Floods in Germany: No impact on ECB policy

In August 2002 Germany was hit by one of its most severe floods in more than a century, causing total estimated damages of €9.2bn (around 0.4% of GDP). While the current floods are unlikely to be as damaging as those in 2002 – although some cities have reported that their rivers are at their deepest in more than 600 years and more rain is forecast for the weekend and the beginning of next week – they have already severely affected economic activity in large parts of the country.

The experience of 2002, however, suggests that the macroeconomic impact is likely to be muted, not least as the German government has already announced emergency aid for the affected region. In the third quarter of 2002, the floods proved no obstacle to German GDP expanding by 0.4%Q/Q, in part reflecting immediate reconstruction measures, which led to the first growth in gross investment in eight quarters. Industrial production also grew as did private consumption. And consumption continued to increase in the following two quarters, suggesting no lagged impact on household expenditures despite the fact that a large part of the losses were uninsured.

But this is not to say that the floods were without impact. Indeed, in September 2002, the German composite PMI recorded the second largest fall in its history, with the headline index contracting by 4.7pts on the month and the manufacturing output sub-component by 7pts. Only in the aftermath of the collapse of Lehman Brothers in the autumn of 2008 the headline index fell more sharply (by 5.5pts). And although sentiment rebounded strongly in the following month as the damage proved smaller than initially feared, the sharp collapse in confidence temporarily raised uncertainty over the short-term economic outlook.

A marked fall in Germany’s PMIs might well be in order again this time around, further fuelling speculation about more monetary stimulus from the ECB. But if the PMIs do fall, we believe that the ECB would be very likely to look “through the shock”, like in 2002 when it dismissed the impact of the floods as temporary. However, the true cause of any renewed deterioration in German sentiment in June might be hard to discern in real-time. Indeed, the ongoing challenges in the periphery and the semi-core, where GDP declined in France, the Netherlands and Finland in the first quarter, together with a continued subdued global growth outlook, might well cause a renewed fall in Germany’s PMIs later this month. But with today’s strong industrial production and trade data from Germany providing evidence that growth in the second quarter might have gained momentum, our central case remains that rates will be left unchanged, even if the June PMIs were to fall again.


Tobias S. Blattner, Euro area Economist

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