Wednesday, March 24, 2010

German Ifo defies double-dippers

Did anyone say double-dip? The German Ifo index surged to 98.1 in March, from 95.2 in February; its highest level since June 2008. The increase was driven by both the current assessment and the expectation component. The current assessment is clearly leaving its depressed levels, increasing to 94.4, from 89.8 in February. At the same time, the expectations component continued its strong upward trend and is now at its highest level since June 2007. Earlier today, the German PMI manufacturing surged to its highest level ever and the PMI services jumped to 23-months high.

Today’s confidence indicators show that the pause of the German recovery around the turn of the year was nothing more than a temporary break. The underlying trend of the German recovery remains healthy: business confidence is high, order books are filling, recruitment plans are increasing and even investment prospects are improving. The German “export machine” is gathering speed again.

There it is again: the German export machine. Together with the European and Greek fiscal crisis, the German export model has dominated headlines in recent days. However, it seems a bit short-sighted to blame German exports for the problems of other Eurozone countries. Very often, German exporters do not compete with other Eurozone exporters but with Chinese, American or Japanese exporters.

While the timing of the debate on the German export model might not have been productive in finding a Eurozone agreement on how to deal with the Greek fiscal crisis, the need for more German domestic demand is undisputable. The German economy needs more domestic investment and consumption. Not for the sake of other Eurozone countries but for the sake of transforming the current rebounce into a self-sustained boom. With the highest economic stimulus packages of all Eurozone countries and the tax relief agreed under the new government, it is hard to criticise Germany for inactivity. In a way, the current uncompromising German position on Greece could even benefit Eurozone rebalancing. Last week’s u-turn on Greece seems to be – partly – driven by the upcoming crucial regional elections in North Rhine-Westphalia. Losing these state elections would rob the government’s majority in the German upper house, limiting scope for major (tax) reforms.

A scary export machine to some, to others it is an export-driven recovery. In any case, today’s Ifo confirms that the German economy will leave its winter depression soon.

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