As I said, a balancing act.
In the past three years there have been a whole series of crises worldwide. Corona was followed by Russia’s war of aggression in Ukraine, coupled with the energy crisis and significantly increasing inflation. Have you ever wondered how long the economy has been resilient?
Yes and no. Sure, the exogenous economic shocks were stark, as you rightly point out. I would cite another shock that is less discussed and that is the 2022 recession in China. So there has been no shortage of stress over the past three years. But what I think has been shown again is that fiscal policy is a very effective tool and was much more important during the Covid crisis than monetary policy, which I think is given too much importance in the financial markets.
Now, after two quarters of negative economic growth, Germany is »officially« in recession. What do you think was the trigger(s)?
First, I would like to stress that two consecutive declines in GDP do not necessarily constitute a recession. What is happening in the labor market is of enormous importance to me, and things are looking much better here in all industrialized countries. But hair-splitting should be avoided, and the situation is obviously not good.
In my opinion, inflation is the biggest burden on the economy, because it has created a massive negative shift in the terms of trade of practically all industrialized countries: imported goods, energy, but especially food, have become drastically more expensive, which is affecting the purchasing power of the households and many companies. In addition, the massive shift in demand from services to goods that was a key feature of the coronavirus recession is now reversing. And Germany, with its above-average weight in the manufacturing industry, naturally suffers more than many others. But you also have to be aware that the German economy was already weakening in 2019, i.e. before Corona. A key contributor was weakness in the auto industry, but a number of other weaknesses also played a role, not least energy policy.
What are the economic indicators saying? Is improvement in sight?
The economic indicators are currently painting a very mixed picture. Apart from the weak GDP, the leading indicators, i.e. mood barometers, are rather weak. But here the signs are very different: weak in industry, but strong in services. And even in industry, very different tendencies can be observed: production in the manufacturing sector is on the upswing, the construction sector is also doing quite well, but energy production is falling rapidly. Now manufacturing orders have also weakened sharply recently, both in terms of domestic and export orders. The PMI for industry is clearly in the contraction zone, the ifo index is weak and price-adjusted retail sales have also fallen significantly, although they are quite robust in nominal terms. That’s the effect of the cost-of-living crisis.
But I also see positive elements that are of crucial importance to me: As I mentioned, the inflation shock is of great importance to me, and it’s turning at the moment. At the same time, we still have a very robust labor market, which is not only manifested in significant employment growth, but now finally also in higher wage growth, which should increase real disposable household incomes again after significant declines, and very soon. In addition, German households are also sitting on enormous savings that they accumulated during the corona crisis with the help of public income support and have not yet activated. I still hope they will. Otherwise, the Germans run the risk of ruining the economy, to quote Chancellor Helmut Schmidt.
The stock markets recently spoke a different language. In particular the DAX, which recorded a new all-time high in June. How do you explain this paradox?
I am an economist and not a stock expert and want to be careful here. It’s true, it’s quite a thing that the public discussion is completely dominated by recession talk and the stock market is still posting gains. And that against the background of significantly higher interest rates. Let me throw in two thoughts: First, stock markets tend to be way ahead of the business cycle and have slumped badly in 2022, not least because of the widespread perception that a severe recession is imminent — which, in fact, hasn’t happened. Not at all in the US so far and in Europe, at worst, to a very mild extent. In other words, equity markets were already pricing in the 2022 recession and are now pricing in the recovery. Second, US equity markets have outperformed those in other economies, so in many places these markets are now looking quite attractive. But like I said, I’m no expert here.
What does it take now to turn things around so that the German economy can grow again?
That’s an enormously difficult question, and I certainly don’t have the Philosopher’s Stone. And after 37 years, in which I no longer lived in Germany, I also miss the closeness. But I can throw in a few impressions: In an international comparison, Germany seems to have fallen behind since the mid-1980s, particularly in terms of infrastructure, both public and private. And especially when it comes to new technology. Germany also gives me the impression of being overly bureaucratic and overly regulated. And while I can’t suggest concrete actions, it seems to me that Germany lacks a strategy to drive business and scientific innovation. Politics can have a decisive influence here, but I miss the will to do so.
Thank you for the interview.
The interview was conducted by Anja Schneider.